Traditional labour market models suggest that when the price of labour increases the number of people employed will fall. Using these models many economists have
argued that mechanisms such as a minimum wage have the perverse effect of
reducing employment. A minimum wage, set above the market clearing equilibrium can only reduce employment. Their conclusion is then that minimum wages hurt the very people they seek to help. However, such claims have been contradicted by empirical
findings showing that the introduction of minimum wages either increase
employment or allow it to remain stable, while granting a higher wage.
recent models suggest many individual firms face monopsony in the labour market
– implying that many individual firms face an upward sloping labour supply
curve in the short run and have control of the wage rate (a monopsony is where a single buyer, i.e. the
firm, faces many sellers, i.e. prospective workers. Like a monopoly, but for a single buyer rather than a single seller). The monopsonist maximizes profit where the marginal expense of labour is equal to the value of the marginal product of labour. What are the consequences
of this? With an upward sloping labour supply curve and imperfect competition an increase in a minimum wage can result in an increase in employment.
As we can see from the graph, the monopsony
wage is lower than the competitive wage and at this wage there is an under supply
of labour. As the market is operating at the monopsony wage, efficient
increases can be made in wages and employment. If the government imposes a
minimum wage at ‘minimum wage 1’, below the competitive wage but above the
monopsony wage, we can see that the wage has increased from the monopsony level
and employment has increased from E1 to E*. There is still some under supply of
labour relative to the competitive outcome, however, this is still a greater
level of employment than under a monopsony.
There is an interesting anomaly presented
by a monopsony model for labour. If the government were to set a minimum wage
above the competitive wage (‘minimum wage 2’ employment would increase (from
E1 to E**) but unemployment would also increase (there distance between A and
B), as more people would be willing to work at this wage than the employers
seek to employ - however, more people will still be employed at a higher wage, generating a greater net surplus than a monopsony.
So we have shown that we can model
scenarios where a minimum wage can both increase wage and employment, contrary to traditional expections. Let us
now have a look at some empirics. In New Zealand, pre-2001, there was an adult
minimum wage (for persons over 20 years old) and a youth minimum wage (for
persons 16-19 years old) which was set at 60% of the adult minimum wage. In 2001 the
government extended the adult minimum wage to cover people over 18, while the
youth wage, which remained for 16-17 year olds, was increased to 80% of the
adult minimum wage. This had the effect of increasing the wage for 18-19 year
olds by 85% and for 16-17 by 50%. Traditional models of labour market supply
would have predicted this wage increase to result in a reduction in employment
for the two treatment groups (18-20 year olds and 16-17 year olds). In fact,
quite the opposite resulted. The employment rate for 18-20 increased by 0.12% and
by 0.11% for 16-17 year olds, both groups increased by 0.12% relative to the control
group (20-25 year olds).While these
are only small increases, the important point is that they are not decreases as
the traditional model would have expected. Furthermore, 16-17 year olds increased
their hours worked by 10% while 18-19 year olds increased their hours worked by
5% (Hyslop and Stillman 2004). These are quite substantial increases, and again, they are inconsistent with
traditional model predictions of a reduction in employment from increasing a
I should also add that there are also very sound
social reasons for minimum wages, but it helps to have economic theory and
evidence supporting the argument too!
On the contrary, this policy change provided a very good opportunity to test traditional economic models - an opportunity that may not have existed elsewhere in the world. There is no reason why New Zealand's labour market should behave fundamentally differently to any other first world country. You can't just say 'it's an exception' because the result is unexpected. The results stack up, and are consistent with theory, just not traditional models.
"So few children wanted to work for 60% of what they deserve." - this may be true, but it ignores the demand side of the model, arguably the key consideration here. It goes without saying that when wages increase more people will want to work. What was surprising here was that labour demand also increased - employers were willing to employ more people at a higher wage. This was very unexpected. That wages went up 85% and employment increased by 5% is a huge result.
Kiwi Ace wrote on Apr 21st, 2009 at 4:22pm : "So few children wanted to work for 60% of what they deserve." - this may be true, but it ignores the demand side of the model, arguably the key consideration here. It goes without saying that when wages increase more people will want to work. What was surprising here was that labour demand also increased - employers were willing to employ more people at a higher wage. This was very unexpected. That wages went up 85% and employment increased by 5% is a huge result.
The point I made is where the increase in employees came from, what groups tehy came from. You can strategically place laws making 16 year olds very good hiring, cause 20 year olds to lose their jobs, but have more 16 year olds than 20 year olds.
Just because employment increased for a percentage of the population during the time of a great economic expansion for New Zealand, does not necessarily mean that we can attribute it solely on this new policy.
In the period from 2001-2005, the New Zealand economy nearly DOUBLED. When I skimmed through the paper, I did not find any reference to GDP. Especially when dealing with Labor, it would be smart of the authors to mention GDP, as the employment lags behind GDP, and should be of great predictive value.
My question is this: "If you owned a McDonald's and typically hired young adults, would you hire more because it now costs you more?"
Regardless of what I believe in your viewpoint, I respect you for being engaged in this wonderful "dismal science"! It is nice to be able to have an exchange of ideas with somebody that is not apathetic to the world around them!