Sunday, February 16, 2014

Minimum Wage: Minimum Idea

Tim recently argued that raising the minimum wage is sound economics. However, doing so would hurt many poor people.

The crux of his argument is that low-wage workers are not paid their proper value for their contribution—in economic jargon, their “marginal product”—and that therefore an increase in the minimum wage would render little, if any, job loss. He further bolsters his case by stating that studies since 2000 demonstrate “little to no employment response to modest increases in the minimum wage.” In fact, he reasons, “a higher minimum wage may even save some employers money in the long term because it reduces costs associated with higher turnover and vacancies by making minimum wage jobs more desirable.”

These points do not support the case for raising the minimum wage.

First, as Russ Roberts points out, the case against the minimum wage does not rely upon “marginal product” theory or any other:

It’s even simpler than that. It’s Econ 1 or maybe Econ 0.
The minimum wage makes some workers, those with the lowest skills, more expensive than they otherwise would be. When things get more expensive, people look for ways to avoid that increased expense. In the case of the minimum wage, employers try to substitute machines and technology for workers, or use higher-skilled workers who are already paid above the minimum instead of lower-skilled workers. It doesn’t require any extreme assumptions about the labor market being in equilibrium or that the demand curve is derived from the marginal product of labor. It’s just that there is some demand for labor and that it slopes downward. All that means is that when workers get more expensive, you try to avoid paying those costs. This is a not neoclassical or neoliberal or Chicago view of the world. It’s everyone’s view of the world.

Second, regarding the weight of studies, according to economists David Neumark and William Wascher, who, in 2006 published a comprehensive review of over 100 studies on the minimum wage, nearly two-thirds found negative employment effects; and 85 percent found “a negative employment effect on low-skilled workers."  Perhaps that is why most economists oppose raising the minimum wage.

But more importantly, and as Tim appropriately notes, the negative effects of minimum wage increases do not always show up through job loss. Employers can weather such wage bumps by raising their prices, cutting employee hours, slashing wages for other employees, automating labor so as to avoid paying low-wage employees, or simply reducing hiring. The point is, cost must manifest somehow. So, even if Tim’s studies are correct that minimum wage increases may not reduce employment, it is a far cry from suggesting it would not hurt anyone. Indeed virtually any of the options available for employers would harm those at the bottom of the pay scale, particularly those who may not be fortunate enough to have a job. Why is that a good thing, especially when a scant three percent of all workers earn the minimum wage?

Later, Tim matter-of-factly admonishes that, “if there were a problem with widespread job losses among low-wage workers, we would probably know by now.”

Thankfully, strong evidence exists regarding the detrimental effects of minimum wage laws, particularly among minorities and teens.

Thomas Sowell explains that “the last year in which black unemployment was lower than white unemployment was the year before the first minimum wage law,” the Davis-Bacon Act of 1931; which, as Sowell enlightens us, “was passed in part explicitly to prevent black construction workers from ‘taking jobs’ from white construction workers by working for lower wages. It was not meant to protect black workers from ‘exploitation’ but to protect white workers from competition.”

Teen unemployment has been devastated by minimum wage hikes as well. The Wall Street Journal laments that, “as the minimum wage has risen, the gap between the overall unemployment rate and the teen rate has widened.”

Advocating increases in the minimum wage may feel good, but we need policies that do good—the poor cannot afford it.

***Update: CBO confirms that a minimum wage hike would cost jobs.

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