Why economists can’t endorse minimum wage hikes

Economists believe that raising the price of low-skilled labour just eliminates many of those jobs

Matthew LauRaising the minimum wage is a popular policy among voters. But economists dispute the value of such a raise. Why the discrepancy?

Recent polls from Ontario found strong support for the province’s minimum wage hike.

And in the United States, a Pew Research poll in 2016 showed that by a margin of 52 per cent to 46, Americans supported more than doubling the federal minimum wage from $7.25 to $15. Unsurprisingly, Pew Research found that the vast majority of Democrats supported the $15 minimum wage, while the vast majority of Republicans opposed.

Surveys of economists, however, reveal much more skepticism of minimum wages – even when the economists surveyed are overwhelmingly to the left side of the political spectrum.

A survey published in Econ Journal Watch in 2011 polled 2,000 randomly-selected economics professors in the United States. Of the 299 professors who responded, 56 per cent identified themselves as supporters of the Democratic Party compared to only 21 per cent who favoured the Republicans. Even though most of the professors identified with America’s left-wing political party, the survey found that 48 per cent were opposed to higher minimum wages, compared to only 34 per cent in favour (the rest were neutral or had no opinion).

Another survey published by the Employment Policies Institute (EPI) in 2015 was sent to 555 economists in the United States and received 166 responses. In this survey, Democrats outnumbered the Republicans by a margin of 59 per cent to only seven per cent – but still, nearly three-quarters of the economists opposed a $15-per-hour federal minimum wage. The survey found 83 per cent agreement that a $15 minimum wage would cut youth employment and 52 per cent said it would reduce adult employment.

Another frequently-cited survey of economists was conducted in 2005 by Robert Whaples of Wake Forest University. The survey was sent to 210 randomly-selected PhD-bearing members of the American Economic Association. Of the 77 respondents, 47 per cent favoured completely scrapping the federal minimum wage, which was then at $5.15 per hour. Another 14 per cent were in favour of freezing it. Only 17 per cent of economists in the survey wanted to raise the federal minimum wage by more than $1.

This is a far cry from the 52 per cent of the American public who want to double the minimum wage today. Why is there this big divergence in opinion between economists and the general public?

Overwhelmingly, it’s due to the difference between how economists and non-economists think about prices.

As economics professor Don Boudreaux has written, many or most non-economists “implicitly assume that whatever trades that are observed to occur are somehow destined to occur independently of the prices.” These non-economists “see prices merely as distributional tools,” wrote Boudreaux.

Those who see prices merely as distributional tools imagine that raising the minimum wage is a straight income transfer from business owners to low-wage workers. They ignore, or at least severely downplay, the role of prices in determining the amount of labour hours transacted between business owners and workers.

Economists are more skeptical of the minimum wage because they more carefully consider the fact that raising the price of low-skilled labour will decrease the quantity of labour that employers would like to pay for. That’s why, overwhelmingly, economists who oppose the minimum wage do so on the grounds that the minimum wage hurts low-skilled workers.

For example, when prominent Harvard professor Robert Barro was asked in 1996 about a possible federal minimum wage hike, he wrote that the result would be “reduced levels of employment for low-productivity workers.”

According to Barro, “The increased joblessness tends to be concentrated among the least advantaged persons, notably minority teenagers … the minimum-wage law ought to be abolished.”

Because raising the minimum wage causes employers to hire fewer low-skilled workers, abolishing the minimum wage would produce better outcomes for disadvantaged workers than raising it.

Matthew Lau is a research associate with the Frontier Centre for Public Policy.


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