Why Doesn’t Minimum Wage Cause Noticeable Job Loss?

Standard economic theory predicts that a price floor, such as minimum wage, would cause a relative surplus in the good: too few of the good is demanded and too much supplied.  The logic is that minimum wage would likely cause layoffs (or higher unemployment) then would occur outside of the price controls.  And yet, for all the theorizing, whenever minimum wage is raised, the negative consequences are usually negligible (or, sometimes, non-existent). Why is this?  To the economically uninformed, this would suggest there are no consequences to hiking the wage.  To the economically-informed, there are a preponderance of explanations, ranging from monopsony power, to rearranging compensation, to attrition.  Allow me to humbly offer one more explanation.

Here is a chart of your standard price floor analysis.  The biggest thing to take away here is that the minimum wage is set above the equilibrium wage.  That is what causes the disemployment effects: a wage set higher than what most workers typically get.  But, what if the price floor is set below the equilibrium?  In that case, the wage floor would appear to have no effect, but that is simply because it is set too low.  I propose this is why minimum wage appears to have no/negligible effects on employment.

To test this theory, I looked at several industries that employ a high number of low-skilled workers.  Here are my findings:

Industry % of Labor that is Low Skill Average Hourly Wage (Non-Supervisory Employees)
Accommodation & Food Services (NAICS 72) 57.40% $11.79
Retail Trade (NAICS 44-45) 36.50% $14.71
Art, Entertainment, & Rec (NAICS 71) 34.20% $16.35

(Sources for the table: BLS, National Employment Law Project)

You’ll notice that, for these industries, the average wage of their non-supervisory employees (meaning managers, execs are excluded) are all above the national minimum wage.  This would suggest that even a minimum wage of $10 or $11/hr would still result in very little disemployment effects!  Of course, those who are working below such a minimum would still be harmed, (let us not forget that the above is an average) but it may help explain why so many studies find such little disemployment effects on minimum wage.

12 thoughts on “Why Doesn’t Minimum Wage Cause Noticeable Job Loss?

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  2. If minimum wage legislation “pays for itself,” a claim I’ve seen many times mostly by armchair economists, then the logical ‘proof’ of this is to set the minimum wage at $100k a year.

    Should they pay for themselves, this would prove the efficacy of minimum wages. We’d see the visible job losses, or we’d see a spurt in economic growth to ‘make up the difference’.

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    • Rick, it isn’t enough to blow out the theoretical top. It isn’t proven to be a linear relationship, or even a single-bend curve.

      We don’t have to disprove it with a $100 or $1,000 minimum. We merely need to ask for their methodology. It’s actually harder for them to tell you the difference between $15 and $16.

      Then ask them how they will go about selecting minimums for various industries.

      Then ask them how they will go about selecting moral minimums for people in various household sizes.

      Too often we assume the heavy lifting of the burden of proof. Time to let them carry it for a bit, and show us (and themselves) how much they really don’t know.

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    • The armchair ones are who make that argument. I’m not sure I’ve ever seen a real economist argue minimum wage has no effect.

      That said, one could reasonably argue diminishing marginal returns. A wage of X could have a limited effect on labor, but X+1 has a stronger negative effect. Similar to the Laffer Curve, where up to a certain point, higher tax rates do indeed create higher tax revenues and only after that point does the relationship reverse.

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  3. When the data quoted by the left includes only how minimum wage workers fair, there is this reason for why an increase in the minimum wage seems not to harm those workers:
    The localities where the economy is not doing so well will hear the loud concerns of businesses about the bad effect of any increase in the minimum wage. Where the economy is doing well, the voices of concern about inequality are loudest and their influence is for increasing the minimum wage. Because the likelihood of a legislator voting for a raise is affected by how well the economy is doing, a negative correlation (in any large scale statistics on the effect of minimum wage) would be masked.

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  4. Aside from the possible trickle up effect an increase in the minimum wage might have on employees paid above the minimum wage, a rise in the minimum wage should not result in unemployment of employees who earn more than the minimum wage. Since you have presented average pays of Non-supervisory employees (“NSEs”) and the averages are above the minimum wage, one must conclude that some non-NSEs make more than the average and some less. The fact that the average pay of NSEs is above the minimum wage should not help one whose skills are not worth whatever the new minimum wage is, regardless of the average pay of NSEs.

    Those lowest skilled employees would either be replaced by higher skilled employees or the jobs would be eliminated. If the minimum wage were set above the average, even more people would lose their jobs. No one ever suggested that all NSEs should lose their jobs with a minimum wage increase.

    In short, I’m not seeing what light average pay of NSEs sheds on the issue.

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    • Good question Harvey. The short answer is the NSE data only sheds light if a substantial number of NSEs are low-skilled. That is why I chose the three industries I did.

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  5. I work with a Socialist, an avowed one. Obviously he has never had a Supply/Demand curve explained. So, I drew one up, just as you did. But, using the same illustration I showed him – on the horizontal/Quantity axis – that the result of a minimum wage higher than the equilibrium wage would lead to unemployment (a surplus of labor) for the reasons you describe. I also showed him what happens when government puts a ceiling on prices – that it leads to shortages. I know that you know all of this, but I have two requests: could you redraw your illustration showing the impact on the horizontal/Quantity axis and if and when you do so, could you make it larger?
    Thanks!

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