It is very important to recognize that economic models don’t always hold up in the real world. During this semester I am sure we will model many examples of the way things should work, but we must remember that there are often factors in the real world which complicate these models and prove them wrong. Minimum wage was the “go to” example of a price floor in my microeconomics course. If minimum wage is binding, then it results in unemployment (a surplus). This article cites various studies where increases in wage have no effect upon unemployment. The simplest explanation of this is that the minimum wage is a non-binding price floor and so the change is irrelevant to unemployment. However, if the minimum wage is binding, than this is more complicated. It could be that the employers are unable to fire their employees because of moral issues, they don’t feel right about taking away someone’s job. Another possibility is that the increased minimum wage increases the amount of consumer spending, which would lead to an increase in consumer demand. There are many other possible causes but these are just two that I came up with.
I find it interesting that while many people have argued in the past that increasing the minimum wage leads to increased unemployment, this article not only refutes that but confirms that increases to the minimum wage can actually decrease unemployment rates, as they did in 1996-97. I agree with Robert that the key piece of information here is that the minimum wage is a non-binding price floor. We should also consider that the minimum wage is rarely raised by large amount all at once; rather changes are often implemented slowly and over time. If the minimum wage were increased by some large amount all at once, then I would not be surprised if we see a spike in unemployment, at least in the short term. However, increasing the minimum wage by small amounts at a time allow employers and consumers to shift their habits more gradually. Employers have time to alter their budgets and ensure that fewer people, if any, would lose their jobs. If the minimum wage were increased suddenly, this would not be allowed to happen, and unemployment could likely increase.
This article attempts to refute the claim that the minimum wage increases unemployment. Instead of using the classic economic model to illustrate the effects of a price floor, the article brings forth case studies showing that unemployment did not increase with wage increases. The article attempts to show that the minimum wage can no longer be classified as a price floor because it does not create the same effects. The most likely explanation for this new claim is education. As people become more educated, less are willing to work in the unskilled labor market (where the minimum wage applies). Unemployment may decrease or stay the same because many may drop out of the labor market altogether if they cannot find a job with high wages and are unwilling to work at a low level job. While there are many contributing factors to this new claim, it does not prove that a minimum wage is necessary to decrease unemployment.-Annie Murphy
When I was reading this article, I got hung up on the minimum wage rate of 1968, the equivalent of $10 an hour. I couldn't help but think of how much more money that is than between 6 and 7 dollars an hour. That's roughly $150 more of spending money that people have a week. Haven't we learned this week in class that spending helps the economy? If everyone is putting in $150 more a week into the economy (buying more clothes, eating out more, going to more sporting events) than doesn't that help businesses and encourage employers to hire more people because their business is doing better?I am no economist, but with what I said above and with the stats and numbers brought up in the article, I dont see how a higher wage rate would be the cause for less jobs. The numbers dont lie.Also, @RobertFoster, I don't think that moral issues are a reason in this case. We are in America, everyone is looking out for themselves, moral issues are not an issue.Finally, again @RobertFoster and @amurphy12, I am not quite sure what y'all mean when you bring up economic models, but in this situation I do not care about economic models. That might be the point you're bringing up, but as far as this article goes a high wage rate does not cause unemployment. I dont need an economic model to tell me otherwise. There could be underlying factors that are the real cause, not just an increase in wage rate and moral issues, but I believe that more jobs for American citizens is a damn good thing. So regardless of why, increase the wage rate and create more jobs for people.
I agree with Johnny. This issue has nothing to do with morals or economic models. The fact of the matter is that if people are getting paid more, they will be able to pump more money back into the economy. Also, many prime candidates for minimum wage jobs are people who are not even currently looking for employment. If the minimum wage was increased, that extra $150 a week might be just enough motivation to get them to enter the labor force. It could be argued that having more people competing for jobs could actually lead to the unemployment rate rising, however I believe that the increased spending of the general population will also lead to more jobs becoming available as businesses expand and need more labor.
It seems to me that the underlying issue is the lack of a direct causal relationship. This article assumes that minimum wage directly affects unemployment. This is obviously not the case as the models do not carry out in the real world. To find the true effect of the minimum wage on unemployment I think one would need to analyze the situation with an instrumental variable method to estimate the causal relationship. A multivariate 2SLS analysis would look past an omitted variable or reverse causality bias by finding a third variable associated with unemployment but no direct effect on minimum wage. This could potentially show the true nature of the relationship.
As we have learned in this class, models do not always reflect reality. In a ceteris paribus model, applying a price floor will create a surplus between the quantity demanded and quantity supplied. Contrary to the model, the article stated that minimum wage does not cause unemployment. To me, there were two possible reasons. One, as some of my classmates pointed out, maybe the price floor is not that much higher than the equilibrium point to create a dramatic increase in unemployment rate. Two, the people who are most affected by minimum wage,teenagers and low education workers,might not be considered part of the labor force.I looked to the article written by Anne Thompson,on teenagers and unemployment rate for possible answers. She points out that historically teenagers experience a steeper fall in employment rates because they have the least amount of experience and education. Instead of minimum wage, she suggests that teenagers have been experiencing high employment rate as a result of greater competition for jobs from retired workers, and a decrease in the number of federally funded summer jobs.