Christina Romer on the Minimum Wage
Former Obama economist Christina Romer–she was the chairman of the President’s Council of Economic Advisers–has a good, though not excellent, piece on the minimum wage in the New York Times. In it, she departs from her ex-boss’s views and points out some of the pitfalls of raising the minimum wage. Two excerpts follow.
On why the minimum wage is not what assures high wages for workers:
Many of my students assume that government protection is the only thing ensuring decent wages for most American workers. But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone — perhaps not when unemployment is high, but certainly in normal times. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.
On the effects of the minimum wage on employment:
A related issue is whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage. There’s been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.
She’s right. But she doesn’t specify what she means by “small.” Also, strangely, to back her point, she references a study titled, “Why Does the Minimum Wage Have No Discernible Effect on Employment?” Saying that it has “no discernible effect” is different from saying the effect is small. If the effect is small, then it’s discernible. If it weren’t discernible, she wouldn’t know that it’s small.
Moreover, Christina doesn’t consider one important reason that the effect would be small: employers would adjust the compensation package to reduce the non-wage components. This also means that there’s a presumption that even many of the workers who don’t lose their jobs would be worse off.
HT to Greg Mankiw.