The Rationale for Minimum Wage Increases

This morning I gave oral testimony to theVermont Senate Economic Committee on their proposal to raise the state minimum wage to $15 an hour by 2024. As part of my written evidence, I explored in detail the rationale for minimum wage hikes from the “Fight for $15” campaigners and other think-tanks. Below is a slightly edited version of that section of my testimony, which has wider applicability.–Theoretically, a minimum wage hike can improve the functioning of a labor market when employers are “monopsonistic. ” When firms have significant labor market power over employees, raising a wage floor can increase both pay for workers and employment levels.Some economists have argued that most firms do have a slight degree of monopsony power over their employees. This suggests a modest minimum wage can, in some cases, actually improve economic efficiency, ending so-called “exploitative” low wage rates without reducing employment.But those advocating minimum wage hikes across America today do not use this economic line of argument.Bureau of Labor Statistics data shows 84 percent of employees paid at or below the federal minimum wage work for businesses in retail, leisure and hospitality, and education and health services. These industries do not tend to be characterized by powerful companies which dominate local labor markets. The theoretical economic case for minimum wage hikes to solve “market failures” is therefore weak.Instead, proponents of higher minimum wages a...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs