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Summary

  • Economists abstract labor to treat it like a commodity.
  • Raising the minimum wage does not always reduce the demand for labor (cause unemployment to rise).
  • Washington State's experience does not fit economic theory.

There is a perennial debate over the impact of minimum wage. Economic theory suggests a higher price for a commodity will reduce the demand, all other things being constant. Commodity is understood to include labor.

Labor is not really a commodity, though labor power is bought and sold. People are not commodities and the abstraction leads to confusion.

In practice, a higher minimum wage does not always produce higher unemployment. Back in April, we posted a short blog about San Jose's experience. The Great Graphic here was tweeted by Stephanie Kelton. It provides another exception to the conventional wisdom. At the start of last year, Washington raised its minimum wage to the highest in the US. As the chart shows, the unemployment rate has trended lower.

This, of course, will not settle the debate. However, the continued accumulation of examples that run counter to the prevailing economic theory, may embolden others to hike minimum wages. Eventually, along the lines of Thomas Kuhn, it may lead to changes in the dominant paradigm.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Washington State's Minimum Wage Experience