More on Minimum Wage and Employment

I realized that yesterday’s post on the minimum wage somewhat begs the question.  It says, “Even if minimum wage doesn’t cause high unemployment, we should lower the minimum wage to increase employment.”  It would be reasonable to ask, “If minimum wage doesn’t cause high unemployment, why would lowering it cause low unemployment?”

That said, I think that it’s uncontroversial to say that minimum wage does at least sometimes relate to employment.  Surely everyone agrees that if minimum wage were set to $200/hour, it would increase unemployment?

The story that liberal economists tell about higher minimum wage not increasing unemployment, or indeed decreasing it, is, I think, compatible with my theory that in times of high unemployment for other reasons, we should lower the minimum wage.  Basically, the concept as I understand it is:

If the economy “naturally” has full employment, then it’s got a certain buffer.  If you aren’t going to be able to hire anyone to replace Albert, then you’re going to give Albert a raise to keep him, whether that’s because Albert negotiates a raise himself or because the government raises the minimum wage.  This isn’t unboundedly true — there is a level of wage that you won’t give Albert even if your alternative is to simply lose him and never refill the position — but there’s a potentially wide margin in which it’s true.

And indeed, in basically full employment, you might even see some positive effects on unemployment by raising the minimum wage, for a variety of reasons (less of a perverse incentive to people who are moving from various welfare benefits to a minimum wage job; stronger negotiation positions for employees leading to better jobs; increased incentive to automate leading to better jobs).

But all of that goes away when you’re at substantially less than full employment.  If there’s significant ongoing unemployment — for any reason — then it seems likely that unemployment is going to be highly sensitive to minimum wage changes.

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