Theory and Empirics: Chicago Society’s Minimum Wage Debate

By Josh Herzberg

On Tuesday, the Chicago Society held a debate on the minimum wage with Professors Casey Mulligan of the Economics Department and Ioana Marinescu of the Harris School.

Tuesday’s discussion on the minimum wage felt representative of society’s discussion on the subject. The Economics Department’s Professor Mulligan, comfortable in his ivy covered tower, explained the theory of minimum wage effects on society.  When we set price controls, supply and demand must adjust to compensate. The resultant quantity is then a result of how much they change. Harris School’s Iona Marinescu spoke to the empirics around the topic. The result was just about the result we all know already: it depends. It depends on the size of the market, on the elasticities of supply and demand. In some cases, there is a small supply effect, in some cases there is none. In many cases, there is low unemployment especially among youths in high minimum wage countries (see France), but we cannot causally link it to the wage floor. Of course, the theory does not disagree with any of the empirics because, as always, it depends. Kidney price ceilings significantly decrease the supply from the $11,000 market price because the supply curve shifts so drastically. The minimum wage sits so close to the market’s minimum wage that the effect cannot be great. However, the effects are real. In low wage jobs, non-cash transfers are almost nonexistent. Discrimination is often one of the ways that the supply curve shifts. The professors did agree on the need for greater research and explanation into other ways to help low wage workers. Negative income taxes, like the EITC certainly need further research. Who picks up the tab for higher wages? Often it is the firms, but often they pass the wages on to consumers. If those consumers are low wage workers, the minimum wage can be harmful.

The talk left the audience somewhat more informed, but generally just as confused as before. Academia has its theory. The real world has its empirics. The two do not disagree and we need more research. Predicting the effect of a new policy is always the same: it depends.