The Debate on the Minimum Wage is Back Again

With the Democrats in Congress, an increase in the federal minimum wage is on the table. The Christian Science Monitor has recently published two articles on the subject (see here and here). In spite of what they say, good economics still teaches the same conclusion about the effects of minimum wage legislation:

• If enforced and above the market clearing level, all else equal, a minimum wage precludes certain transactions on the labor market from taking place. These transactions would have been beneficial to all parties. Involuntary unemployment may result and employers may adopt a different (and less preferred) mix of (heterogeneous) capital and labor.
• Logic dictates that even if an impact on the employment rate cannot be measured, an enforced minimum wage will have an impact on the allocation of resources. For instance, the life of many capital goods may be extended beyond what would have taken place absent the legislation. As a result, working conditions may deteriorate. This is because factors of production ultimately receive their discounted marginal value product. If, by government fiat, one artificially increases the return of a given type of factor (low-skilled labor), then other factors’ returns will necessarily be affected. Employers don’t determine factors’ returns; consumers do.
• The long-term effects of minimum wage legislation are perhaps the most dreadful: the creation of a dual society of insiders and outsiders with high unemployment (as seen in Europe and South America). Moreover, many people who have jobs may face lower incentives to invest in their human capital. And those who would have benefited from the experience of a low-paid employment (such as young people) remain excluded from the job market (and from the accumulation of on-the-job experience).
• Poverty does not result from a low price of labor (and artificially constraining it will therefore not solve it). The roots of poverty are to be found elsewhere (such as low labor productivity). Labor’s returns are influenced by human capital investment, but also by capital accumulation elsewhere in the economy. Capital accumulation and factor productivity depend on entrepreneurial activity and the division of labor (Kirznerian and Smithian effects). Thus the conditions for entrepreneurship and the division of labor are crucial to a growing economy and higher wages. Giving people the incentives to seize profit opportunities and to invest in their human capital via low taxation is the best way to reduce poverty in the long run. Minimum wage legislation cannot reduce poverty overall; it only masks it for a while.

Comments

[David]

I have a question regarding Austrian economics and Christian Science. The Austrian economists here seem to use the CS monitor as a regular source for economic and policy news. Is there a particular reason for this? Is there a link between the modern Austrian school (I am not aware of any historic link) and Christian science. Any insight would be greatly appreciated.
Frederic - good post about the minimum wage. I agree. There is so much bad economic thinking around the minimum wage these days.

[Matt C.]

Here is an article from the Washington Post that shows how a minimum wage increase can effect a community. It certainly has a bend to its "positive" effects and anti-Walmart stance, but it does show the problem with increasing the minimum wage.

http://www.washingtonpost.com/wp-dyn/content/article/2007/01/09/AR2007010901812.html?sub=new

[frederic]

To my knowledge there is no link between AE and Christian Science. And the CSM is just one source of news among many.

[Rafe]

I don't know about the CS connection but during the Popper Conference in Vienna a person from the US told me with a straight face that the Mises Institute had been taken over by Roman Catholics. He was paying for lunch so I felt obliged to be polite (is this corruption or just good manners?).