Thursday, June 24, 2004
Minimum Wage Debate
Kerry's proposal to increase the minimum wage is a great excuse for a classic economic policy debate. Arnold Kling has some facinating discussion going on his way cool econ blog. Most recently he quotes Glen Whitman's argument that true proponents assume a monosony model of employment, meaning that there is only one buyer (or employer) of labor, and they keep prices artificially low. This would justify government price setting, or in english, a higher minimum wage. Kling responds to this as follows:
The only other effective argument that I have heard in favor of the minimum wage is the theory that inefficiencies in the market cause employers to use the minimum wage as an inaccurate siginal for the value of unskilled labor, setting the wages artifically low, thus a small minimum wage increase would bring the market into equillibrium, and not hurt employment. I have not read any of the empirical studies on this point though, so all bets are off as to whether or not it works.
Kerry's proposal to increase the minimum wage is a great excuse for a classic economic policy debate. Arnold Kling has some facinating discussion going on his way cool econ blog. Most recently he quotes Glen Whitman's argument that true proponents assume a monosony model of employment, meaning that there is only one buyer (or employer) of labor, and they keep prices artificially low. This would justify government price setting, or in english, a higher minimum wage. Kling responds to this as follows:
It's hard to think of any real-world labor market monopsonists. Perhaps there is monopolistic competition--many firms, each with some price-setting and wage-setting power. However, in a monopolistically competitive market, price ceilings (and presumably wage floors) do not increase output and employment. Instead, they drive firms out of business.
The only other effective argument that I have heard in favor of the minimum wage is the theory that inefficiencies in the market cause employers to use the minimum wage as an inaccurate siginal for the value of unskilled labor, setting the wages artifically low, thus a small minimum wage increase would bring the market into equillibrium, and not hurt employment. I have not read any of the empirical studies on this point though, so all bets are off as to whether or not it works.
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