Economics : More is less?

When it was published some 17 years ago, Myth and Measurement: The New Economics of the Minimum Wage argued that minimum wages do not necessarily cause fewer jobs. The authors were Princeton University professors David Card and Alan Krueger. When the state of New Jersey increased its minimum wage to US$5.05 an hour in 1992, they studied the comparative effects of the increase on fast-food restaurants and low-wage employment in New Jersey and Pennsylvania, where the minimum wage remained at the federal level of $US4.25 an hour.
Their data demonstrated that modest increase in wages did not appear to cause any significant harm to employment. In some cases, rise in the minimum wage even resulted in slight increase in employment.
Commenting on their work at that time, New Zealand economist Brian Easton emphasised the writers were not arguing that an unlimited hike in any minimum wage did no damage and they were cautious about drawing any policy conclusions.
But they were challenging the conventional wisdom. survey of members of the American Economic Association in 1990 showed 60 percent agreed that minimum wages increased unemployment among young and unskilled workers. By 2000, only 46 percent of members agreed with that proposition. study in 2006 showed just under half of American economists surveyed thought the minimum wage should be eliminated, while more than third favoured increasing it.
The conventional wisdom was changing, but respected economists were highlighting what they saw as methodological limitations of the Card-Krueger studies. Nobel Prize laureate (and liberal-leaning) economist Paul Krugman that year said the centrist view probably was that minimum wages “do”, in fact, reduce employment, although the effects were small and swamped by other forces.
In this country, Council of Trade Unions economist Bill Rosenberg acknowledges that the overall effect of minimum wage on total employment depends on number of factors, such as the elasticity of labour supply to wages and to demand for labour. The main empirical difficulty is to isolate the wage effects from other exogenous influences.
He also says international studies are useful, insofar as some factors will be relatively common to labour markets across many different countries. But vital country-specific elements make it important to look at local studies about the impact of the minimum wage.
These include study by Hyslop and Stillman (2004), who found that 69 percent increase in the minimum wage for 18 and 19-year-olds in 2001 and 41 percent increase in the minimum wage for 16 and 17-year-olds over two-year period had no adverse effects on youth employment or hours worked. To the contrary, hours of work increased for 16 to 17-year-olds relative to other age groups.
But as with the Americans, studies can be cited from those for and against minimum wage or by those calling for bigger or smaller increases in the minimum wage. In the upshot, Easton wrote in Listener column, the nub of the matter is not policy issue, “but whether labour markets behave like conventional markets, such as those that determine the price of wool”. Is it enough to use basic market models that treat wages like any price and labour like any other commodity – in other words – or should the social and human dimensions of selling and buying labour be considered?
Maybe the focus should shift from minimum wages to wages generally. In the nine years to 1999, the minimum wage was pared from 43 percent to 40 percent of the average wage. Labour lifted it in the next nine years by an average eight percent year. But while that rate of increase has slowed to less than five percent year under the Key Government, at just $13 an hour it now amounts to almost 50 percent of the average wage – sign of the comparative slippage in the average wage.