Economists’ views on the minimum wage

David Farrar today posted on the minimum wage, noting that, despite the much higher median wage, and much higher GDP per capita in the UK, their minimum wage (just increased) is only 88% of ours.

A regular commenter on Kiwiblog posted a link to a 2006 paper reporting on a (smallish) survey of American economists conducted by Robert Whaples. Among the issues on which the economists were surveyed was the minimum wage.

The Kiwiblog commenter used this quote from the paper in an attempt to highlight the lack of consensus among economists on the efficacy of minimum wages.

The efficacy of the minimum wage continues to divide economists. As Table 3 shows, almost half (46.8%) have concluded that the federal minimum wage should be eliminated, while a slightly smaller number (37.7%) favor increasing it.

First off, I think it is worth noting that 46.8% is not slightly more than 37.7%. It’s a significant difference. Of the 77 economists who responded, 36 thought that minimum wage should be abolished altogether, and 29 thought that it should be increased. That’s a 24% difference. There’s nothing “slight” about it.

Here are the full results.

The federal minimum wage in the U.S. should be:

  • eliminated. 46.8%
  • decreased. 1.3%
  • kept at the current level. 14.3%
  • increased by about 50 cents per hour. 5.2%
  • increased by about $1 per hour. 15.6%
  • increased by more than $1 per hour. 16.9%

At the time of the survey, the federal minimum wage in the US was $5.15 per hour. Only 16.9% of respondents thought that the federal minimum wage should increase by more than $1 per hour.

What that means is that 83.1% thought that minimum wage should be $6.15 per hour or less. As best I can make out, the median personal income in the US in 2006 was a little under US$33,000. The annual income on $6.15 per hour, assuming 2080 hours per year would be about $12,800. So 83.1% of economists opposed lifting the minimum wage above about 39% of the median wage.

It’s also worth noting that in 2006 the US ecomony appeared to be in good shape, and unemployment levels were low.

So, the Kiwiblog commenter has rather helpfully, though entirely inadvertently, highlighted what is actually a clear demonstration of consensus among economists* that the New Zealand minimum wage is too high.

Unfortunately, it’s set to go even higher in a few days.

*To be fair, 77 isn’t a great sample size.

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2 comments on “Economists’ views on the minimum wage

  1. Peter Pumpkinhead says:

    Great blog, occasional reader, I think this is the first time I am calling in.

    On the face of it your premise appears to have some merit.

    However, my own conclusion is that politicians who own the debate (and they do) have captured the way the discussion is framed.

    I do not believe it is the role of the government to provide these services at all.
    The voluntary or private sector would be much more effective and efficient at this. It is the role of the community to support its own.

    The discussion should be brought back to the morality of service provision – resources taken by force – and redistributed at will.

    So to allow them to discuss the virtues of an ‘amount’ is counter-productive, as it allows the platform for whichever party puts up the best argument for THEIR approach to minimum wage (historically buying votes!), to gain political points and win.

    It’s also the normalisation of something which should cause cognitive dissonance for anyone with half a moral, and anyone claiming to be a classical Liberal.
    ;-)

    Keep up the great blog!

  2. Thanks for the kind comments, Peter.

    I agree that the question ‘should there be a minimum wage at all?’ Or rather ‘is it the role of government to interfere in private agreements between to people to exchange labour for money?’

    But given that there is a minimum wage, the question of what level it is set at is, unfortunately, of great relevance to small business owners around the country.

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