Minimum Wage Regulation

Minimum Wage Regulation

When workers who devote most of their energies to the service of their employers are nevertheless found living in poverty, there is a strong legislative urge to do something about it. The obvious thing to do is to require employers to pay a "living wage." Such legislation has now been in force in various countries for over a hundred years, and economists have been discussing the issue much longer than that. While recognizing the alleviation of poverty as a primary goal of policy, economists have almost uniformly opposed minimum wage legislation, at least until very recently. To some extent, this opposition reflects the division of labor. John Stuart Mill (1848) remarked on the many minimum wage plans current in his time, and went on to describe, at some length, the adverse consequences of such plans. As Marshall (1897) put it, "... there is popularity in the doctrine of a living wage; so we had better leave politicians to praise it and set ourselves to criticize it." More recently, the attempt by Card and Krueger (1995) to debunk the conventional economic wisdom on minimum wages has again generated much popular support, and much criticism by other economists.

Employment Effects

The main economic objection to minimum wage laws is that some workers will lose their jobs. As a theoretical proposition, this is easily demonstrated, under general conditions. Consider a profit-maximizing employer paying n* workers the minimum wage m, and making (maximal) profits . Suppose the minimum wage rises to M, (with no effect on other prices, or on the demand for the employer's product). If this increase is granted, and nothing else changes, profits fall by n*(M-m). Let N* be the number of workers employed after all profit-maximizing adjustments have been made, and note that the new profit level must be at least -n*(M-m). Now consider what would happen if the wage is restored to its old level: starting from -n*(M-m), the employer's profit rises by...