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November 27, 2005

Employment and the Minimum Wage

By Neil the Ethical Werewolf

Battlepanda cites a piece from the Tampa Tribune about the aftereffects of Florida's minimum wage increase last year.  Despite the dire predictions of the restaurant and retailing industries, retail employment rose 2.1% over the past year while restaurant employment rose 5.2%.  The understanding of economics among retail entrepreneurs seems to have risen too:

"I don't think it's going to kill jobs because you need the people to do the work no matter what," said Walter, owner of Highland Park Furniture, which has a license to use the trade name Macy's Furniture & Mattress Clearance Center. "But it might hurt profits, and it sounds better to say it's going to hurt jobs than hurt profits."

This is how things usually tend to go after a minimum wage increase.   To quote right-wing economist Stephen Landsburg:

In fact, the power of the minimum wage to kill jobs has been greatly overestimated. Nowadays, most labor economists will tell you that that minimum wages have at most a tiny impact on employment... It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.

If you're wondering how companies will pay higher wages without an increase in unemployment, the answer is simple -- profits go down.  (Prices can go up too, but this doesn't happen in an especially dramatic way.  The Florida restaurants cited in the article raised prices about 3%.) Labor market monopsonies are regarded as the big explanatory factor here. Corporations have a huge bargaining power advantage over low-wage workers, and minimum wage laws keep them from pressing this advantage all the way to the sweatshops.

There's a lot of ways in which differences in bargaining power manifest themselves. A corporation can, at some cost, leave a factory inactive and shut down for years if conditions are unfavorable. But you can't shut down for years -- you've got to eat and pay the rent. So you've got to accept their ultimatums, while they can reject yours.  Furthermore, in some areas a small group of employers basically have the labor market cornered.  If corporations were allowed to push the downwards bidding war as far as they wanted, they could go a very long way.

People of the charts-with-curves-loving variety can get their fill here.

November 27, 2005 in Economics | Permalink


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Of course raising the minimum wage by a small amount isn't going to cause massive unemployment. The costs get passed on to customers. Most of the services provided by minimum wage employees are far to valuable to just get rid of because the wage goes up by a dollar.

Posted by: Stacy Rosenbaum | Nov 28, 2005 9:21:32 PM

I don't think if the minimum wage marks a bigger growth this would turn into unemployment.Maybe the search for employees would lower a little but this wouldn't cause so much problems.

Posted by: Cara Fletcher | Jul 11, 2007 11:21:51 AM

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