There has been no discernible impact on employment despite early scaremongeringby Jonathan Portes / March 31, 2019 / Leave a comment
“How do employers in a low-wage labour market respond to an increase in the minimum wage? The prediction from conventional economic theory is unambiguous: a rise in the minimum wage leads profit-maximising employers to cut employment.” The first two sentences in perhaps the most famous, and certainly the most influential, paper in modern labour economics. This position was very much in line with the Economics 101 model of the world that I’d picked up, almost by osmosis, in my first few years at the Treasury. But having paraphrased the theory this paper was about to overhaul it.
When I read it, in 1993, I’d just arrived at Princeton, where the author, Alan Krueger, taught labour economics. The paper was still an early draft, but it was already making waves. New Jersey had just raised the minimum wage by 20 per cent; neighbouring Pennsylvania had not. Yet Alan’s painstaking research (involving a survey of more than 400 fast-food outlets) showed that the job losses that theory would have predicted simply didn’t materialise. For a young economist, still thinking on Treasury tramlines, it was a revelation. As the anniversary of the introduction of the UK national minimum wage approaches it is worth remembering the lessons.
Astonishingly for an economics paper, the impact was immediate. Other research followed, generally reaching similar conclusions, including that by Alan Manning and others in the UK. There was a backlash from the ultra-orthodox wing of the economics profession, who believed that when the facts contradicted the theory, there must be something wrong with the facts. In the Wall Street Journal, Nobel Laureate James Buchanan wrote:
“Just as no physicist would claim that ‘water runs uphill,’ no self-respecting economist would claim that increases in the minimum wage increase employment. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.”
In fact, Buchanan was precisely wrong: many economists did follow Alan, and not just on this specific topic. The paper signalled the beginning of a revolution in microeconomics—especially in labour and development economics—with detailed empirical research, often involving actually going out and collecting new data, taking priority over elegant theoretical modelling.
Meanwhile, in the UK, a minimum wage was Labour Party policy,…