Is Decreasing the Minimum Wage a Good Way to Spur Employment?

Check out this answer from Consensus:

The evidence on whether decreasing the minimum wage is a good way to spur employment is inconclusive. While some studies indicate that higher minimum wages can lead to job losses, particularly in automatable and low-skilled jobs, others find minimal or no adverse effects on employment. Additionally, the reallocation of workers and changes in occupational mobility complicate the overall picture. Policymakers should consider these nuanced findings and the specific context of their labor markets when making decisions about minimum wage adjustments.

The debate over the impact of minimum wage adjustments on employment is a long-standing one, with various studies providing differing perspectives. This article explores whether decreasing the minimum wage is an effective strategy to spur employment, drawing on recent research findings.

Theoretical Background

Traditional economic theory posits that lowering the minimum wage should increase employment by reducing labor costs for employers. However, empirical evidence on this matter is mixed, and the effects can vary significantly across different sectors and demographic groups.

Evidence from Recent Studies

Negative Employment Effects of Minimum Wage Increases

Several studies have found that increasing the minimum wage can lead to job losses, particularly in automatable and low-skilled jobs. For instance, one study found that higher minimum wages decrease the share of automatable employment held by low-skilled workers, increasing the likelihood of nonemployment or worse job positions for these workers1. Another study highlighted that employment adjustments are more pronounced in industries and plants strongly affected by the current minimum wage, with larger increases leading to more significant reductions in employment4.

Mixed and Nuanced Effects

Other research presents a more nuanced picture. A study using administrative payroll data found that while the overall number of low-wage workers in firms declines, incumbent workers are no less likely to remain employed. The reduction in employment primarily occurs through decreased hiring rather than layoffs3. Additionally, some studies suggest that the employment effects of minimum wage changes are small and difficult to detect, with some even finding modest positive effects on employment in specific sectors like the fast food industry5.

Reallocation and Occupational Mobility

The introduction of a minimum wage can also lead to the reallocation of workers. For example, a study on the German minimum wage found that it led to the reallocation of low-wage workers from smaller to larger, higher-paying, and more productive establishments, without lowering overall employment2. However, another study indicated that minimum wage increases could decrease occupational mobility and increase job mismatch, potentially dampening aggregate output7.

No Significant Impact on Employment

Some research argues that minimum wage increases have little to no impact on employment. A comprehensive review of the British National Minimum Wage found no significant evidence of employment effects, attributing this to factors like labor market frictions, tax credit offsets, and productivity improvements9. Similarly, another study suggested that the recent findings challenging the traditional view of minimum wage effects should prompt a broader examination of labor market dynamics6.

Is decreasing the minimum wage a good way to spur employment?

Steve Keen has answered Extremely Unlikely

An expert from Kingston University in Economics, Complex Systems Science

The obvious source of this belief is the theoretical microeconomic model of intersecting supply and demand curves determining an equilibrium price. The minimum wage is then seen as a price floor set above this market-determined equilibrium price for labor, which causes supply to be higher than equilibrium and demand lower. The gap between supply and demand at that price is then total unemployment.

While this is an appealingly simple general model for individual goods markets taken in isolation, there are several flaws in applying it to the labor market:

(1) The standard model for the market for, say, apples, derives its supply curves from the behavior of profit-maximizing firms and its demand curves from the behavior of utility maximizing consumers. While there are reasons to question the validity of both these curves, under the assumptions made in the model, it makes sense that the price has to rise to being forth a higher supply, and that demand will fall if price rises. It is an inevitable result of the geometry assumed for the utility function for a single consumer, and for the profit function for a single firm. However, in the case of the labor market, this direction of derivation is reversed. The labor supply curve is derived from the behavior of consumers, who face a choice between labor which generates an income, and lesiure which does not. Properly derived, this labor supply curve can slope downwards just as easily as it can slope upwards: that is, less labor might be supplied in response to a higher wage, and more labor to a lower wage. This is actually quite intuitive–a higher wage means a higher income for the same number of hours worked, and someone who values leisure over income might work less if offered a higher wage, thus allowing them more time for leisure. Most economists ignore this possibility, and simply assume that in the aggregate, a higher supply of labor will be on offer if the wage offered is higher. But their theory provides absolutely no reason why this should be so: it is believed by them rather than proven by them (given their assumptions) as applies to the market for ordinary commodities. There is no way of theoretically telling whether their belief is true or not, but the belief itself has to be based on macroeconomic factors that by definition are not part of the standard micro model. So at the very least we have to throw away this micro model when thinking about the labor market and consider macroeconomic issues.

(2) Macroeconomics is based on one essential insight that distinguishes it from microeconomics: one person’s expenditure becomes another person’s income. There are complex causal factors that determine how expenditure changes (and I focus on credit’s role here, which puts me outside the mainstream of the profession–see my forthcoming book “Can we avoid another financial crisis” ). But the bottom line here is that if decreasing the minimum wage also decreased total income for workers, it could also lead to less aggregate expenditure by workers. This would then reduce the total income of the entire economy. The fall in income would then cause a fall in employment: so cutting the minimum wage might actually increase unemployment rather than reducing it, by causing demand for labor to fall. Whether this would actually happen is an empirical question, and this would need to be tested at the national level as well: a local test (like abolishing the minimum wage in Seattle) isn’t subject to the “expenditure IS income” rule since much of the expenditure in Seattle goes to income earners not living in Seattle.

So I can’t say definitiively that cutting the minimum wage would not increase employment, but neither can advocates of cutting the minimum wage for macroeconomic reasons be confident that this will reduce unemployment. There are many other issues that weaken the standard “intersecting demand and supply curve” argument that most advocates use to justify cutting the minimum wage, which I cover in my book Debunking Economics.

Is decreasing the minimum wage a good way to spur employment?

Peter Kriesler has answered Extremely Unlikely

An expert from UNSW Sydney in Economics

People who argue this do so on the basis of a restricted mainstream model where perfect competition reigns and employment is determined by the supply and demand for labour. In this simplistic model, if a reduction in the minimum wage reduces actual wages then, by making labour cheaper to employ, this will stimulate employment. However, even in mainstream models, this is not true if there is imperfect competition in either labour or output markets – which is always the case in the real world. Then the story is much more complex, and you can’t tell without analysing the actual situation. In any case, this is not accurate as Keynes clearly showed. According to Keynes, the main determinant of the level of employment is the level of demand – as employers only employ people if they can sell what the extra employees produce. If the level of demand is important, then reducing wages will reduce demand – and so may very well worsen unemployment. So, reducing the minimum wage is unlikely to spur employment, and is certainly not a good way to do so. It would be much better to stimulate demand through the many policy options available to government.

Is decreasing the minimum wage a good way to spur employment?

Jason Scorse has answered Extremely Unlikely

An expert from Middlebury Institute of International Studies in Economics, Environmental Science

The link between unemployment and the min wage is tenuous. And decreasing it drives many more people into poverty.

Is decreasing the minimum wage a good way to spur employment?

David Shapiro has answered Extremely Unlikely

An expert from Pennsylvania State University in Economics

You mean the minimum wage, not the minimal wage. Employment is already at a relatively high level; the job market issue of greater significance is the lack of wage growth. Clearly, decreasing the minimum wage will not help this problem, nor will it induce those not in the labor market to begin searching for employment.