On The Minimum Wage and Populism

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Last week, a slew of politicians in California, New York, and the United Kingdom embraced higher minimum wages.

That might look attractive to youths and minorities. But, analysis of the data shows that higher minimum wages will not fulfill most of the advertised promises. Among other things, it throws those who lack skills out of work. In the first comprehensive study of the effects of higher minimum wages, David Neumark and William Wascher examined 17 OECD countries over the 1975-2000 period, and they found that the minimum wage elasticity of teenage employment is significantly negative -- in the -0.2 to -0.4 range. This means that a 10 percent increase in the minimum wage would cause teenage employment to fall by 2 to 4 percent. Since the Neumark-Wascher pioneering work, there have been numerous other international studies based on OECD data. The results are all similar: higher minimum wages have a significant negative impact on employment in the affected groups (teenagers, women, minorities, and so forth).

As it turns out, the European Union (E.U.) provides a natural experiment on the effects of minimum wages. Most E.U. countries impose minimum wages, but some do not.

The accompanying charts tell the tale for both overall and youth unemployment in the E.U.. Unemployment rates are dramatically elevated in the E.U. countries that impose minimum wage laws, relative to those that do not. Milton Friedman clearly had it right when he concluded that “A minimum wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.”

Sources: Eurostat (Unemployment rates – Annual Average, Monthly Minimum Wages-Biannual data, Monthly Minimum Wage (1999-2009)), and calculations by Prof. Steve H. Hanke, The Johns Hopkins University
Note: The averages displayed in the chart are arithmetic means
Sources: Eurostat (Unemployment rates – Annual Average; Age: Less than 25, Monthly 
Minimum Wages- Biannual data, Monthly Minimum Wage (1999-2009)), and calculations by Prof. Steve H. Hanke, The Johns Hopkins University
Note: The averages displayed in the chart are arithmetic means