Minimum wage = less jobs?

Everytime that minimum wage laws become a hot button topic again, the most common response from conservatives is:

Bob Business Owner needs to hire some general help. He can afford to pay $10/hr. William Worker and Larry Laborer are both willing to work for for $5/mr. Great! Two new jobs have just been created. However, if the state passes a minimum wage law that states that Bob must pay at least $7/hr, he can only afford to hire William. Larry is still jobless, and most likely has to continue live off of public assistance even though he’d be happy to work for $5/hr. Ergo, minimum wage laws are harmful to both the working class and to the tax-paying middle class.

I’m posting this in “General Questions” and not “Great Debates” because I’m not interested in eveyone’s opinions (though, not that you all aren’t insightful). I want to know if there exists any rigously scrutinized, scientifically valid studies that either prove or disprove this assertion. In some ways it makes sense, but in other ways it seems like Republican hand-waving, using nebulous macroeconomic theory.

Fewer jobs?

I’m afraid this may be better as a Great Debate. The studies I read showed that raising the minimum wage did not have much effect on unemployment. William takes the extra money he would get and spends it at the bowling alley. Pretty soon the Bowling Alley needs help, and hires Larry to help out Paul Proletarian, who now has more work than he can do in a shift. Now if there’s no minimum wage, perhaps William and Larry work for Bob and Paul is at the Bowling Alley. But then someone comes by who’ll work for $4 and hour. In fact they get undercut by someone who’ll do it for $3 and hour. That leaves no spare money for bowling, but a job’s a job. Now Larry, Paul and William are all out of a job.

Anyway, there are conservative models on this, and studies to show how right their position is, I don’t doubt.

The question is why can Bob business owner only afford $10? Even if he had to raise the cost of his goods/services, his competitors would have to do the same. If he has a fixed margin (not uncommon) he might actually make more money. Suppose McDonalds had to raise proces 20%; how much business would they lose if their competitors did the same?

The actual answer has to do with elasticity of demand, marginal propensity to spend, and other factors that are difficult to quantify and predict.

Thank you. That was hurting my brain.

The thing is your analysis is that Bob the Business Owner will pay the workers he needs the maximum he is willing/able to. Thats not necessarily the case. If he can pay the two laborers $15/hr but is only paying them $10/hr combined, he can raise their wage to $15 and remain profitable. Assuming thats the case, then instituting a minimum wage will do nothing more than redirect the profits of the business to the workers.

Its not that simple either, but thats basically the jist of what a minimum wage hopes to accomplish.

If Bob the business owner truely can’t afford the new wage then yes, theoretically he cuts a job or goes out of business. What happens in reality is that Bob the business owner hires two illegal immigrants for below minimum wage.

There’s psychological factors that go beyond mathematically-rigorous calculations in play in both the raising/instituting minimum wage situation AND the dropping-minimum-wage-altogether scenarios.

If minimum wage were suddenly increased to, say, $10 an hour, we would see people put out of work, no question. However, some of them would be removed because the owners think they can’t afford them, even if they can (just like people whine about a $1 raise in the price of a gallon of gas, when in the vast majority of situations, gas is not the majority of the cost of a car.)

And if minimum wage were dropped altogether, we’d have business owners complaining of the lack of good workers when they only want to pay said workers $2 an hour, and not registering that they need to pay a wage that will attract good workers.

We need to think about both of these factors, as they have genuine economic consequences even when the logic behind them is faulty. Not only might they produce unemployment/poverty, they can also contribute to sub-par economic performance in general in society via non-ideal use of economic resources.

The belief that an increase in price makes the quantity of a good (in this case, labor) supplied increase and the quantity demanded decrease is a matter of micro-economics, not macro. And rather than being “nebulous” “Republican hand-waving”, this belief has been the foundation of microeconomics for more than 150 years.

Well, as pointed out, what really happens is the cost of the new salaries gets passed along in price increases - Bob remains competitive because all businesses had to bear this new cost.

Back to the OP’s actual question:

AFAICT, no. Legally mandated wage floors and their economic effects are a very ramified and complicated subject, and I don’t see how there could be any single study that conclusively either proves or disproves a statement as broad as “minimum wage increases cause job losses.”

However, the Economic Policy Institute did a briefing paper in 2004 that surveyed the results of more narrowly targeted research on various state minimum wage policies and employment levels. (Note that EPI is frequently described as having a pro-labor bias, but I haven’t come across any substantive refutations of this article in particular.) The author summarizes:

It’s not a Republican or Democrat thing. It’s a basic MICROeconomics thing - as in you should be able to find it in any basic Econ book.
http://en.wikipedia.org/wiki/Supply_and_demand
Basically increasing wages causes firms to do a couple things - hire fewer workers, increase prices to pass some of the costs along or turn to the ‘black market’ to hire either cheap illegals or pay workers under the table. The increase in wages may or may not stimulate growth in other areas of the economy.

To me it completely makes sense. It’s called the Law of Unintended Consequences. Emotionally it’s satisfying to set a minimum wage law with the intent of making sure everyone gets a fair wage. But in economics there is no free lunch so there must be a cost associated with setting that wage.

No, that doesn’t necessarily happen. Price is determined by supply and demand. Assuming demand is constant (which I am not sure is a valid assumption), that means price is determined by supply. It would seem that becuase your labor goes up, that your supply cost goes up, therefore your price goes up but thats not necessarily the case. You can’t simply raise your price and sell the same units to make up for your lost profits. If a company could just raise prices they would have done so already.

What might happen when you increase the labor price, is that machines/equipment to speed up production become the best choice. In other words, a response to increased labor cost could be to buy machines, ramp up production, lower prices, and work on volume. That way you cut down on the cost of labor per product, and make up the machine investment through higher volume. The company’s profits will go down compared to pre-minimum wage laws but lets look at this situation. We have the same number of people employed, more product on the market, and lower prices at the expense owner profits. Thats not what I would call a bad situation.

It is true that higher wages put some industries out of business, but thats just what happens. I don’t think anyone is crying about the lack of elevator men. Some industries can send their work overseas, and still other industries hire illegal immigrants. A minimum wage does create problems, but typically those problems are solved through other means.

Thats not true, there are other options than what you list.

I was going to add that it forces companies to be less labor-intensive. Push a button, and the elevator deivers you to your floor, perfectly lined up with the shaftway entrance, so you don’t have to step up or down. So no more elevator operators, except in the House of Representatives.

What kind of a crappy businessman is Bob? The question he should, and would be asking in any business I have ever worked in is not “How much can I pay?”, but rather “How many do I need?” If he needs two workers, he’ll hire two, and if the minimum wage goes up he’ll raise prices to compensate. If he needs only one, he’s not hiring two, no matter how cheap they are. What’s the extra guy going to do, watch?

However, the trouble with simple basic principles, such as the economic law of supply and demand, is that they’re often too simple to adequately explain real-life situation that have complicating features.

For example, the fact that the acceleration due to gravity is a constant independent of mass is a simple basic principle of physics. It implies that objects of different mass should fall in the same time. However, this simple basic principle doesn’t adequately explain how objects fall in our everyday experience, where they are affected by air resistance.

Similarly, the simple basic principle of supply and demand predicts that if the price of labor goes up, the demand for labor will go down. However, in the real world, labor markets are very complicated things, differing in many respects from the ideal perfect competitive market. Things happen in real-life markets that simple basic economic principles, by themselves, don’t adequately explain.

By the way, is anybody else interested in trying to answer the question that the OP actually asked, about the existence of scientifically valid studies on this issue? I posted what seemed to be the most relevant information I could find, but I’d be curious to know if there actually exists a more comprehensive study that attempts to resolve this issue definitively.

You can also look at two articles :http://www.gmu.edu/departments/economics/wew/articles/06/folly.html

and : http://www.gmu.edu/departments/economics/wew/articles/05/wage.html
They are by Walter E Willams Economics professor at George Mason University

He by the way is against raising the Minimum wage.

Actually, Osip, those Walter Williams articles are press releases that are essentially opinion pieces, not “scientifically valid studies” such as the OP asked about. Nor do they contain references to such studies, unfortunately.

No, he’s against having a minimum wage. Williams believes in the concept of pure capitalism. He has said that the reason the Volga River is as polluted as the Cuyahoga was fifty years ago is government regulation, for example. If he can direct you to a source, he can be useful to this discussion. He is not source himself, though.

Kimstu (and others), thanks for pointing in the right direction and for addressing my question.