We're about to live through that experiment in applied economics. On Friday, the U.S. minimum wage is set to increase from $6.55 an hour to $7.25 an hour. That makes it 11 percent more expensive for businesses to employ a minimum-wage worker.
(The last time the minimum wage was increased was July 2008 as part of the second-to-last step in a series of increases required by a law enacted the year before. This week's increase is the last.)
As anyone paying even scant attention to the news in the last year knows, economists often disagree more than they agree. Some economists, including Nobel laureates, say the spending package known as the "stimulus" bill was a great idea. Others, including Nobel laureates, think it wasn't. More generally, business cycle theory and Keynesian economics are points of sharp disagreement.
The effects of a minimum wage on unemployment are an exception to that rule. Perhaps it's because the economic laws at issue are straightforward, but economists generally agree that increasing the minimum wage also decreases employment; workers who aren't worth $7.25 an hour to their employer won't have a job.
"Most noneconomists believe that minimum wage laws protect workers from exploitation by employers and reduce poverty," says Econlib.org's Concise Encyclopedia of Economics. "Most economists believe that minimum wage laws cause unnecessary hardship for the very people they are supposed to help. The reason is simple: although minimum wage laws can set wages, they cannot guarantee jobs. In practice they often price low-skilled workers out of the labor market."
It's true that some research has indicated otherwise. The most famous study comes from economists David Card and Alan Krueger, who conducted telephone interviews of fast food restaurants in the neighboring states of Pennsylvania and New Jersey before and after the 1992 increase in New Jersey's minimum wage. Their book suggested that minimum wage hikes have little effect on employment.
Other economists looked at the Card and Krueger data; one evaluation suggested that the New Jersey employment variation was seasonal and, using actual payroll data from fast food chains, calculated that New Jersey employment fell 4.6 percent relative to Pennsylvania. Another analysis calculated that a 1 percent decrease in the minimum wage increases the probability of an unemployed worker getting a job by around 1 percent.
Greg Mankiw, a Harvard University professor who was the chairman of the council of economic advisors under George W. Bush, wrote a textbook that said in part:
The minimum wage has its greatest impact on the market for teenage labor... Many economists have studied how minimum-wage laws affect the teenage labor market. These researchers compare the changes in the minimum wage over time with the changes in teenage employment. Although there is some debate about how much the minimum wage affects employment, the typical study finds that a 10 percent increase in the minimum wage depresses teenage employment between 1 and 3 percent. In interpreting this estimate, note that a 10 percent increase in the minimum wage does not raise the average wage of teenagers by 10 percent. A change in the law does not directly affect those teenagers who are already paid well above the minimum, and enforcement of minimum-wage laws is not perfect. Thus, the estimated drop in employment of 1 to 3 percent is significant.
Other research is more counter-intuitive. One paper by David Neumark and Olena Nizalova says that: "Exposure to minimum wages at young ages may lead to longer-run effects. Among the possible adverse longer-run effects are decreased labor market experience and accumulation of tenure, lower current labor supply because of lower wages, and diminished training and skill acquisition."
While this debate may never be completely resolved, it's probably fair to say, as George Mason University's Don Boudreaux argues, "the theoretical case that (employers) respond in ways unfavorable to low-skilled employees is too powerful to dismiss."
Let's assume for the sake of argument that's true. Going back to our original Econwatch question, this implies that politicians who might be only mildly worried about increasing unemployment rates during an economic boom should be much more worried about job losses in a recession. (Shadowstats.com's alternate way of calculating unemployment, using the earlier methodology that counts discouraged workers, puts the rate at around 20 percent.)
No wonder that David Neumark, a professor of economics at the University of California, Irvine, says now is the worst time to raise the minimum wage. "Given present economic conditions, the imperative should be to create and enhance job opportunities," he argues. "I do not expect President Obama or congressional Democrats to give up their long-held support for a higher minimum wage. However, they should delay the increase in the minimum wage scheduled for this summer."
Of course, that never happened. Politicians love to tout increases in the minimum wage; it's a near-perfect opportunity to claim that Americans' salaries will increase without any negative effects. In the next few months, look for the real world to put that theory to the test.