The Union Cabinet is expected to approve a bill that, among other things, mandates a universal minimum wage. The code empowers the Centre to set a minimum wage to help poor, unskilled workers earn more. Economists, however, have warned for long that price floors prevent the available supply of goods from being fully sold. So, the minimum wage would logically hurt workers by increasing unemployment. But such logic has been questioned since a famous 1993 study by David Card and Alan B. Krueger that made the case that a rise in the minimum wage in New Jersey actually decreased unemployment.
Since then, a flurry of studies has concluded that a minimum wage has either no, or very little, negative effect on employment. For instance, “Seattle’s Minimum Wage Experience 2015-16”, a 2017 study by researchers at the University of California Berkeley, found that since the city raised its minimum wage in 2015, unemployment dropped from 4.3% to 3.3%.
Do we need a minimum wage law?
Another paper, “Do Lower Minimum Wages for Young Workers Raise their Employment?”, by Claus Thustrup Kreiner, Daniel Reck, and Peer Ebbesen Skov, found that employment among the youth in Denmark decreased by one-third when they attained the age at which their minimum wage increases by 40%. Other economists have found similar evidence suggesting that a minimum wage increases unemployment.
Given such contradictory empirical findings, some say it may be wise to trust age-old economic wisdom. The minimum wage increases unemployment, except when it is set below the market price for labour; or only marginally higher, in which case the minimum wage enhances the bargaining power of workers. But figuring out, and also periodically adjusting, the wage rate at which the worker benefits is often impractical.
Consider that even when it looks like the minimum wage has no negative effect on employment, it can have other unintended effects. Companies, for example, instead of firing workers, may employ them for fewer hours, which in turn will affect the quality of their services. In fact, “Minimum Wage and Restaurant Hygiene Violation”, a 2017 paper by Subir K. Chakrabarti, Srikant Devaraj, and Pankaj C. Patel, found that hygiene violations by restaurants increased significantly after a rise in the minimum wage as the restaurants tried to cut down on cleaning-staff expenses.