The minimum wage is a controversial topic where efficiency, equity, and values clash. This article seeks a balance point from an academic and value perspective.
Minimum wage debate
One of the common misconceptions among the public about economics is that “economists hate the minimum wage system.” In a 1992 survey, 79 percent of respondents agreed that the minimum wage system increased the unemployment rate of young, unskilled workers, but a survey conducted since 2013 shows that the number of economists who are favorable to the minimum wage system has increased considerably.
Let’s take a look at a survey conducted at the University of Chicago in 2013, a long time ago. Forty percent of respondents agreed with the argument that raising the federal minimum wage from $7.50 to $9 would make it harder for low-skilled workers to find jobs, while 38 percent disagreed and 22 percent were unsure. The minimum wage issue is a topic of intense debate among scholars, and no clear answer has yet been found.
The minimum wage issue is quite complex, and there is much that is missed in a simple theoretical analysis, and there is still fierce debate as the latest research continues to come out. There are many difficulties in covering these contents in a short article. In this blog post, let’s try to explain the key points in the simplest way possible.
Theoretical and Empirical Analysis of the Minimum Wage System
The minimum wage system is a system that prohibits employers from paying workers less than the hourly wage set by law. The main advantage of this system is that it increases the income of low-income workers, thereby contributing to the reduction of poverty and inequality. On the contrary, one of the most important arguments against the minimum wage is that it may make it more difficult for low-income workers to find employment. Not many scholars agree with the argument that raising the minimum wage will increase inflation or that raising the minimum wage will contribute to economic growth by increasing the income of low-income earners. Therefore, let’s focus on the impact of the minimum wage system on low-income workers.
First, let’s look at it from the perspective of supply and demand. In a market economy, labor is a tradable commodity. Companies that want to use labor for a certain period of time and pay for it become the demand side of labor, while workers who want to provide labor and receive payment become the supply side of labor. And a balanced wage will be formed where supply and demand meet. If the minimum wage increases, the company will have to spend more money on the worker, so it can be assumed that the company will try to hire fewer workers to reduce that cost. As a result, the theoretical inference about the minimum wage is that it reduces labor demand and increases the number of unemployed.
So, do we actually see such results? David Card and the late Alan Krueger, who won the Nobel Prize in Economics in 2021, analyzed the employment volume of fast food restaurants that employ low-skilled workers who do not have to compete with imported products, when the minimum wage was raised from $4.25 to $5.05 in New Jersey, USA, in 1992, and the minimum wage was not raised in neighboring Pennsylvania. The results showed that raising the minimum wage does not cause job losses. Starting with this study, numerous empirical analysis studies were conducted, and at least a number of economists came to believe that a minimum wage increase of “not a large level” would not cause job losses in the short term.
If a theoretical hypothesis is rejected in actual data analysis, it is necessary to explain it again theoretically. First, the minimum wage system only affects low-income groups, so the impact on those who already receive high wages is quite low. However, some argue that the minimum wage system has a greater impact in Asian countries such as South Korea and Japan, where wages are determined based on career rather than job.
In addition, wages are affected by supply and demand, but also by various other factors. For example, there are high-income earners and low-income earners, and there are regular employees and non-regular employees. In addition, the characteristics of low-income earners who are greatly affected by the minimum wage are diverse. Therefore, even if the minimum wage is raised, the number of workers affected may be considerably smaller than expected.
In addition, there is recent research that wages are determined by the “dominance of the firm” rather than the “principle of supply and demand” between workers and firms, and that the firm’s monopoly power over demand has an impact. A study found that the marginal product of labor in the US manufacturing industry is 53 percent higher than the wages of workers, meaning that companies are paying only 65 percent of the value of workers’ contributions to production in wages. This means that companies have the financial capacity to provide their workers with a higher wage and, as a result, will not immediately reduce the number of employees needed even if the minimum wage increases.
The Minimum Wage as a Question of Efficiency and Fairness
The minimum wage issue can also be understood as a conflict between efficiency and fairness. If the increase in the minimum wage causes a certain number of unemployed people, the total production of the entire economy will also decrease. However, if the increase in the minimum wage sufficiently increases the income of low-wage workers, this will improve equity.
This is a bit of an extreme assumption, but what would you think of this situation if, in the process of doubling the minimum wage, jobs were reduced by 1 percent? Although jobs were reduced, equity would have been greatly improved, and it could be expected that if people were taxed more to help those who lost their jobs, the damage to low-income people could be reduced. In other words, it is enough to compensate for the damage caused by the minimum wage increase in other ways.
So the arguments of those who support raising the minimum wage can be divided into two. One is that the damage from the minimum wage increase is not significant, and the other is that although there is damage, the benefits of the minimum wage increase are greater. When the aforementioned University of Chicago survey reflects this opinion, the number of people supporting the minimum wage increase increased to 62 percent. In other words, the minimum wage increase issue is linked to the issue of damage to low-income workers and the issue of values regarding how important equity is.
So far, we have looked at their relatively positive stance on the minimum wage, but their claims are not always correct. Looking at the case of Korea, the minimum wage rose considerably in a relatively short period of time, from 6,470 won in 2017 to 8,350 won in 2019 under the Moon Jae-in administration. Therefore, the claim by opponents of raising the minimum wage that it could adversely affect employment is somewhat justified. In addition, when they argue for raising the minimum wage, they only emphasize the justification, not the scientific basis. Attitudes that repeat only that raising the minimum wage is ‘justified’ or appeal to emotions are too easily refuted by the argument that ‘if the minimum wage is raised and jobs are reduced, the low-income class will be harmed.’
And even if the minimum wage were not raised, various policy combinations are possible to reduce inequality. We can reduce inequality by increasing general welfare, expanding unemployment insurance, and providing work incentives. Although these methods have the disadvantage of being funded by government taxes, they do compensate for the limitations of the minimum wage. Therefore, it is more important to consider various policy combinations with the aim of reducing inequality rather than insisting that the minimum wage must be raised unconditionally, and to consider which of these methods would be realistic and provide practical help.
I have a relatively reserved stance on the minimum wage. Nevertheless, I think it is necessary to think positively about the minimum wage issue, because there is a fairly widespread misconception among the public that ‘economists dislike the minimum wage system’. As already explained, even leading American economists have different opinions on the minimum wage, and sometimes they are more likely to support raising the minimum wage. A person who discovered that raising the minimum wage does not reduce jobs won the Nobel Prize in Economics, and many of the economists who are in favor of raising the minimum wage are well-known in mainstream economics. There is a widespread prejudice that economics is the discipline of the right-wing, but in reality, there are many mainstream economists who are concerned with issues of inequality and equity. This is clearly seen in the debate over the minimum wage.
I think the more interested I am in areas such as poverty alleviation and inequality mitigation, the more I should embrace economics. This is because economics is the discipline that best explains the economic system of modern society, and based on economics, we can come up with the best alternative to how to make people happier while ensuring equity. In fact, many scholars are taking that path. It’s just that we’re a little less well known.
