Minimum Wage Increase

According to the Associated Press, on March 7, the Senate defeated two bills designed to increase the minimum wage. Senator John Sununu voiced his argument against the wage increase, "when you raise the minimum wage you are pricing some workers out of the market." In macroeconomics we learned that as the minimum wage increases the unemployment rate also increases. Is this true? If somehow these minimum wage bills do get passed will it hurt the economy?

A minimum wage increase could make it more difficult for employers to hire unskilled workers. How could this minimum wage hike effect firms? Everybody who is paid minimum wage would like an increase, but I think it could possibly cause more negative effects on the economy than positive. What is your opinion? Are the macroeconomics books telling us the truth?

1 comment:

Dr. Tufte said...

All our theory tells us that a minimum wage increase should decrease employment and raise unemployment (recall that the minimum wage is a form of price floor).

But there has been some evidence accumulated over the last decade that it might not work that way. We're not really sure why, but people are more open minded about an increase perhaps not being a bad thing.

But Landsburg has given a very good argument against raising the minimum wage in his Slate column "The Sin of Wages ...". That is, that the point of the minimum wage is to make minimum wage workers better off - which if fine. The problem is that the minimum wage doesn't require everyone to chip in to help out - it requires the employers and customers who employ those workers to pay them more. Does it seem fair to be required to pay more for choosing to consume something that doesn't require skill to produce?