The recent policy updates on the federal minimum wage has led me to some relatively sleepless nights (referred to as "minimum wage blackholes" hereafter) as I've trolled the econ blogs for information and commentary. For the full text of Obama's State of the Union, see this.
In our Econ 101 courses, we are taught (maybe not directly) that such policies are a "bad idea", that binding price floors create artificial shortages which, in the case of the labor market, creates unemployment. The logic is simple: a minimum wage increases the cost of hiring one more employee, presumably above their level of productivity (assuming such productivity is reflected in equilibrium wages). This increase in labor costs would lead an employer to hire fewer workers, thus increasing unemployment.
At face value, such a policy would hurt exactly that population which it was intended to help. Lifting some minimum wage workers out of poverty comes at the cost of putting others into poverty. The effect is a redistribution of income, but not in the traditional way; it redistributes income from the poor to the poor.
A student who stops after getting an A in Econ 101 would claim vehemently that this is terribly policy (I did this myself when my phone lit up with a Politico update on the SOTU address). But is this really the case?
Tyler Cowen basically says yes, but others (Paul Krugman) say absolutely not.
So, as students of economics, what are we to believe? Of course, such discussions and disagreements are going to happen as science progresses. But there is a reason we call it the "Dismal Science." It seems a symptom of economists (macroeconomists in particular) that they come to relatively few consensuses. Anyone doubting this can take a look at the relatively recent econ war on Ricardian Equivalence.
And so I am reduced to my minimum wage blackholes for the time being. Look out for more on this topic as I continue to lose sleep...
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