Minimum Wages and Unemployment

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MiStudent ID#00001439

Advanced Economics BUZE600, CW1

Contents
Introduction ............................................................................................................................................. 2 Topicality and importance of the minimum wage effect on employment .............................................. 2 Lagged Effects of the Minimum Wage ................................................................................................... 3 Hours versus Employment Effects.......................................................................................................... 5 Employment transition effects of wage floors ........................................................................................ 6 Conclusion .............................................................................................................................................. 7 Bibliography ........................................................................................................................................... 8

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Student ID#00001439 Introduction

Advanced Economics BUZE600, CW1

The analysis of the effect of the minimum wage on unemployment is necessary in order to evaluate whether minimum wages are effective policy tool for bettering economic state of individuals at the bottom of the income distribution – which is the fundamental objective of minimum wage policy. Topicality and importance of the minimum wage effect on employment The minimum wage has been the matter of fierce debate among policymakers and economists in the United States for much of the precedent century. The "marginalists" with the claim that minimum wage labor market was best described as a competitive market disagreed with "institutionalists" who stated it was not, stressing on the implications of the minimum wage (Leonard, 2000). For instance, though Stigler (1946) admitted the case of monopsony where increase in minimum wage could, from theoretical standpoint, cause higher employment in a labor market, he argued that competitive features of low wage industries most probably lead to displacement of low-wage labor. In response, Lester (1947) argued that “reasoning about labor markets as though they were commodity markets seems to be an important explanation for erroneous conclusions on such matters as the minimum wage” (p. 146) since he found Stigler's model of competitive wage determination as conflicting with existing business practices. As a result, other economists started to conduct research on the effects of minimum wage, with much of collected empirical evidence implying that higher minimum wages were negatively affecting on the employment opportunities of low-wage workers (Goldfarb, 1974). In the review by senior economists of Minimum Wage Study Commission, namely, Charles Brown, Curtis Gilroy, and Andrew Kohen (1982) summarized the existing research with the statement that “time-series studies typically find that a 10 percent increase in the minimum wage reduces teenage employment by one to three percent” (p. 524). Once the publication of survey results made economists to come to an apparent consensus on this range regarding the employment effects of wage floor, economic research on this issue came to a halt till late 1980s. In early 1990s, due to renewed prominence of the issue in public policy debates, along with further evidence to investigate, the researchers started to reexamine the employment effects of minimum wage.

Though more than 100 research papers have been published since 1990s on the effects of minimum wage increases on employment, the economists and politicians fail to find unambiguous evidence on what the minimum wages says. Along with contradictory findings, the results from newer studies on 2

Student ID#00001439

Advanced Economics BUZE600, CW1

wage floors are summarized and interpreted differently in different sources. In some studies economic theory is found to...
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