Professor Gisser weighs in on the living wage

Thanks to Micha Gisser for sending the following comments:
Some Comments on Minimum Wage laws
Micha Gisser
Minimum wage laws at the federal level have a long history. In 1938 Congress legislated a statutory minimum wage rate as part of the Fair Labor Standards Act. Initially, the federal minimum wage rate was established at $0.25 an hour. Since then, to adjust for the inflation erosion, it was raised many times. For example, the minimum wage was $3.35 in 1981 and $4.25 in 1991, and it has been $5.15 since 1997. The U.S. Labor Department estimated that this increase in the minimum wage rate between 1981 and 1991 led to a loss of 100,000 jobs, mostly women and teenagers in two-or three-earner families. Since most skilled workers earn wages above the minimum wage, they are not directly affected by it. Thus, most of the effects of the minimum wage fall upon unskilled workers. Early on, Jacob Mincer (1) demonstrated that the imposition of a minimum wage rate reduced the employment of all teenagers, of males 20 to 24 years of age, of females in general and the employment of males 65 years and over. He also demonstrated that the minimum wage law discouraged many workers from remaining in the labor force.
Most of the economic empirical research supports the theory that clearly shows that imposing statutory minimum wage rates results in unemployment among women, minorities and teenagers. However, more recent studies by David Card and Alan Krueger (2), claimed that New Jersey data did not support reduction in employment after the 1990 and 1991 federal minimum-wage increases. In New Jersey the increase was minimal, from $3.35 to $4.25 an hour, in contrast to the increase in Santa Fe. More importantly, studies by Donald Deere, Kevin M. Murphy, and Finis Welch (3), David Neumark and William Wascher (4), and other researchers demonstrated that the research methods used by Card and Krueger are flawed.
The major negative impact of minimum wage laws is unemployment among unskilled workers—mainly teenagers, women, and minorities—leading to heavy welfare losses to these groups. But there are other economic disruptions that are less visible. An example is the reduction of fringe benefits to mitigate the higher wages that must be paid to unskilled labor. Also, minimum wage laws suffer from poor targeting, e.g. tipped employees and employees from one-or two-family earners. On that, a detailed analysis is provided by Finis Welch. (5).
The ceteris paribus issue is relevant for statistical studies. For example, employment in Santa Fe may have increased recently because employment in New Mexico probably increased recently, and Santa Fe is an integral part of New Mexico’s economy.
Raising the federal minimum wage may cause cost-push inflation, followed by a demand push inflation if the Fed attempts to ease the money supply.
(1) Jacob Mincer, “Unemployment Effects of Minimum Wages,” Journal of Political Economy, vol. 84, August 1976. Pp. S87-s104.
(2) David Card and Alan Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review, September, 1994.
(3) Donald Deere, Kevin M. Murphy and Finis Welch, “Employment and the 1990-1991 Minimum Wage Hike,” American Economic Review, Papers and Proceedings, May 1995.
(4) David Neumark and William Wascher, “The Effect of New Jersey’s Minimum Wage increase on Fast-Food Employment: A Reevaluation Using Payroll Records,” American Economic Review, Papers and Proceedings, May 1995.
(5) Finis Welch, “Minimum Wage Issues and Evidence.” American Enterprise Institute for Public Policy Research, Washington, D.C., 1978.

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