Overview
The economics of the minimum wage examines what a legally set wage floor does to the labor market and is a central topic in labor economics. Korea's legal rules, setting procedure, weekly holiday pay and remedies are covered in the Korean minimum wage article; this article concentrates on the economic theory and evidence about employment and distribution.
The competitive model
In the textbook competitive model the wage is set where labor demand meets labor supply. A minimum wage above that equilibrium reduces the quantity of labor demanded while increasing the number who want to work, creating excess supply, or unemployment. Workers who keep their jobs earn more, but young or low-skilled workers may lose theirs. Using this reasoning, Stigler (1946) argued that the minimum wage is an inefficient anti-poverty tool and that income supplements such as a negative income tax would work better.
The monopsony model
Under monopsony, a term popularized by Joan Robinson (1933), employers as buyers of labor have power over wages. When workers find it costly to switch jobs or there are few local employers, firms pay less and hire fewer people than in a competitive market. A well-set minimum wage can then raise both wages and employment, although a minimum set too high still reduces jobs. Search models that emphasize information frictions and job-switching costs reach similar conclusions.
Evidence and debate
- Card and Krueger (1994): when New Jersey raised its minimum from $4.25 to $5.05 an hour in 1992, they compared employment at 410 fast-food restaurants there and in neighboring Pennsylvania, which had no increase, and found no evidence of job loss. The study sparked fierce debate and became a classic difference-in-differences natural experiment.
- Counter-evidence: Neumark and Wascher (2008) reviewed the literature and argued that disemployment effects generally appear among teenagers and the low-skilled.
- Recent work: Cengiz et al. (2019) studied 138 US state minimum wage increases from 1979 to 2016 and found that jobs lost just below the new minimum were offset by jobs at or just above it, leaving the number of low-wage jobs essentially unchanged.
- Where views converge: many economists now hold that employment effects are small when the minimum stays within a moderate range relative to the median wage (the Kaitz index), but can grow if it is set very high or raised very fast.
Distribution and policy issues
- Spillovers: wages just above the minimum also tend to rise, compressing the bottom of the wage distribution.
- Prices and profits: part of the higher labor cost is passed to consumers, for example through restaurant prices, and part is absorbed by profits; firms may also cut hours or automate.
- Limits as anti-poverty policy: many minimum wage earners do not live in poor households, so the effect on poverty is limited, and the minimum wage is often paired with earned income tax credits.
- Korea: after large increases in 2018–2019, debate focused on the burden on small businesses, employment effects and whether to set different minimums by industry or region.
References
- Robinson, J. (1933). The Economics of Imperfect Competition. London: Macmillan.
- Stigler, G. J. (1946). The economics of minimum wage legislation. American Economic Review, 36(3), 358–365.
- Card, D., & Krueger, A. B. (1994). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania. American Economic Review, 84(4), 772–793.
- Neumark, D., & Wascher, W. L. (2008). Minimum Wages. Cambridge, MA: MIT Press.
- Cengiz, D., Dube, A., Lindner, A., & Zipperer, B. (2019). The effect of minimum wages on low-wage jobs. Quarterly Journal of Economics, 134(3), 1405–1454.