What do minimum wages do?

Larry Elliott's take on the national minimum wage lacks both an awareness of economic research and any political vision. He says:

The evidence so far is that the NMW has not cost jobs.

This is plain wrong. The Low Pay Commission itself says the NMW has cost jobs. Appendix 3 of its 2005 report surveyed employers in 9 low-wage sectors. 37% said they had cut staffing levels in response to 2003's NMW increase. And this paper found that the NMW had led to job losses in care homes, a sector affected by the NMW.
Larry's committing the aggregation error here - he's assuming the impact of the NMW would show up in macroeconomic data. But it wouldn't. Simple sums tell us this. The LPC reckons the NMW raised wages by 20.2% between 2o02 and 2005 for just under 1 million workers, 0r 3.1% of all workers.  That's a rise in the aggregate wage bill of 0.031 x 20.2 = 0.63%. If we assume a price elasticity of demand for labour of 0.6, this implies a fall in aggregate employment of 0.6 x 0.63 = 0.38%. That's 110,000. Spread over three years,   this just wouldn't show up in macro data - it's around two weeks inflow into unemployment.
What's more, job cuts aren't the only way employers respond to higher wages, at the expense of workers. They also cut hours. That LPC report found that 31% of employers cut basic hours. This paper corroborates this finding.
However, it's not Larry's lack of awareness of economic research - which only confirms common sense - that irks me most. It's his lack of imagination.
He seems to think it a sufficient defence of the NMW to point out that it's harsher critics were wrong.
But this is not interesting. The interesting question is: is the NMW the best possible way of helping the poor? Or would other arrangements - possibly a basic income - be better? Larry, like most defenders of the NMW, never asks.

Comments

[Jack]

Wouldn't any increase in unemployment directly resulting from a minimum wage be offset, at least in part, by looser monetary policy and increased spending by its recipients?

Most of the studies I've seen have been related to local minimum wages in the US where the rest of the economic environment can be assumed not to respond.

Great file name for the Warwick paper.

[Ironman]

"Wouldn't any increase in unemployment directly resulting from a minimum wage be offset, at least in part, by looser monetary policy and increased spending by its recipients?"

You really couldn't count on monetary policy to wash out the effects of a minimum wage increase on unemployment levels. What's to say that monetary policy wouldn't become tighter instead? It's simply driven by too many other factors.

As for increased spending power, it's kind of a wash. For businesses with minimum-wage earning employees, their options for staying in business with sufficient margins include increasing prices, reducing labor costs (number of employees, hours worked, benefits and, in the long term, shifting labor costs to capital costs, such as through automation.) The latter reduces the need for minimum wage employees in the first place.

Combine those economic forces with the declining numbers of minimum wage earners, and you don't get a lot of impact from hiking the minimum wage.

Don't take my word for it - do the math yourself, and find your own solutions:

http://tinyurl.com/jcdjw