More thoughts on the minimum wage

In this post from Mitch, one of the resident liberals linked to this study, which claims that the effect of raising the minimum wage is minor.  Now the study is remarkably reticent to actually provide the statistical data, so it ought to be taken with a grain of salt ("In God We Trust, all others must bring data"), but one piece of data it does present is that a 10% increase in the minimum wage corresponds over time to a 1% decrease in employment among low wage workers.

So let's work with that.   Let's assume, for what it's worth, that "low wage workers" includes about the bottom quintile, or about 30 million workers.  So that 1% decrease in employment impacts about 300,000 workers, which is about the same number of people as are currently employed by Sears, Roebuck and Company--which now includes Kmart as well.  In short, three of every forty minimum wage workers would lose their jobs.

In short, even a 10% increase in the minimum wage impacts a LOT of people.  But of course, the story gets worse, as President Obama and Governor Dayton Messinger are proposing 24% and 31% increases in the minimum wage.  So we would expect, if the relationship were linear, that over 700,000 people would lose their jobs from Obama's minimum wage proposal--seven out of forty--and we can thank God that Mark Dayton is not the President.

Of course, few things are linear in real life, and so I've constructed a model assuming that the actual productivity of labor is normally distributed somewhere above the minimum wage, and that those workers whose productivity does not exceed the minimum wage will lose their jobs.  If we assume that the current minimum wage deprives only 2.3% of these workers of work (-2 standard deviations), then we arrive at a mean productivity of $8.95/hour with a standard deviation of about $0.85.

Shift the minimum wage to $9/hour, and we then predict overall job losses of approximately half of minimum wage workers.   Any historical comparisons?

Glad you asked.  From 2007 to 2009, there were three consecutive increases in the minimum wage exceeding 10%.  Here's what happened to unemployment among young people:  it more than doubled as overall unemployment went from 4.6% to 10%.  When the increases in the minimum wage stopped in 2009, the trend in unemployment quickly stabilized and started to reverse.  In short, it's exactly what one would predict if the productivity of entry level labor were normally distributed somewhere above the minimum wage.

Now granted, there were other things going on at this time, but reality is that it shouldn't take a PhD economist to realize that when the price of labor rises, less of it will be demanded.  So if someone tells you he's trying to increase the minimum wage for your good, let him know that you'd be thankful if he didn't try to "help" you that way.

Oh, and how did that group of PhD economists miss the obvious?  By not looking in the right places, of course.