chapter  4
Labor Demand Elasticities
Pages 39

In 1995, a heated debate broke out among economists and policymakers about the employment effects of minimum wage laws. Clearly, the standard theory developed in chapter 3 predicts that if wages are raised above their market level by a minimum wage law, employment opportunities will be reduced as fi rms move up (and to the left) along their labor demand curves. Two prominent labor economists, however, after reviewing previous work on the subject and doing new studies of their own, published a 1995 book in which they concluded that the predicted job losses associated with increases in the minimum wage simply could not be observed to occur, at least with any regularity. 1

The book triggered a highly charged discussion of a long-standing question: just how responsive is employment demand to given changes in wages? 2 Hardly anyone doubts that jobs would be lost if mandated wage increases were huge, but how many are lost with modest increases?