Tuesday, July 13, 2010

Are minimum wage hikes the answer to recession?

The current economic downturn has caused belt tightening by businesses globally, and much of the hardship has been felt by low-paid workers. In response, many have called for a higher mandated minimum wage. From California and Minnesota to Azerbaijan and Nigeria (just in recent news) the issue has been a political hot-button.

In the economics literature, a consensus has not emerged on whether minimum wages cause unemployment. According to basic economic theory, any binding price floor (e.g. minimum wage laws) will cause a surplus of the good in question. In the labor market, that means unemployment. While politicians and pundits tout the benefits of "a living wage" or the difficulty of living off $8.25 an hour they conveniently ignore those unable to find work as a result. Until relatively recently, this trade-off was at least acknowledged. However, a study conducted by Card and Krueger, which found no impact on the fast food industry in Pennsylvania and New Jersey from a minimum wage increase, fueled a new round of optimism regarding higher price floors on wages. Is economic theory put on hold when discussing the labor market, or is this just too good to be true?

You can read my paper on minimum wages and unemployment here. By comparing state unemployment levels to their unemployment rates in 2008 while controlling for other job-related factors, a positive relationship between minimum wages and unemployment rates was found (it's a riveting read, I promise). It was presented at the SIRC on April 24, 2010.

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