Does Raising the Minimum Wage Increase Unemployment?

Photo: nicksarebi

Conventional wisdom holds that instituting or raising the minimum wage will increase unemployment. But a recent paper by Jeremy Magruder, an economist at Berkeley, finds the opposite effect. Magruder examines the case of Indonesia in the 1990s, “where real minimum wages rose rapidly in a varied way and then dropped quickly with the inflation rate in the South East Asian financial crash.” Here’s an excerpt:

When minimum wages rose in one district relative to their neighbors, that district observed an increase in formal sector employment and a decrease in informal employment. It also observed an increase in local expenditures, which is consistent with the hypothesized mechanism of the big push: that local product demand increases labor demand. Moreover, this increase was only observed in local industries which can be industrialized and do supply local demand, supporting the model further. Tradable manufacturing firms saw no growth in employment, and un-tradable, but non-industrializable services saw an increase in informal employment.

Of course, few modern-day economists argue that an increase in the minimum wage will actually create jobs in America, and such policies failed dismally during the Great Depression. Magruder explains why the policy may have worked in Indonesia, but not in Depression-era America:

One, as a less-developed country receiving substantial foreign investment, Indonesia may have had new access to potential, unadopted, and profitable technologies that simply needed a market. A second is that much of the 1990s were a time of growth in Indonesia, when sticky wages may have limited wage growth (the opposite of conditions in the depression). Finally, Harrison and Scorce (2010) show that anti-sweatshop activism also raised labor standards in foreign firms without an accompanying drop in employment. This indicates that wages may have indeed been below marginal products in the 1990s, reducing coordination and creating an opening for policy.

(HT: Chris Blattman)


Cebukonomics

Have you tried looking at the Philippines? Companies do not follow the MINIMUM WAGE at all! workers tend to go home with almost nothing to eat at all.

Jack

The article states that "few modern day economist would argue that increasing minimum wage will increase jobs in America and such policies failed during the Great Depression." This says it all and does not leave much doubt about what increasing the minimum wage does to unemployment in America. Most minimum wage workers really do not care if it increases unemployment but they will vote for the political party that does increase their salary not realizing they put their job at risk.

Tyler Green

If the minimum wage would have gone up constant to inflation, it would be over $20/hr today. It was created to ensure that even the people on the bottom could still enjoy their piece of the American dream, but wages are sticky (business owners are greedy) and they've barely risen at all. $7.70/hr isn't enough to raise a family.

Will

I don't think your calculation is accurate. Real Minimum wage (Minimum wage adjusted for inflation) has never been higher than $10.77 in 2013 dollars. (Found on a 20113 report by Congressional Research Service)

And your right, $7.70 isn't enough to raise a family. But if you do desire to have an income high enough to support a family, there are options you can try. You can re-train yourself through schooling, certifications, or other experiences. You could try to get a second job or work more than 40 hours a week. Your spouse could also get a job and bring a second income into the house. You could start your own business. And there are a lot of government assistance you could seek out to help as well. (I've personally done all of the above to try and get an income higher than minimum wage.)

While the options I listed aren't comfortable or easy, I think it is important that we keep the responsibility of providing for a family on the shoulders of the "head of households" and not on the "greedy business owners."

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Tyler Green

gone up constant to inflation since it was created*

Drew

Raising the minimum wage will always cause unemployment. It is merely by how much and whose jobs are politically expendable.

Keep in mind, determining how much the minimum should be raised and when is a POLITICAL decision, not an economic one. Politicians do not care if a 15 year old cannot find a job because a 15 year old cannot vote. Furthermore, a teenager is far less likely to apply for unemployment insurances and therefore will not appear in many standard statistics.

Jacob Connelly

With the raising of the minimum wage, and the rise of unemployment that will most likely follow due to suppliers and business being unwilling to spend more money on unskilled workers, how will the GDP growth and production of the country be effected? Also how will this affect the supply and demand of not only jobs but the goods and services that are being sold. Finally, with increased inflation do you believe that the heightening of the minimum wage will even have a great enough impact on the income of the workers?