Mankiw’s Non-theorem on Minimum Wage Laws

Once again, Greg Mankiw tries to ridicule any economist who supports an increase in the minimum wage:

Consider this policy aimed to help workers at the bottom of the income distribution:

1. A wage subsidy for unskilled workers, paid for by
2. A tax on employers who hire unskilled workers.

Now, if you think like an economist, you might wonder about the logic of part 2 of this proposal. You might say, “A tax on the hiring of unskilled workers would discourage their employment, offsetting some of the benefits they would get from the wage subsidy. It would be better to finance the wage subsidy with a more general tax, rather than with a tax targeted specifically on employers of unskilled workers.”

I agree. So why did I bring up this proposal? Because a policy essentially the same looks likely to become law, having been advocated by Congressional leaders and, recently at his news conference, President Bush. Haven’t heard of it? It is called an increase in the minimum wage.

Dr. Mankiw is posing the following experiment in three steps but he only mentions the last two:

(1) Raise the minimum wage floor by Z;

(2) Grant an employment subsidy equal to X;

(3) Impose an employment tax equal to X.

Regardless of the size of X (in the real world experiment, X = 0 – but in Mankiw’s experiment X = Z), (2) and (3) cancel. If Dr. Mankiw thinks this proves (1) has no effect, I suggest he rethink his experiment.