“The General Trend Seems A Puzzling Suspension Of The Law Of Supply And Demand”

There can be no reasonable argument against a living wage from a moral perspective. None. But the economics of the minimum wage are puzzling and often partisan. We’re warned that decent pay will kill jobs–even a philanthropic soul like the mid-life, sweater-clad iteration of Bill Gates holds this position–but is it true? In his latest Financial Times column, Tim Harford suggest there should be fewer opinions and more research. An excerpt:

The UK minimum wage took effect 16 years ago this week, on April 1 1999. As with the Equal Pay Act, economically literate commentators feared trouble, and for much the same reason: the minimum wage would destroy jobs and harm those it was intended to help. We would face the tragic situation of employers who would only wish to hire at a low wage, workers who would rather have poorly paid work than no work at all, and the government outlawing the whole affair.

And yet, the minimum wage does not seem to have destroyed many jobs — or at least, not in a way that can be discerned by slicing up the aggregate data. (One exception: there is some evidence that in care homes, where large numbers of people are paid the minimum wage, employment has been dented.)

The general trend seems a puzzling suspension of the law of supply and demand. One explanation of the puzzle is that higher wages may attract more committed workers, with higher morale, better attendance and lower turnover. On this view, the minimum wage pushed employers into doing something they might have been wise to do anyway. To the extent that it imposed net costs on employers, they were small enough to make little difference to their appetite for hiring.

An alternative response is that the data are noisy and don’t tell us much, so we should stick to basic economic reasoning.•

 

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