For decades, economists have argued that an increased minimum wage leads to more unemployment. They base the argument on a solid theoretical foundation, but definitive empirical proof has been elusive due to the difficulty of doing experiments in the real world, and politicians have therefore chosen to ignore economist’s warnings. Now, however, two new studies provide that irrefutable and oh so obscure evidence.
The first is a study commissioned in part by the city of Seattle to test the impact of their newly enacted policy to raise the minimum wage. The initiative itself is highly unusual and laudable because politicians rarely examine the consequences of their actions. The finding of the study is unequivocal: after increasing the minimum wage to thirteen dollars per hour, the number of hours worked by low-wage workers fell by 3.5 million per quarter. This was the result of both the loss of thousands of jobs and reduced number of hours worked in the remaining jobs.
Due to these dramatic changes in the labor market, the average low-wage worker lost $125 per month in income. The data could hardly be more damning. The effect of the minimum wage hike was the exact opposite of what the politicians intended.
The second study comes from Denmark, a Scandinavian country that is often hailed by the left as a utopian social democratic paradise. Researchers used a novel approach that allowed them to generate the most compelling empirical evidence of the effects of the minimum wage to date. A more conclusive study is hard to find in the social sciences.
The scientists used a particular oddity of Danish law to generate the perfect social experiment. In Denmark, the minimum wage jumps 40% on the day that the worker turns eighteen. Since both wage and unemployment data are comprehensively available for all employees above sixteen years of age, a simple analysis of wage around the eighteenth birthday provides a stunningly clear effect of the minimum wage law. The effect can unambiguously be seen in the figure below. As the minimum wage increases by 40%, the corresponding employment drops by a whopping 33%.
In combination, these two studies vindicate the prediction of classical liberal economic theory, and in a world where truth and fact matters, the debate of the effects of a raised minimum wage should now – once and for all – be over. Whether politicians and labor unions will be sufficiently honest to accept this result is another matter. They have ignored facts before, and there is therefore ample reason to believe they will repeat it.
These studies are, however, stepping stones upon which opponents of the minimum wage could build an insurmountable argument. The next phase should be to combine this result with studies of the effects of youth unemployment with long-term income trend. We already know that people who are unemployed for a prolonged period on average have lower income than their peers that have remained employed. McJobs (low-paying, dead-end jobs that require few skills and offer little in the way of advancement) are often a way for young people to enter the workforce and gain experience before they move onto higher paying jobs. The evidence now suggests that minimum wage hikes prevent them from accruing the labor experience they need to get higher paying jobs in the future.
If the evidence for this could be combined with a unified study of the long-term effects of the minimum wage on long term income, it could bring the labor unions on board and allow the laws to be repealed once and for all.
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