Monday, January 01, 2007

The Logic of Minimum Wage

In a recent post, Greg Mankiw, author of the dominant economics textbook I had in university and practically any ECON 101 course, and former Chairman of the President's Council of Economic Advisers, questioned the logic of raising the minimum wage. He observes that a minimum wage increase is, in effect, "a tax on employers who hire unskilled workers."

Not convinced? Let's say you're running a small business, forced to choose between a teen who you had hired for $5 bucks an hour and are now forced to pay $7. You know that if you had paid $7 originally you could have hired someone who is better and likely more productive (that is if you decide you can afford someone at all at $7). With the government forcing you to hire at $7 then, why would you continue with the unskilled teen? What then, happens to the unskilled? Consider the difference between how France and the US have approached the problem. With somewhat different results.

The oddity of the arguments for minimum wage (once you get past the idea that what feels good may not actually be good and the cynicism of what's an obviously populist ploy), seems to be that money magically grows from trees and with the sprinkling of a little pixie dust, by creating a "price floor" no unintended consequences will result.

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