10-5-05 Putting an Old Generality to Bed

One of my favorite arguments of the libertarian idology is that minimum wages are bad. The arguments against usage of a minimum wage goes as follows.

Employers are willing to provide more jobs at lower wages. Therefore, if employees are willing to work at the lower wages, then employers will hire more people. More people will have jobs.
This gets demonstrated in economics textbooks all the time, on a supply and demand graph. You've probably seen it. It looks like this. There's the supply curve, which shows the employer's willing to hire more people at lower wages, and the demand curve, which shows that more people will demand work at higher wages. The two lines intersect somewhere, and that is the market equilibrium. then some fool comes along and puts in a minimum wage (what economists would call a price floor), and the result is a shortage of jobs.

Sound pretty simple, right?

Not really.

There's actually a bunch of possible holes just below the surface of this argument. I'm probably not qualified to discuss too many of them in all their glorious detail, but here are some that I do understand:

1. The demand curve for work cannot go down to zero in the absence of long term welfare programs. If someone is unskilled and unemployed, and not getting checks from the state, they will either work or become a criminal to survive. If they chose to work, they will take a job at whatever wage they can get, no matter how low.

2. The supply and demand idea is based on a fully cometitive market where neither suplier nor demander has a concentration of power over the other. This is at least arguable. The real world is full of imperfect competition, market power, and wages set based on researched information rather than market pricing.

3. In order to affect a nation or a state's overal employment, a minimum wage law would need to set overall wages higher than the equilibrium point for wages, not just
the low wage market. In other words, when looking at the larger economy in reality, the minimum wage line is way below the market clearing equilibrium line.

In any case.... enough of the previews, lets get on to the main event.

Here is the data for the unemployment rate change in each of the years the federal government has raised the federal minimum wage.

(year),(new min wage),(unemployment rate),(percent change in min wage),(change in unemployment rate),(trend)
1956, $1.00 , 4.1, 33% -0.30% Down
1961 , $1.15 , 6.7 , 15%, 1.20%, Up
1963 , $1.25 , 5.7 , 9% , 0.20% , Up
1967 , $1.40 , 3.8 , 12% , 0.00%, Even
1968 , $1.60 , 3.6 , 14%, -0.20%, Down
1974 , $2.00, 5.6 , 25%, 0.70% , Up
1975, $2.10 , 8.5 , 5% , 2.90%, Up
1976 , $2.30 , 7.7 , 10% , -0.80%, Down
1978 , $2.65 , 6.1 , 15%, -1.00% , Down
1979 , $2.90 , 5.8 , 9%, -0.30% , Down
1980, $3.10 , 7.1 , 7% , 1.30%, Up
1981 , $3.35 , 7.6 , 8% , 0.50%, Up
1990, $3.80 , 5.6 , 13% , 0.30%, Up
1991 , $4.25 , 6.8 , 12% , 1.20% , Up
1996 , $4.75 , 5.4 , 12%, -0.20% , Down
1997 , $5.15, 4.9, 8% , -0.50% , Down

What we can see pretty easily here is that national unemployment rate has no coorilation to raises in the federal minimum wage. Out of the sixteen times the minimum wage has been lifted, the unemployment rate only went up eight times. One time, it stayed equal, and the rest of the years, it actually dropped.

I know what you are thinking. "Well," you say "that's not fair. You need to isolate the low wage workers to see the effect. You haven't isolated the wage variables from the intrest rates, the economic growth profile, the budget, the deficit, the cost of oil..." or any of a hundred other things that could have an effect on unemployment.

And you are absoloutly right, I haven't. But, is it me that is being unfair? I've been told that raising the minimum wage causes less employment. And, while telling me that, nobody gave me a list of qualifications, exceptions, and considerations. They just said one thing causes the other, period.

It's not ture.

It may be true that higher minimum wages act as a weak force twards unemployment which can be countered and overtaken by other forces in the economy. It may even be true that higher minimum wages causes less employment in the low wage market. I'll gladly read those arguments and look at the data presented to prove them. But, when it comes to blanket statments about minimum wage killing jobs - Sorry, guys. In the search for truth, we must throw out the garbage.