This is the third in an eight-part series of CEE’s Economist Spotlight with Dr. Alan B. Krueger.
Dr. Krueger, the Bendheim Professor of Economics and Public Affairs at the Wilson School at Princeton University and former chairman of President Obama’s Council of Economic Advisers, is the author of the newly published textbook, Explorations in Economics. In this spotlight series, Alan will address topical issues including unemployment benefits, increased job growth, minimum wage legislation, investment in human capital, and more.
The interviews were conducted by 2013 Alfred P. Sloan Teaching Champions Awardees, Kathleen Brennan and Saji James.
Q. Some people argue that minimum wage legislation will only hasten automation in low skill industries, resulting in increased unemployment. To what degree is this a valid argument? Does your empirical work address this possibility?
A. I used to believe this too! Before David Card and I started our research on the minimum wage in the early 1990s, I fully expected that we would find results that confirmed the conventional wisdom that a higher minimum wage causes firms to substitute away from low-wage workers. But after so many studies found results that were inconsistent with the conventional wisdom (John Schmitt has a very nice recent survey), I came to the conclusion that other factors were at play and the labor market is more complicated than the simple supply-and-demand model suggests. Most importantly, a higher minimum wage reduces turnover and makes it easier for employers to fill vacancies and recruit more workers. Dynamic considerations in the labor market (e.g., turnover, recruitment and other frictions) cause the labor market to exhibit effects that are similar to predictions of a static monopsony model. In addition, morale matters in labor markets. A higher minimum wage likely raises morale and improves productivity in many instances. I suspect that a small number of companies may react to the minimum wage by automating or substituting capital for labor, but that at least as many respond by finding it easier to fill vacancies and retain workers with a moderately higher minimum wage, and this is made easier by the rise in productivity that accompanies a minimum wage increase. On balance, most research has found that the minimum wage has little effect on overall employment.
In teaching the minimum wage, I have found it very helpful to ask students if they were ever paid the minimum wage and if they got a raise when the minimum went up or if they lost their job. No one has yet said they lost their job, but many have said they got a pay raise. I think students are skeptical of economics in part because the simplest models do not always align with their experiences. Of course, they need to learn the supply-and-demand model, and there are many markets where it works very well, but they should also learn that economics is an empirical science and that there are alternative models.
The next Economist Spotlight: Interview with Alan B. Krueger will publish February 18, 2014.
the next installment in this series is published.