The Minimum Wage Debate: Politically Correct Economics?

Abstract

Economists have long thought that an increase in minimum wage rates would lead to higher unemployment of unskilled workers. The higher minimum rates would cause employers to substitute other classes of labour or capital for unskilled labour and to contract output. Situations in which an increase in minimum wage rates will not increase unemployment do not seem to be practically relevant. The results of Card and Krueger have reopened this question. In their major study a survey of fast food outlets suggested that an increase in the minimum wage rate actually increased employment. Unfortunately, closer inspection of their results has not justified the attention paid to their study. The quality of their data is suspect and other data support the traditional view. In addition, the interpretation of their results is very questionable. The new material actually gives economists no reason to revise their traditional view on this subject.