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What will a 10% ... 50% ... 100% increase in the minimum wage do?

By Richard Freeman - posted Tuesday, 15 June 1999


The bottom line question is:

5. What is a reasonable level of the minimum to redistribute income without risking sizeable job loss?

Myth and Measurement -- the new economics of the minimum wage makes a convincing case that we have overestimated the dangers of job losses and that level of the minimum that does more good than harm is probably much higher than many economists have previously thought. The book shows as best as empirical economics can that 10%-20% increases in the current U.S. federal minimum will not harm employment (much if at all). It is properly cautious in extrapolating analysis of minimum in the range found in the U.S. to potentially much higher minima. At some point, every SR economist becomes a BR economist. A 100% increase in the minimum? A 200% increase? I know (sadly) that if you raise my pay to rock star levels, my employers will disemploy me, tenure and my singing talents notwithstanding. Still, if within plausible ranges, the minimum has little effect on employment, per Card and Krueger; if low wages reduce employment through supply responses, per Juhn, Murphy, and Topel; and if earnings inequality has become a major national problem, as we all recognise, policy debate should concentrate on the question of "what level of the minimum can redistribute income to low paid workers without serious job loss?" We do not have too many weapons in the policy arsenal to raise the pay of low wage workers. The book has raised my assessment of what level of minimum wage could redistribute income without causing job losses. I predict it will do the same to yours.

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References

Brown, Charles 1989 "Minimum Wage Laws: Are They Overrated?" Journal of Economic Perspectives, 20: 487-528

Gregory, Robert and R.C. Duncan "Segmented Market Theories and the Australian Experience of Equal Pay for Women" Journal of Post-Keynesian Economics, Spring 1991

Juhn, Chinhui, Murphy, Kevin M. and Topel, Robert "Why Has the Natural Rate of Unemployment Increased Over Time?" Brookings Papers on Economic Activity 1991 (2), 75-142.

Machin, Steve and Alan Manning. 1994 "The Effects of Minimum Wages on Wage Dispersion and Employment: Evidence from the U.K. Wage Councils" Industrial and Labor Relations Review 47: 319-329

Neumark, David and W. Wascher "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws" Industrial and Labor Relations Review vol 46 no 1, 1992, pp 55-81.

Neumark, David and W. Wascher "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws" Industrial and Labor Relations Review vol 46 no 1, 1992, pp 55-81.

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Topel, Robert "What Have We Learned from Empirical Studies of Unemployment and Turnover?" American Economic Association, Papers and Proceedings, May 1993, pp 110-115

Wellington, A. "Effects of the Minimum Wage on the Employment Status of Youth: An Update" Journal of Human Resources, vol 26, no 1, 1991, pp 27-46

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This article is reprinted courtesy of Professor Richard Freeman from an article that first appeared in Industrial and Labor Relations Review.



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About the Author

Professor Richard Freeman was a Professor of Economics at Harvard University.

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