The controversy over the economics of minimum wage
Dietz, William A.
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Introduction of a Federal minimum wage came with the Fair Labor Standards Act of 1936. From 1938 to date, there has existed a seemingly permanent controversy among economists, laymen, and legislators over the economics of minimum wage. The three components of the controversy involve minimum wage theory, interpretation of empirical studies, and conflicts in self interests and vested interests. Operationally, the competitive model is used as a hypothesis for elucidating and partially solving the controversy. Th© major cause of the controversy has been the fact that introduction of a statutory minimum has not resulted in severe consequences. To explain the American experience, the "shock" and monopsony models have been suggested as alternatives to competitive theory. Chapter II is devoted to presentation of the theoretical analysis of all three models. Both the "shock" and competitive models are retained for testing against the available empirical studies on minimum wage effects. The various monopsony models are not subjected to empirical testing because the industries affected by minimum wages are very competitive. However, a model containing a perfectly competitive product market and a monopsony factor market is analyzed. After reviewing the studies on this model, the present author developed an analysis which shows the competitive-monopsony model to be unstable and self-destructive. Practical implications drawn from the analysis suggest that an effective anti-trust policy may be able to negate the use of minimum wage as a corrective for labor exploitation. Chapter III presents the empirical evidence available on the economic consequences of minimus wages. For the interested reader, this chapter offers, in capsule form, a significant portion of empirical studies conducted on minimum wage effects. The evidence indicates that the competitive model, not the "shock” model, is best able to explain and predict thirty years of minimum wage experience. The "shock" model appears to be correct in special cases, but it lacks the comprehensive and sophisticated abilities of competitive theory to account for the economic consequences of minimum wages. Generally speaking, the evidence lends greatest support to the unemployment and factor substitution predictions, and least support to the output, price, and firm failure predictions of competitive theory. Complete vindication cannot be claimed because the "ceteris paribus" necessity could not be maintained. Because of this problem and ether statistical insufficiencies, the pure minimum wage effect could not be isolated. Controversy over empirical evidence is solved only to the extent that, until a more adequate theory of the fir® is developed, competitive theory does an ample job of explaining and predicting minimum wage effects. within the context of competitive theory one finds two fundamental reasons for the relatively mild affects of minimum wage. One important reason for this result has been the relatively moderate size of minimum wage increments. The other is the fact that all increases in the statutory minimum have occurred during prosperous periods. Had times been less expansionary and increments been larger, the results would have been much mere severe. Historically, because the size and scope of the mini must has been limited within narrow bounds, the macro effects of the minimum tend to be irrelevant and only the micro effects reveal themselves. The major goal of minimum wags legislation has been the amelioration of poverty. Obviously, on® cannot allege that the continued existence of poverty proves the minimum wage has failed. Whether the minimum has resulted in a net social benefit or loss is net ascertained in the thesis. The important point to be grasped is that alternative policies, (i.e., negative income tax, retraining programs, improved employment agency service, and maintenance of aggregate demand), can move the American economy forward without the adverse micro effects caused by the minimum wage.