Yesterday we listened to the debate between the Prime Minister and David Cunliffe on TV 3. The leaders spoke at length about the minimum wage. The Prime Minister’s story that the increase of the minimum wage would increase unemployment and that would actually make us worse off. He said that the correlation between the minimum wage and the unemployment rate is positive. Put simply, a rise in the minimum wage of $2 would increase the cost of production for small businesses. In turn, they either reduce employment or pass the cost’s increase to consumers by raising prices. This is the typical textbook argument.
My colleagues Dean Hyslop and Steven Stillman, both professors of labour economics at leading New Zealand universities, studied the youth minimum wage in New Zealand. It might be worth restating their findings http://www.motu.org.nz/publications/detail/youth_minimum_wage_reform_and_the_labour_market . They say, "we find no robust evidence of adverse effects on youth employment or hours worked. In fact, we find strong evidence of positive employment responses to the changes for both groups of teenagers, and that 16-17 year-olds increased their hours worked by 10-15 percent following the minimum wage changes. Given the absence of any adverse employment effects, we find significant increases in labour earnings and total income of teenagers relative to young adults. However, we find some evidence of a decline in educational enrolment, and in unemployment inactivity, although these results depend on the specification adopted."
In another paper on the issue, which they examined the 2008 youth minimum wage reform, they say," The study found that the introduction of the New Entrant (NE) minimum wage was largely ignored by businesses and that most 16 an 17 years old workers were moved on the adult minimum wage, which resulted in an increase in the minimum wage of 28 percent of this group. This research found that the minimum wag increase accounted for approximately 20-40 percent of the fall in the proportion of 16 and 17 years olds in employment (4,500 - 9,000 jobs) by 2010. The introduction of the NE minimum wage did not have a significant impact on unemployment, because most of the 16 and 17 years old impacted were students who were combining study with part-time employment."
I have no doubt that both the Prime Minister and Mr. Cunliffe care about jobs, want to put people to work, and provide them with decent wages. They have the same objective (same preferences), but different policies (different budget constraints) to achieve it. However, the fact is that there is an empirically significant relationship between wages, productivity and unemployment; i.e., the Wage Curve, which has been ignored in the debate. I have shown in a previous blog that there is a significant correlation between the real wage rate-labour productivity wedge and unemployment.
However, I want to provide an alternative, appealing, interventionist or activist, policy proposition, which might encompass both of the PM and Mr. Cunliffe’s views. It is appealing because it accounts for productivity, wages and unemployment. The Economics Nobel Laureate Edmund Phelps argues that the government can subsidize low-wage employment, by paying employers for every full-time low-wage worker they hire, and calibrate the subsidy to the employee’s wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero. With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid-out as direct or indirect labor compensation. People could benefit from the subsidy only by engaging in productive work – that is, a job that employers deem worth paying something for.