Increasing the Minimum Wage Can Create Jobs—If It’s Enforced

[Bill USA]

"Employers routinely violate current minimum wages, federal and state. They pay for fewer hours than employees work, or dip into restaurant workers’ tips. "


http://washingtonspectator.org/index.php/Economics/increasing-the-minimum-wage-can-create-jobsif-its-enforced.html#.UwQWlfZshi0

Back when I first studied economics, we “proved” in class that a minimum wage causes unemployment. You just draw supply and demand curves for labor, add a horizontal line for a wage above the “market clearing” competitive equilibrium wage, and—bingo!—a gap appears between labor supply and labor demand.

I took this orthodoxy on faith until 1992. That’s when David Card and Alan Krueger’s famous paper “Minimum Wages and Employment” appeared, comparing unemployment among fast food workers in New Jersey and Pennsylvania before and after New Jersey raised the minimum wage.

Card and Krueger found no effect. None. Zip. At first I shared the economics profession’s incredulity. The research was sloppy. The sample was too small. The researchers’ liberal bias skewed the results. Why even waste time testing something obvious? But then more studies came out, some also showing no effect, and some showing a small positive effect.

An explanation also began to emerge, in terms of the “efficiency wage hypothesis,” developed among others by our new Federal Reserve chairwoman Janet Yellen. Instead of there being a single “market” wage for unskilled labor, there is a market wage range. The higher the wage an establishment pays relative to other firms, the more diligent and loyal its employees, and the less likely they are to quit. So up to a point, the establishment saves on supervision and training costs what it loses in higher wages. Thus there’s nothing remarkable about the fact that Costco remains profitable while paying substantially higher wages than low-wage super-stores like Walmart. The efficiency wage hypothesis supports a cautious case that setting a minimum wage toward the top of the wage range will benefit workers without harming employers. (Needless to say, conservatives do not buy this argument.)
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