There is talk coming out of Washington about rasing the minimum wage. I am one of those economists who thinks this is a bad idea. The law of demand says that as the price of something goes up, its quantity demanded goes down. So fewer low-skilled workers will be hired.
"... research shows that in the long run the adverse effects of a higher minimum wage are quite substantial." (page 84, The Economics of Public Issues, 13e, by Roger LeRoy Miller, Daniel K. Benjamin, and Douglass C. North).
"In a new report, economists David Neumark of the University of California at Irvine and William Wascher of the Federal Reserve Board say a review of more than 90 studies in more than 15 countries since the early 1990s shows nearly two-thirds of the studies find a "consistent" though not always statistically significant negative impact on employment. Fewer than 10 found a consistently positive impact. While there's "no consensus," they say, "the weight of empirical evidence" supports the traditional view." (The Wall Street Journal, p. A4, Nov. 3, 2006)
From Greg Mankiw's blog:
"Economists Richard Burkhauser (Cornell University) and Joseph Sabia (University of Georgia) report:
a beneficiary from a proposed federal minimum wage hike to $7.25 an hour is far more likely to be in a family earning more than three times the poverty line than in a poor family. In total, only 12.7 percent of the benefits from a federal minimum wage increase to $7.25 an hour would go to poor families. In contrast, 63 percent of benefits would go to families earning more than twice the poverty line and 42 percent would go to families earning more than three times the poverty line."
Gary Becker and Richard Posner at their blog discussed how the minimum wage is a symbol and not a substantive way to fight poverty. But this brings me to my point: that symbols are very important in politics. Symbols express emotions and that is often what wins over voters. It makes it look like the government cares about the poor. I have written about the role of symbols at
I understand the Law of Demand, but do you think this could work if corporations cut the huge salaries that they pay to executives? If this was the case, the demand would probably still be there, becuase there would be more than enough money circulating. Surely nobody needs more money than they know what to do with.
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