Impact of Minimum Wages on Other Wages, Employment, and Family I n comes ONE OF THE ISSUES that has traditionally split politicians from economists, and now splits radical economists from traditional economists, is the minimum wage. As the passage of the Fair Labor Standards Act in 1938 testified, many politicians have seen the minimum wage as a direct means of reducing poverty and providing decent living standards to lowwage workers. In this belief they have recently been joined by economists asserting that higher wages will prod firms to create better and more productive jobs for workers, that the marginal product of labor is basically unmeasurable anyway, or that labor demand is simply quite inelastic. Other economists have objected strenuously to such ideas, insisting that the long-run distortions and disemployment effects of minimum wages far outweigh any supposed short-run benefits. For all the controversy engendered by minimum wages, the United States has not pursued the policy very aggressively, at least in an aggregate sense. In 1975 the head of a family working full time at the basic minimum of $2.10 per hour would have earned $4,368, 20 percent less than the poverty standard for a nonfarm family of four. This minimum Note: I am indebted to Leonard Herk for help with the computer, to Michael Barth, Paul Ryscavage, and Michael Wachter for supplying and helping to interpret data, and to Daniel Hamermesh, Fred Siskind, and Wayne Vroman for making comments on an earlier draft. Much of the work here was supported by a grant from the U.S. Department of Health, Education, and Welfare. 409 Brookings Papers on Economic Activity, 2:1976 UNCOVERED SECTOR, NO UNEMPLOYMENT The theory that includes a sector not covered by the minimum wage but does not take note of the existence of any unemployment has been developed most fully by Finis Welch.2 In the diagram below, the equilibrium wage in the absence of a minimum is assumed to be WO in both sectors. The initiation of a minimum at W, in the covered sector creates Sc-d, of excess labor there, and this labor is willing to transfer to the uncovered sector. But, given positively sloped supply curves, that much labor will be added to the uncovered sector only if the uncovered wage is W,. As that wage is bid down, the addition to the uncovered supply, SU, declines by an amount that depends on who gets the covered jobs. (If the covered jobs went to those with the lowest reservation wages, the workers on the covered supply curve to the right of d, would move to the uncovered sector and shift out the supply by an appropriate amount above their reservation wages. If the covered jobs were allocated randomly, the uncovered supply would shift out in the manner drawn.) Covered sector Uncovered sector wu~~~~~~~~~~~~~~ de ~~~~SC Obviously, the equilibrium uncovered wage in this case is Wu, slightly below WO. But even though uncovered wages fall, it is not clear whether low-wage laborers as a group are better or worse off: those getting the 2. Finis Welch, "Minimum Wage Legislation in...