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Why some economists oppose minimum wages?

2015-07-14 13:39:48

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WORKERS across the rich world have suffered stagnant wages for much of the past decade, in good times and bad. Governments are increasingly responding by boosting minimum wage-rates. State and local governments in America are passing wage increases, and Barack Obama supports a rise in the federal rate from $7.25 per hour to $10.10. Angela Merkel’s new government has signalled its support for a new national minimum wage, and on January 16th George Osborne, Britain’s chancellor, backed an above-inflation rise in the minimum wage. A higher wage floor seems like a simple and sensible way to improve workers' fortunes. Yet many economists argue against it: Germany’s leading economic institutes, for instance, have pushed Ms Merkel to resist calls for a wage floor. Why do economists often oppose minimum wage-rates?


Historically, economists' scepticism was rooted in the worry that wage floors reduce employment. Firms will hire all the workers it makes sense to hire at prevailing wages, the thinking goes, so any minimum wage that forces firms to pay existing workers more will make those jobs uneconomical, leading to sackings. Yet economists were forced to rethink their views in the early 1990s, when David Card and Alan Krueger of America's National Bureau of Economic Research presented evidence that past minimum-wage increases did not have the expected effect on employment. A rise in New Jersey’s minimum wage did not seem to slow hiring in fast-food restaurants in New Jersey relative to those in neighbouring Pennsylvania, they found. One explanation, some economists speculated, was that firms had previously been getting away with paying workers less than they were able, because workers were prevented from searching for better-paid work by the costs involved in changing jobs. That would mean that when wages were forced up, the firms were able to absorb the costs without firing anyone.


Academics continue to trade studies on whether minimum wages cost jobs. A recent survey of economists by the University of Chicago showed that a narrow majority of respondents believe a rise in America’s minimum wage to $9 per hour would make it “noticeably harder” for poor workers to find jobs. Yet a narrow majority also thought a rise would nonetheless be worthwhile, given the benefits to those who could find work. Economists' opposition to specific minimum-wage hikes is sometimes due to concerns that politicians will impose recklessly high wage-floors, which firms may find difficult to absorb without laying people off. Some economists argue that there is a better alternative in the form of wage subsidies, which cost governments money but do not discourage hiring.


Recent minimum-wage debates have been complicated by the unusual macroeconomic circumstances of the day. When economies are plagued by weak demand, as much of the rich world has been since the crisis of 2008, firms may be more sensitive to wage floors. (Others argue that healthy corporate profits show that firms have plenty of room to accommodate pay rises.) New technologies could also amplify the employment effect of a wage hike. Given expanding opportunities for automation, firms may seize on higher wage-floors as an excuse to reorganise production and shed jobs. But opinion among economists remains divided (and studies contradictory), because most recent minimum-wage increases have been comparatively modest.