by Sukrit Sabhlok

Created on: January 02, 2007   Last Updated: April 14, 2008

Some commentators have put forth a 1995 study, Myth and Measurement: The New Economics of the Minimum Wage', by American economists David Card (Berkeley) and Alan Krueger (Princeton) to substantiate their claims in support of minimum wages. This study has been used by minimum wage advocates to argue that because total employment continued to grow in a majority of the fast-food outlets surveyed each time the minimum wage was raised, those who claim the minimum wage causes job loss must be wrong. Yet this is erroneous thinking.

It is true that minimum wage laws at present do not cost jobs in the sense that employment growth ceases completely. There are two reasons for this.

First, as minimum wages usually impact upon unskilled workers, only a small percentage of the total labour force is on the minimum wage. The effects on aggregate employment are thus difficult to measure and would in any case be proportionately small.

Second, the legislated rates for minimum wages are low enough that the adverse effects are not widespread, but high enough to have some negative effects nonetheless. They are well below $100 per hour, a rate at which reduced employment would undoubtedly result. But they are higher than, say, $1 per hour.

So minimum wage laws do cause job loss in the sense that, in their absence, employment would have grown to an even greater extent. Thus, job loss occurs if, holding other factors constant, there are fewer jobs created than there might otherwise have been.

Another problem with the study is that it focuses on a small niche of the world two American states and does not take into account global trends.

Even the fiercest minimum wage advocates usually concede that there is a point when minimum wages would cost jobs. Take Zach Alexopoulos, a Sydney University economics tutor, who writes on Vibewire.net: "Of course, there is a point where a high enough minimum wage would indeed cost more jobs than it created, but the evidence of Card and Krueger shows that we're not as that point yet."

What he, and others, neglect to understand is that there's no known theoretically established rate which can be rationally fixed as a minimum wage. In other words, there's no person in the world who has a Ph.D. in market interference, and who knows exactly when and where to interfere with the market. Economists make models, but a model is a simplified version of reality and is not the truth.

Predictions of positive economics involve the influence of one variable on another, holding all other variables constant. But controlled social experiments are impossible to conduct, and economists generally use proxies to draw conclusions. This is one reason for differing conclusions on a hypothesis that makes logical sense.

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