Reconciling Facts with Fiction, or: A Theoretical Speculation of why the Minimum Wage has no Discernible Effect on Employment

Arne Heise

Abstract


Purpose – There has long been a discussion about the employment impact of minimum wages and this discussion has recently been renewed with the introduction of an economy-wide, binding minimum wage in Germany in 2015. In traditional reasoning, based on the allocation-based approach of modern labour market economics, it has been suggested that the impact is clearly negative on the assumption of a competitive labour market and clearly positive on the assumption of a monopsony-based labour market.

Design/methodology/approach – A post-Keynesian employment market, based on a different pre-analytical vision of the economy than traditional mainstream economics, is presented here.

Findings – The most likely prediction of the employment effect of minimum wages based on the alternative model presented here - a negligible impact on overall employment - is very much in line with the empirical evidence established by a bulk of literature.

Research limitations/implications – The research proposes an analytical framework and invites future empirical investigation.

Originality/value – The paper contends that existing literature affords too much attention to a (false) theoretical approach based on the pre-analytic vision of market exchange as basic constituent of capitalist economies.

Paper type - Conceptual paper.

Keywords: Minimum Wage, post-Keynesianism, Labour Market Theory.