WORKERS across the rich world have suffered stagnant wages for much of the past decade, in good times and bad. Governments are responding by proposing increases in minimum wage rates in America, Britain and Germany. A higher wage floor seems like a simple and sensible way to improve workers' fortunes. Yet many economists argue against it: Germany’s leading economic institutes, for instance, have pushed Angela Merkel to resist calls for a wage floor. Why do economists often oppose minimum wages?
Historically, economists’ scepticism was rooted in the worry that wage floors reduce employment. Firms will hire all the workers it makes sense to hire at prevailing wages, the thinking goes, so any minimum wage that forces firms to pay existing workers more will make those jobs uneconomical, leading to sackings. Yet economists were forced to rethink their views in the early 1990s, when David Card and Alan Krueger of America's National Bureau of Economic Research presented evidence that past minimum-wage increases had not had the expected effect on employment. A rise in New Jersey’s minimum wage did not seem to slow hiring in fast-food restaurants in New Jersey relative to those in neighbouring Pennsylvania, they found. One explanation, some economists speculated, was that firms had previously been getting away with paying workers less than they were able, because workers were prevented from searching for better-paid work by the costs involved in changing jobs. That would mean that when wages were forced up, the firms were able to absorb the costs without firing anyone.
