Minimum Wage

Economic theory says that in a competitive economy for workers, an increase in the minimum wage should cause job losses.  Experience of minimum wage increases in various US States and in the UK shows that this has not been the case.

Why not?  The most reasonable explanation is monopsony, the equivalent of monopoly power in employment opportunities.  Much other data shows that this indeed the case.  Anne Case and Angus Deaton discuss the details and implications in their book Deaths of Despair.

When labor markets are competitive, a government-imposed minimum wage that is higher than the going wage will cause employers to lay off workers. This is what the economics textbooks commonly say. There have been many studies that have looked for such outcomes. Although the federal minimum wage has not increased since 2009, many states have raised their state minimum wage since then, providing many opportunities for studying the effects. The most comprehensive and persuasive study to date, by the economists Doruk Cengiz, Arindrajit Dube, and their collaborators, finds no effects on employment; instead of firing workers or restricting new hires, employers simply shift workers from just below the new minimum to just above it.27 There is similar evidence from other countries, especially Britain, which, in 1999, went from no minimum to a relatively high minimum wage; dozens of studies there have failed to find any effect on employment levels.28 None of these outcomes would be possible if employers had no power to set wages. Labor markets are not as competitive as the textbooks would have us believe, and if employers are paying their workers less than they are worth, it is not a surprise that they keep them on when they are forced to pay them more because, at least up to a point, they remain worth more than they cost.

Case, Anne. Deaths of Despair and the Future of Capitalism (pp. 236-237). Princeton University Press. Kindle Edition. 


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