Minimum wage law and unemployment

   Minimum wage law has been adopted in most advanced economies for a very long period of time. However, to Hong Kong people, this is a relatively new issue. We adopt it only since May 2011. Before it was introduced, there was a very hot debate especially in related to its impact on unemployment.
   Even high-school economics students know that minimum wage law will generate unemployment as this is a very useful way to introduce one key concept in economics: equilibrium (versus disequilibrium). The introduction of minimum wage law prevents prices from freely adjusting to achieve equilibrium in a demand-supply diagram. The result is that quantity supplied of labour is higher than the quantity demanded of labour and so unemployment is produced. This is the textbook treatment of minimum wage law and has been used for many many years. Beyond textbooks, there are some dissenting opinions (notably the findings due to a 1993 paper by Card and Krueger) but perhaps there are still more professional economists believing in the textbook case.
   This post is not concerned with the academic debates mentioned above. Let's consider if the textbook case of minimum wage law is correct. Then, look at the figures. We can find little evidence, if any, for the hypothesis that minimum wages are to increase unemployment in Hong Kong.

	2010	2011	2012	2013	2014	2015	2016	2017
Hong Kong unemployment rate (%)	4.3	3.4	3.3	3.4	3.3	3.3	3.4	3.1
minimum hourly wage	0	28	28	28-30	30	30-32.5	32.5	32.5

   The most dramatic counter-evidence is that unemployment rate decreased from 2010 (when minimum wage was not effective) to 2011 (when it became effective). The drop is so sharp: from 4.3% to 3.4%. Next, since May 2013, the minimum wage raise from $28 to $30. But unemployment actually fell from 2013 to 2014. Then, since May 2015, the minimum wage raise from $30 to $32.5. This time, unemployment rate slightly went up from 3.3% to 3.4%. Taken as whole, how can we say minimum wage law bring about unemployment? The data is simply not supportive to this hypothesis.

   In fact, around 2010 and 2011, when minimum wage law was first introduced and so this was a hot topic in the society, I often asked students during interview: The data of unemployment rate is not consistent with the prediction by economics. Does it mean the economic theory is wrong? Notice that this was a question given to high-school students. Thus, what I asked for is an answer made based on high-school level economics. But most students did not know how to cope with such a question. Perhaps they was accustomed to learning what has been taught but not to thinking upon what has been taught. Some students, being not able to explain the inconsistency between data and theory, simply replied: perhaps the theory is wrong. But that's also not my expected answer. I didn't try to criticize the conventional theory during interviews (it would be unfair to require students to think beyond the conventional theory but it is fair to require them to truly understand the conventional theory they learn). 

   The answer should be so simple, and is exactly what is the topic of my last post: ceteris paribus or other things being equal. Even if the theory of minimum wage law is correct, it is correct only when other things being equal. If the demand and supply curves do not shift, but the minimum wage is imposed, then unemployment is created. However, if demand curve shifts (say, the economy grows strongly so as to increase labour demand) or supply curve shifts, there need not be (extra) unemployment to be created by the law. We have to know what happen during 2010-2011, 2013-14 and 2015-16 when the wages were increased. Perhaps the economies were good (or bad) at that time. We can never jump to the conclusion that the theory is wrong. Thus, what we need is a model to take account of those relevant factors that affect unemployment rate, such as GDP, labour force change, etc. Only when we control these other factors (by an econometric or a statistical model), we can then assess if minimum wage has extra effect on unemployment. If we have already controlled these other (relevant) factors, and we still find that unemployment rate is not increased, then we can conclude that the minimum wages do not matter.