Recent stuff on minimum wages

A couple of very interesting papers on the minimum wage have come out recently.

One that corroborates my prejudices Bayesian priors is by David Neumark. Unusually, he has studied the long-run effects of minimum wages. These are, he claims, “unambiguously adverse.” The longer people are exposed to minimum wages, the less they earn.

This is because minimum wages encourage some young people to leave school to get jobs – thus reducing skill accumulation – and push others out of work, which reduces their experience and hence later earning ability.

A paper that challenges my priors is by Arantza Gorostiaga and Juan Rubio-Ramirez. It’s entitled “Optimal minimum wage in a competitive economy”, which invites the riposte; “It’s zero you twonks.”

Not necessarily. Imagine a government wants to redistribute income to low-skilled workers. One way of doing this is to tax the rich. But this is inefficient; it reduces their labour supply. Under some conditions, therefore, a minimum wage might be a less inefficient form of redistribution than tax and benefits. Not least of these conditions is that the price-inelasticity of demand for low-skilled labour be low.

This paper is a neat addition to the small but interesting literature on how a minimum wage might be efficient in a second-best world. An older contribution is this.

What really annoys me here (but not as much as the pretence that opposition to minimum wages is heartless towards the poor) is the vast gulf between the academic arguments for a minimum wage and the politicians’ ones. If a politician were to follow the Gorostiaga and Ramirez line, they’d say: “Of course the minimum wage destroys jobs, but we want to redistribute income to the working poor and the alternative is to tax the rich. And it’s better to lose some low-skilled labour than high-skilled labour.”

What are the chances of anyone ever saying this in public?

Comments

[Ravi]

Well, Brad DeLong said something of the sort on his blog (basically the idea he expressed is that we have lots of different ways of redistributing to the poor - welfare, EITC, minimum wage, ... and that part of the idea is to have a diversity of measures so we don't have to lean on any particular one too heavily).

[Chris]

Sorry, I meant: what are the chances of a politician saying this? Professor De Long is no politician - he's got way too much intelligence and integrity for that.