Minimum Wages and Employment: a critical appraisal of two theoretical frameworks

This paper addresses the theoretical fallout from empirical studies published in the 1990s that showed no negative relationship between the introduction of minimum wages and employment. The theoretical developments have proved to be very meagre and this, it is alleged, is due to the unwieldy neo-classical framework which can only accommodate such an anomalous relationship in circumstances where employers face positive labour supply curves and for a small increase in wages. It fails to explain why more generalised minimum wages did not adversely affect unemployment. An earlier debate on the effects of minimum wages occurred in the 1940s and 1950s which provoked a dialogue between Neo-classical theorists and their Institutional critics as to the nature of economic research. Since then the framework of analysis has narrowed considerably, with only explanations consistent with the neo-classical view of optimisation by rational agents in a world of diminishing returns being theoretically acceptable. This has led to the impoverishment of economics and can partially explain the crisis in the profession when real world phenomena are at variance with the predictions of idealised models.