The minimum wage is a public policy that is debated the world over. It has widespread public support because there is something very appealing about the notion that those who work hard will be rewarded with a reasonable standard of living. Economists, living up to their reputation as dismal scientists, point out that this is all very well, but there may be unintended consequences of such a policy:
The theory of the minimum wage is straightforward and convinces most economists that, even if the minimum wage has some benefits in terms of the distribution of income, it carries costs with it as well. There is less consensus among economists about whether the redistribution brought about by the minimum wage is desirable. Although the working poor benefit, others are made worse off—including those who are unemployed, who are perhaps even more in need of help than the working poor. Individuals differ in their beliefs about how society’s resources should be distributed, and there is no right answer to the question “what is fair?”
When we looked at the evidence on minimum wages, however, we found that the picture is much less clear. Although some studies are in line with the predictions of theory, many studies suggest that, in practice, the effect of the minimum wage on employment is minimal. At the same time, the effect of the minimum wage on the distribution of income is small as well. In the end, it is difficult to resist concluding that the minimum wage is much less important—in terms of both benefits and costs—than one would think from the rhetoric of the debate.
When you read the newspapers or watch television, you will frequently hear economists offer different viewpoints on economic policies. These disagreements are typically not because economists differ on the theory. The disagreements often come down to different opinions about how to analyze and interpret economic data. Remember as well that television and print journalists go out of their way to find differing points of view because that makes a better story, so the disagreement you see in the media is usually not representative of economists as a whole. That said, economists also have different political viewpoints, and they are sometimes guilty of letting their political preferences cloud their economic analysis.
Having gone through the arguments in this chapter, you should be better able to assess debates and discussion on the minimum wage the next time it comes to the forefront of public debate. This chapter has a much broader purpose, however. We have been studying the effect of government intervention in a market, and we have shown how we can use our tools of supply and demand to understand the likely effects of that intervention. There are many other examples of government interventions that can be investigated using very similar reasoning.
Finally, we have learned something about how empirical work is conducted in economics. Because economists cannot conduct experiments, they are forced to trawl through messy data in an attempt to test their theories. It is difficult to be sure that the variables in which we are interested are indeed changing enough to be useful, and it is even more difficult to disentangle those changes from all the other irrelevant changes that affect the data that we observe.
Economics Detective
Spreadsheet Exercise
