A theme of this blog is that wages and employment are not determined by, and cannot be determined by, the interaction of well-behaved supply and demand curves in the so-called labor market. I here bring to your attention two new papers supporting this claim:
- Steve Fleetwood, Do labour supply and demand curves exist?, Cambridge Journal of Economics, V. 38, Iss. 5 (Sep. 2104): pp. 1087-1113.
- Daniel Kuehn, The importance of study design in the minimum wage debate, Economic Policy Institute (4 Sep. 2014).
- The studies that compare labor markets experiencing a minimum-wage increase with a carefully chosen comparison labor market tend to find that minimum-wage increases have little or no effect on employment.
- The studies that do not match labor markets experiencing a minimum-wage increase with a comparison labor market tend to find that minimum-wage increases reduce employment.
- Labor market policy analysts strongly prefer studies that match "treatment" with "comparison" cases in a defensible way over studies that simply include controls and fixed effects in a regression model.
- The studies using the most rigorous research designs generally find that minimum-wage increases have little or no effect on employment.
- Application of these findings to any particular minimum-wage proposal requires careful consideration of whether the proposal is similar to other minimum-wage policies that have been studied. If a proposal occurs under dramatically different circumstances, the empirical literature on the minimum wage should be invoked with caution.
The objective of this paper is to show that circumstantial and empirical evidence for the existence of labour supply and demand curves is at best inconclusive and at worst casts doubt on their existence. Because virtually all orthodox models of labour markets, simple and complex, are built upon the foundation stones of labour supply and demand curves, these models lack empirically supported foundations. Orthodox labour economists must, therefore, either provide stronger evidence or stop using labour supply and demand curves as the foundation stones of their models. The conclusion discusses implications for future orthodox and heterodox labour economics.
This paper reviews the empirical literature on the employment effects of increases in the minimum wage. It organizes the most prominent studies in this literature by their use of two different empirical approaches: studies that match labor markets experiencing a minimum-wage increase with an appropriate comparison labor market, and studies that do not. A review of this literature suggests that:
A better understanding of which approach is more rigorous is required to make reliable inferences about the effects of the minimum wage. This paper argues that: