Economics Happy Hour
Economics Happy Hour Podcast
#4: Minimum Wage & Recent Research
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#4: Minimum Wage & Recent Research

Nearly half the states in the US saw an increase in the minimum wage on January 1st. We chat about the theory of minimum wage and discuss some recent papers on the topic.

In this episode, we’re diving into the hotly contested topic of the minimum wage and its effectiveness as a tool for helping low-wage workers. It is certainly one of the most contentious issues economists debate. Some economists argue that raising the minimum wage provides extra pay for workers or may generate the same pay with more time off. Others believe it limits firms from innovating and causes unemployment for the group it purports to help. This is sure to be a lively and thought-provoking debate, so let's dive in.

In this episode, we chat about the following topics:

  • Some thoughts on beer ratings and a Dry January update

  • The textbook example (and impact) of minimum wage

  • Some research (old and new) on minimum wage impacts and the public’s perception of minimum wage impacts

  • Pop culture economics examples related to unemployment

    • Matt highlights Henry Ford, from the musical Ragtime

    • Jadrian highlights a clip from Saturday Night Live

Watch This Episode on YouTube:

Some Show Notes:

This episode was recorded in January, which means Matt has officially started Dry January. He’s trying to stick with the theme and has poured himself a virgin Moscow mule. Jadrian is not participating in Dry January, so he cracked open a back-of-the-fridge beer Devil’s Backbone. It seemed like it would be a new one to check in, but thanks to Untappd he realized he had it years ago.

We’re talking about the minimum wage in this episode as 23 different states raised their minimum wage this year. A minimum wage is a legally binding price floor that mandates firms can’t pay workers below that wage. There are different minimum wages for groups of people based on whether they earn most of their wages from tips or if they are in a particular group of workers who are exempt from minimum wage laws.

In the traditional competitive analysis, minimum wages are expected to raise the cost of labor, reduce employment, and increase unemployment whenever the minimum wage is above the market rate. If it were below the market rate, it isn’t binding and has no real effect on the market. Some of those outcomes can be reversed if minimum wages are applied to monopsony markets in which firms have some sort of market power over the local labor market. In that scenario, there is a narrow band of wages that could result in increased employment and increased wages for workers.

We chat about two interesting studies on the minimum wage in this episode. The first is new work by Conor Lennon, Keith Teltser, Jose Fernandez, and Stephan Gohmann in the Journal of Economic Behavior & Organization. They find that people are willing to accept a large amount of job losses in exchange for higher wages, but not when those changes would disproportionally impact minority groups.

The second article we discuss was written by David Neumark and Peter Shirley, and published in Industrial Relations: A Journal of Economy and Society last year. The authors look at the ways in which minimum wage researchers frame the way “the literature” discusses minimum wage. There are a number of studies finding both positive and negative impacts of minimum wage laws, but you wouldn’t know that if you read some literature reviews. The authors find most studies find that minimum wage reduces employment and the impact is more substantial for teenagers and those with lower education levels.

This Week’s Pop Culture References

Matt’s got a great Broadway reference from the show Ragtime. Henry Ford was one of the greatest entrepreneurs of all time. His success was due in large part to the use of assembly line production, which significantly decreased the costs of production. In the song, he sings “even people who ain’t too clever, can learn to tighten a nut forever”.

Jadrian’s favorite pop culture clip about minimum wage laws comes from Saturday Night Live. In the Weekend Update segment, Chris Rock is invited on to talk about minimum wage laws. The best part about the scene is how well Rock describes minimum wage laws from the point of view of the employer:

If I could pay you less I would, but it’s against the law.

Here’s the scene on YouTube:

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Economics Happy Hour
Economics Happy Hour Podcast
A podcast & newsletter about two economists who love talking about all things economics.