On the minimum wage, economists generally agree that a higher minimum wage will have an adverse effect on employment of low- skilled members, but they disagree extremely on how big that effect would be, some saying it would be very small, others saying it would be more significant.

So I can only say that, probably, there would be some employment effect, but it's very difficult to know how big it would be.

On the minimum wage, it's actually a very controversial issue among economists. Clearly, if you raise the minimum wage, then those workers who retain their jobs will get higher income and therefore it helps them.  The concerns that some economists have raised about the minimum wage are first, is it as well targeted as it could be?  That is, how much of the increase is going to the teenage children of suburban families, for example?

And secondly, does it have any employment effects? That is, do higher wages lower employment of low-wage workers?

...The minimum wage affects a very small number of workers, actually, so I don't think it would affect a great majority of people that you're concerned about.

There is wide agreement about the necessity of some regulation to protect workers from illegal discrimination or employer fraud. There is less agreement, however, on the extent to which workplace regulations—including minimum wage laws, mandatory severance pay, right-to-work laws and legislated fringe benefits—are necessary. Overregulation of hiring, firing and working conditions can make the labor market too rigid and make businesses reluctant to start up and to hire workers.

This evidence suggests that government policies toward labor markets can be an important determinant of labor mobility and, consequently, the average unemployment rate and duration of unemployment spells. Most of us would agree that government should provide a safety net for people who become unemployed. However, we must keep in mind that the level and structure of benefits can affect the incentive for the unemployed to seek out new jobs, while high minimum wage rates and high tax rates can reduce the demand for labor.

Also on the income front, we have the issue of the minimum wage. Proposals to increase the minimum wage abound, and they are usually “sold” as beneficial to people with low incomes. But economic analysis suggests that this is not the whole story. It is more accurate to say that an increase in the minimum wage is helpful to low-income workers who remain employed; however, an increase in the minimum wage will decrease employment, other things equal, because labor will have become more expensive, and hence employers will use less. Straightforward supply and demand analysis produces this conclusion.

But the incentive effects of an increase in the minimum wage also ought to raise concern. An increase in the minimum wage may induce some to drop out of high school earlier than otherwise to seek employment, since returns to work have gone up. This outcome may not be desirable. After all, we know that the economic and other returns to education are substantial, and in general education is something we want to encourage. An increase in the minimum wage seemingly does not contribute to this objective.

The central bank is capable of achieving an inflation objective, at least on average over a period of years. In contrast, if we define full employment in terms of a threshold for the unemployment rate consistent with maximum sustainable employment, the central bank has no choice about what this threshold should be. It is determined by the structure of the economy, including the effectiveness of institutions and markets in matching vacancies and unemployed workers, and by policies, such as the levels of unemployment compensation and minimum wage rates.

Nonetheless, the trends in the core CPI and in broader price measures are likely to come under pressure from a continued tight labor market, whose influence on costs will be augmented by the scheduled increase in the minimum wage later in the year.

Before we can tell the story about favorable supply shocks, I should note that 1996 featured an unusual coincidence of adverse supply shocks. First, the minimum wage was increased; this should boost overall wage gains, labor costs and hence prices. Second, both food and energy prices increased faster than other prices. As a result of the food and energy price increases, there were wide gaps between overall and core measures of inflation for both the PPI and the CPI. The overall CPI increased about 3/4 percentage point more than the core CPI and overall PPI increased more than two percentage points faster than core PPI.