Minimum wages hurt the economy, though there are different ways to measure how much damage they do. It would be better not to have any minimum wages.
David Card, Joshua Angrist, and Guido Imbens were given the 2021 Nobel Prize in Economics. David Card won the award for his paper, "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," which he wrote with Alan Krueger. Some people used this as scientific proof that the minimum wage doesn't make people lose their jobs and that it should be raised. However, this is untrue, and even Card and Krueger do not draw this conclusion.
Why the Minimum Wage Creates Unemployment
Austrian economics says that the scientific method cannot be used in economics because it is not a natural science. The scientific method involves isolating variables and changing others to see if there is a relationship between them.Instead, Austrian economics is based on praxeology, the study of how people act, which is hard to understand and hard to predict because control variables can't be used. "Pattern predictions" are only possible, as F.A. Hayek and Jess Huerta de Soto explain in this book:
These predictions are of an exclusively qualitative and theoretical nature and refer to the prediction of mismatches and effects of lack of social coordination caused by institutional coercion (socialism and interventionism) that is exerted on the market.Here are some examples:
The increase in the money supply tends to cause prices to increase, but it is not possible to know exactly what the level of price inflation will be. The government releases several price inflation indices, but for many reasons, they do not represent the actual price. Taxes harm the economy because the government wastes resources in unnecessary and unsustainable ventures since the government does not operate under the profit/loss mechanism. Artificially low interest rates create malinvestments that lead to business cycles. This prevents efficient resource allocation since interest rates do not represent real time preferences. People with little or no work experience or skills have a hard time getting jobs because of the minimum wage. If the minimum wage is more than what a person is worth, the company will have no reason to hire.
So, like other ways the government gets in the way of a free deal between an employee and an employer, the minimum wage hurts the weaker party. Since the company has to pay for these costs, the employee gets paid less, and in the end, consumers pay more. Whether a law is forced on someone or a deal is made on their own, the weakest party always pays the cost.
The more free a market is, the more competition there will be or could be. Companies must invest in their productivity if they want to lower their prices. The more free the market is, the better the companies have to make working conditions. After all, if there is a lot of competition or the possibility of a lot of competition, it is easy for another company to hire professionals by offering at least a little bit better working conditions.
Costs of labor and rules make it more expensive to hire people. So, the higher the salary (which is usually the case for jobs that require specific training), the higher the cost of the employee and the less likely it is that someone with less experience will start a career. Companies will only hire the most skilled and experienced people to make up for the cost.
The minimum wage in Germany is €10.50 per hour, and the unemployment rate in Germany is lower than in Portugal, where the minimum wage is €4.75 per hour. But the minimum wage isn't the only time the government gets involved in free trade. The Heritage Foundation says that when it comes to economic freedom, Portugal is less free than Germany. The ratio of Portugal's public debt to its gross domestic product is also higher.
Germany is not much more free economically than Portugal, but the Germans are more productive than the Portuguese because Germany is free enough. So, a minimum wage of €10.50 per hour in Germany doesn't hurt the economy more than a minimum wage of €4.75 per hour in Portugal, which has a weaker economy.
Card and Krueger’s Case Study
In their paper, Card and Krueger look at how the minimum wage has affected the fast-food business in Philadelphia (a city split between Pennsylvania and New Jersey). In New Jersey, the minimum wage went from $4.25 per hour to $5.05 per hour in April 1992. At the time, Pennsylvania's minimum wage did not change.So, Card and Krueger chose a "natural experiment," which was mentioned in the studies of Joshua Angrist and Guido Imbens. This is a situation that happens naturally but can be used as an experiment. During the Cold War, when East and West Germany were split up, and when North and South Korea were also split up, these were both natural experiments. Note that natural experiments can't be controlled like experiments in the natural sciences. They are also neither natural nor spontaneous because no one chose for them to happen. But there are some differences that can be seen between each variable (the sides of each territory).
Card and Krueger's study looked at the side of Philadelphia (New Jersey) where the minimum wage went up and the side where it didn't change (Pennsylvania). Usually, unemployment should be going up on the New Jersey side, right? The paper shows that there was, in fact, a small rise in jobs. Why?
Card and Krueger say in the end that none of the current models can explain what happened: "Taken as a whole, these results are hard to explain with the standard competitive model or with models in which employers face supply constraints (like monopsony or equilibrium search models)."
Card and Krueger also say that fast-food prices "went up in New Jersey compared to Pennsylvania, which suggests that consumers took on a lot of the cost of the minimum wage increase." Later, they say that there was no evidence to show that "the increase in New Jersey's minimum wage led to fewer jobs at fast-food restaurants in the state."
The paper also shows that wages have gone up to the middle of the wage range in New Jersey. So, some businesses were already paying more than the new minimum wage, and the increase didn't make much of a difference. But this happened in the fast-food business in particular. There is no proof that it did not cause unemployment in other areas or long-term unemployment (including the fast-food industry since the study was limited to a single city using data from two years after the minimum wage increase).
The Consequences of the Minimum Wage Increase in New Jersey
In economics, both what is seen and what is not seen are taken into account. Let's say the government wants to build a bridge and decides to do so by raising taxes. We can see both the people who are building the bridge and the people who will use it when it's done. But we don't see the people who lost their jobs, didn't get raises or got smaller ones, or were out of work and couldn't find jobs because of the tax hike (which forcibly diverted resources that would have been used voluntarily in other ventures).
In the case of the minimum wage increase in New Jersey, we see that there was no increase in unemployment in the fast-food industry, but there are two things we do not see:
The consumption that individuals had to cut due to the increase in fast food prices The reduced revenues in other industries (since consumers had to pay more for fast food), which invested less in increasing productivity (i.e., because they had a harder time maintaining or lowering their prices) and hired fewer or even fired some people
Of course, these are extreme extrapolations. But given that consumers had lower disposable income, these consequences occurred at least to some degree.
The minimum wage creates unemployment and a lack of opportunity for people with little or no work experience or skills. Only if the minimum wage was set below the productivity of all individuals, would it not cause unemployment. This is unlikely since the minimum wage would have to be low enough that it would become irrelevant as a government voting tool.