Minnesota’s Economic News — W/E 9/24/21
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Last Friday, I wrote about how 81% of economists agree that rent controls are bad policy. In a field so renowned for its fractiousness, this degree of consensus might seem rather surprising.
The same is true with minimum wages. In 2015 the Employment Policies Institute surveyed 166 economists based in the United States on the subject. They found that
• Nearly three-quarters of these US-based economists oppose a federal minimum wage of $15.00 per hour.
• The majority of surveyed economists believe a $15.00 per hour minimum wage will have negative effects on youth employment levels (83%), adult employment levels (52%), and the number of jobs available (76%).
• When economists were asked what effect a $15.00 per hour minimum wage will have on the skill level of entry-level positions, 8 out of 10 economists (80%) believe employers will hire entry-level positions with greater skills.
• When economists were asked what effect a $15.00 per hour minimum wage will have on small businesses with fewer than 50 employees, nearly 7 out of 10 economists (67%) believe it would make it harder for them to stay in business.
• A majority of surveyed economists (71%) believe that the Earned Income Tax Credit (EITC) is a very efficient way to address the income needs of poor families; only five percent believe a $15.00 per hour minimum wage would be very efficient.
• The economists surveyed are divided on the impact of a $15.00 per hour minimum wage will have on poverty rates, as well as the impact it would have on the spending level for public programs such as the EITC, TANF, or others.
• At lower levels (under $11.00 per hour) of proposed federal minimum wages, economists are divided largely by self-identified party identification as to an acceptable rate with a majority of Republicans and Independents who responded favoring lower minimum wages ($7.50 per hour or less) and a plurality of Democrats who responded preferring a minimum wage between $10.00 and $10.50 per hour.
This isn’t surprising. After all, as I’ve written before, the balance of empirical evidence suggests these things to be true. This is for the same reasons – but in reverse – that make rent controls such bad policy.
The economics of price floors
Whereas rent controls are an example of price ceilings, minimum wages are price floors. As Figure 1 shows, as the market clearing wage rate (Wc) where labor supply meets demand, the quantity of employment of Ec. But then a minimum wage law is passed. Wages cannot now legally be below Wm. As a result, the quantity of labor demanded falls from Ec to Em.
As we see, the predictions of this theoretical model are broadly borne out in the empirical literature. As a famous economist once said,
So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.
Who was that economist? Paul Krugman.
John Phelan is an economist at the Center of the American Experiment.