Would Reducing the Minimum Wage Spur Employment?

Casey Mulligan, writing for the New York Times' Economix blog, pushes a theory that's gathering momentum: We can juice employment if we lower the minimum wage.

Some would say that high real wages are part of the problem -- that employers would be hiring more if labor were cheaper. If that's right, public policy so far in this recession seems to have gone in exactly the wrong direction by raising the minimum wage and otherwise increasing employment costs.

The Wonk Room's objection is simple: The current minimum wage already supports a nearly unliveable salary of only $16,000. Paul Krugman's objection traces the impact of broadly lower wages: Lower wages means a lower overall price level, which juices demand but also raises the real value of debt. Tyler Cowen pushes back.

I'm of two minds here. On the one hand, we want to make it as easy and desirable as possible for employers to hire, and a minimum wage is a marginal barrier to cheap hires. There are certainly some people collecting unemployment benefits from the government that would, with a lower minimum wage, get scooped up in the private sector. At the same time, my sense is that a lower minimum wage might not contribute meaningfully to employment or aggregate demand. When I imagine myself as an struggling employer with a X dollars in compensation that I split between Y workers, some of which are paid at the minimum wage, a lower MW might encourage me to reduce X, the compensation pool, rather than Y, the number of workers. After all, times is tough, and I'm still not convinced that aggregate demand will support a sustainable recovery. The opportunity to reduce the compensation pool would essentially be a short- and long-term transfer of wealth from employees to employers, which would hurt aggregate demand.

In short, I think the effects of reducing the minimum wage would be mixed, and I prefer other job-spurring ideas.