Minimum wages

Myth and Measurement: The New Economics of the Minimum Wage
By David Card and Alan B. Krueger
Princeton University Press

Reviewed in The Independent Monthly, May 1996, p. 65.

Freeing up the labor market was not just high on the coalition’s agenda before the Mach elections but is an urgent obsession with John Howard, Peter Costello and Peter Reith.

Economically Correct advisers have convinced these ministers of an iron law of wages according to which any increase in the prescribed minimum wage must reduce employment chances for the most vulnerable. This claim is defended by demand-and-supply curves rather than a supply of facts for which the experts have never exhibited much demand. That textbooks offer next to no evidence for this causal connection is not surprising because the statistics have long suggested considerable uncertainty about the effect of minimum wage laws on job opportunities.

Card and Kreuger measured the impact of an increase in minimum wages on employment opportunities by comparing Pennsylvania, where the pay rate remained stable, against New Jersey where the starting wage went up by 11 per cent in 1991. Despite the State’s economy prior dip into recession, Card and Krueger could document an increase in employment for people considered most at risk. Further, when they tracked the “McJobs” on offer to minimum-wage juveniles, they found that the rate of opening of McDonalds-style outlets had not diminished. In addition, the extra labor costs had no effect on the share value of firms with a preponderance of low-wage employees.

After California increased minimum teenage wages by 10 per cent, the pair of investigators identified increases in teenage employment. A rise in the federal minimum in 1991 had a zero or positive employment outcome in Texas.

Card and Kreuger point to four empirical results which conflict with the assertion that higher minimum wages must lead to unemployment among the relevant segment of the work force. First, introduction of a minimum wages sees an increase in the wages for workers in sub-minimum rates. Secondly, when the minimum is raised, a ripple-on effect lifts wages for those above the minimum. Both those results challenge the Economically Correct assumption that workers were being paid in accord with their productivity. Thirdly, affected employers made few, if any, cuts to non-cash benefits. Finally, they had little resort to youth or other sub-minimum areas of the work force.

To explain their results, Card and Kreuger revisit arguments put forward in studies which showed the negligible impact of 1938 minimum wages on textile employment in the southern US. Wages there had been so low that employers had been rewarding their laborers well below the margin of their productivity and so had an “ability to pay”.

The authors also acknowledge the late great Joan Robinson, who accepted in the early 1930s that firms had some discretion in the wages they paid. Wage levels, she proposed, were linked to the relative strengths of the employees and employers. There is no iron law. Robinson developed this notion of buyer power (monopsony) in the labor market as part of her exploration of monopolising tendencies in the expansion of capital. Such imperfect competition pricks the fairy story about a market where freedom of trade is restricted only by the state or trade unions.

Subtle though Myth and Measurement is for its computations and reasoning, Australian actualities have to be distinguished from those in the US. From late in the nineteenth century, working people won a version of social democracy around a basic wage to promise frugal comfort. A nation-wide trade union movement grew to protect these conditions. One result is that our minimum wage is a higher percentage of average earnings than in the US. Hence, it is possible that an increase in minimum wage rates here would have a negative effect on certain employment chances. To decide, we need measurement more than a reiteration of the myth discredited by Card and Kreuger.