Minimum wage laws are bad for profits. That's the message of this new paper (pdf) from the CEPR. Steve Machin and colleagues estimate that the introduction of the UK minimum wage in 1999 led to a fall in profit margins of 23% in the average care home (an industry paying very low wages) and 8-11% for low-wage firms more generally.
This follows from a simple fact. The short-run employment effects of a minimum wage are small - that's small, note, not zero; see this paper (pdf). This means a minimum wage raises the wage bill. Unless prices rise - and there's little evidence they do - it follows that profits must fall.
But here's the puzzle. Machin and colleagues say:
We could not find any evidence that low wage firms were forced out of business by the higher wage costs resulting from the minimum wage.
There are, they say, three possible reasons for this:
1. The time period they looked at was too short (two years after the introduction), and that in the long-run there's lots of exit.
2. Lower profit margins deter firms from entering the industry.
3. Firms were making "excess profits" from employing low wage workers, and the minimum wage led to cuts in these.
Personally, I find 1 and 2 more plausible. But consider point 3. It raises two questions.
First, how could low-wage firms be making excess profits? Such firms are usually small, and have few barriers to entry.
Second, what are the consequences of a shift in incomes from profits to wages?
Unreconstructed Keynesians would say they are positive. They raise aggregate demand because the marginal propensity to spend out of low wages is higher than that to spend out of profits.
However, this is by no means certain. The effect of profits on investment spending varies enormously, and can sometimes be high. And low wage workers might use their pay rises to cut their debts. For more on these effects - it's all about stagnationist and exhilarationist regimes - see this old paper (word doc) by Amit Bhaduri.
Given these problems, I'm with Tim and Don; a minimum wage is a terribly inefficient way to help the poor.
Another thing: Don ably discusses the argument about Card and Krueger's work which found that the minimum wage didn't destroy jobs. However, Card and Krueger also said that the effect of higher minimum wages upon poverty was "statistically undetectable" (Myth and Measurement, p280 in my copy.) Why do advocates of minimum wages cite the controversial aspect of Card and Krueger's research but not the uncontroversial one? Is this an example of Blinder's law - that economists have the least influence where they agree the most?