[cjo]

Even if minimum wage does cause some unemployment that's not the beginning or the end of the story. It's a market distortion created to counteract two other market distortions - namely already existing unemployment and market concentration on the employers' side, both of which depress wages.

So even proving beyond a doubt that minimum wage causes an increase in unemployment isn't enough to abolish the institution if there isn't a better solution to the problems at hand. Plus, unemployment percentage is not a robust enough metric to base the entire conversation on.

I liked Bryan Caplan's piece but to me it was predicated on the idea that minimum wage is based on errors in logic and not based on distortions in markets (especially in his conclusion.) I'm yet to see a better idea for addressing the downward effect of unemployment and oligopolization on low end wages. Caplan's solution seems to be deregulation but to me that's a bit like letting the wolves and the sheep work it out for themselves.

[jordanb]

Yep, and notice that the article was talking about a reduction in aggregate poverty rather than total employment. If a few people lose their jobs but a significantly larger number of people get higher wages, poverty in aggregate goes down.

But as the article points points out, there is excellent and robust empirical evidence that the current minimum wage (and even earlier minimum wages in America, which were much higher) are too low to significantly affect total employment. Wikipedia has an excellent writeup of the scholarship on this topic:

http://en.wikipedia.org/wiki/Minimum_wage#Empirical_studies

[xixi77]

I am actually a little confused, why do you consider unemployment a market distortion, and how does the minimum wage helps to correct it?

[cjo]

OK, I'll respond to this and harryh's at the same time. First of all, "distortion" is relative to what economic model you're starting with - so it can get a bit tricky, and I'm not very concerned with using the absolute correct technical term. But I'll make my case from the ground up:

Unemployment has a downward effect on wages because there's more competition for every job, just like competition between firms for employees will increase wages. Ideally these things will all even out. Unfortunately in our current economy we have high market concentration (so low competition between firms for employees which decreases wages) and high unemployment (so high competition for each job which also decreases wages). So we see lower wages from what they would be under Perfect Competition (or an ideally functioning free market) where I'm told it's impossible for these things to persist.

Minimum wage laws put a limit on how much firms can wield this market power given to them by market conditions. Without minimum wage/collective bargaining of some sort (and without technological advances, etc.) history and economic theory agree that firms will tend to push wages down to subsistence levels in order to maximize profits. Minimum wage is not the greatest tool, and I don't actually like it - but I do think it should be higher. We have a lack of good options at the moment so we're left picking the best of the bad.

But why do I call it a distortion? Large enough unemployment, coupled with lack of competition between firms for employees causes such a shift that the free market is barely distinguishable from slavery for those at the bottom (subsistence wages are literally only enough to survive and keep working.) So I throw around the word distortion because I'm trying to communicate that unemployment gives such a large amount of market power to employers that the market becomes fundamentally different from what we expect in a Free Market.

[harryh]

Unemployment is a market distortion?