The minimum wage: theory before history

Greg Mankiw and Brad DeLong are having some back and forth over the minimum wage.  I’m willing to admit, unabashedly, that I form my judgments on this matter by theory more than "raw evidence."  When the evidence is unclear, or points in multiple directions, I favor the most plausible explanation.

Unlike like most market-oriented economists, however, I am not obsessed with the story of the downward-sloping demand curve for labor, to the exclusion of all other possible mechanisms.  I am more likely to see markets as extremely flexible and to look to the quality of job as a critical variable.  If minimum wages go up, I expect some mix of two scenarios:

1. The employer restores the previous net wage by worsening working conditions.

2. The employer upgrades the quality of job and thus marginal products, to meet the new level of minimum wage.

Now #1 is not much of an argument for boosting the minimum wage.  But is #2?

It sounds good but the employer had decided in the first place not to create those higher productivity jobs.  So those jobs must cost more and we should expect a negative effect on employment, albeit perhaps a slight one.

It is also the case that those jobs will go to the "most easily upgradable" workers among the low-wage working set.  I suspect those are the low-wage workers with relatively high human capital and high levels of adaptability.  Among the class of low-wage workers, the effects are probably anti-egalitarian.  That again does not make the minimum wage sound so great, even though the employment effects could be small or perhaps even zero.  I might add this also explains why the most articulate low-wage workers probably, for reasons of self-interest, favor increases in the minimum wage.

I don’t buy into the Card-Krueger monopsony scenario, at least not outside of rural Nebraska.  If you wish to defend it (does anybody? — even Krugman scorned it), comments are open.

I invite all participants to the debate to indicate the relative weights they place on "theory" vs. "history."  I’ll invent an imaginary, meaningless scale and opt in at "0.7" in favor of theory.  If the evidence were clearer, of course, my weights would change.


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