A Misguided Controversy

Recently debates over minimum wage laws have flared up again. The starting point was president Obama's State of the Union speech, in which he announced that he would push through a higher minimum wage (among other things) regardless of the objections anyone in e.g. Congress might have.

Thereafter there was a 'pro/con' debate on the Daily Show that ended up making some waves. Mish has amply documented the controversy in 'Schiff vs. Ritholtz: Political Correctness vs. Law of Supply and Demand'.

There can actually not be any controversy over the basic economic laws involved, and yet the debate continues to be revived again and again. The promoters of labor market intervention are certainly not above employing “outrageous political statements dressed up as economic theory” as Caroline Baum has pointed out.  As an aside, Ms. Baum cites a number of empirical economic studies in her article that thoroughly debunk the idea that wages are magically exempt from the law of supply and demand, but as a matter of fact, no such studies are required to explain the economic effects of instituting minimum wages.

Institutional unemployment will be the inevitable result, and all that is needed to prove this is economic logic. There is no quantum theory of employment according to which cause and effect are only tentatively ascertainable. No empirical testing of a 'minimum wage hypothesis' is necessary to establish what the effects of the policy will be.

As Mish correctly noted, the fact that Mr. Schiff was shown in the most unfavorable light possible on the Daily Show has no bearing whatsoever on the facts or on the economic laws on which they are based. Those will continue to apply, regardless of whether Schiff is presented as a cruel and heartless capitalist exploiter. By the way, Schiff certainly took  exception to the manner in which his interview was edited. Robert Murphy's comments on Schiff's interview on the Daily Show may also be of interest; as it were, we agree with him that the show is usually quite funny, regardless of its political bias.

 

How to Properly Think About the Problem

Minimum wage laws invariably create institutional unemployment, hit the lowest skilled workers (and hence the poorest members of society) the hardest and infringe on people's freedom to enter into contracts. After all, a low-skilled or unskilled worker who wants to work for less than the minimum wage is no longer allowed to offer his services at a price the market will bear.

There is a very simple and effective way of demonstrating that the pro minimum wage arguments are flawed. Consider the president's proposal from the SotU speech:

 

“Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.

 

One thing we were immediately wondering about was why no-one stopped to ask: “Why only nine dollars per hour? Why not ten? Or eleven? Wouldn't that be even better?”

It would be a very good question and we'd be extremely curious to hear the answer. Indeed, for those earning the minimum wage, $9 must surely sound like a better deal than $7.50. But $10 would sound even better and $11 even more so. So why does the president not want to impose a raise to $10 or $11?

Obviously, the only thing that can possibly stand in the way of an even bigger increase in the minimum wage is some vague recognition, even if it only exists on a subconscious level (or is not admitted to), that economic laws do indeed exist. The 'good deal' would turn into a very bad deal if people were to begin losing their jobs left and right because keeping them employed had become uneconomic.

In fact, it is easy to test the limits of the belief in the efficacy of minimum wage laws to raise the standard of living by proposing some obviously absurd number. After all, if $9 is better than $7.50, $10 is better than $9, and $11 better than $10, then why not go all the way and raise the minimum wage to $100 or $1,000?  Surely almost everyone would regard such a proposal as absurd – at which point it would undoubtedly be highly illuminating to hear the supporters of minimum wage laws explain why exactly it would be absurd.

Lastly, often pro-labor type legislation of this sort is actually a bit of a political trick, designed to pull the wool over voters' eyes (mind, we have not done any calculations or considered any studies on the $9 demand specifically). Since it is not possible for governments to wave a magic wand that suspends economic laws, one will often find that the height of a proposed new minimum wage is in the vicinity of what is already paid in the marketplace for low-skilled labor, due to a combination of inflation effects and rising productivity as a result of capital accumulation.  After all, businesses cannot simply offer any arbitrary price for labor, contrary to what many leftists seem to think. Labor remains a scarce resource for which businesses must compete. So while it is certainly not possible to pay absurdly high prices for unskilled or low-skilled labor, it is also not possible to offer absurdly low wages, as one's offers must be competitive.

 


 

 

 

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9 Responses to “A Comment on the Minimum Wage Debate”

  • It is ironic those that claim credit for raising the minimum wage do more to devalue it in the first place. When I got out of high school, $7.50 a hour was a pretty good wage, likely in the range of $90,000 a year today. It is sure going to be disappointing to the masses when they are making $100K a year and find they can’t live on it. At the same time, Obama and company insist on accommodating more unskilled labor in the country to compete with what is already here.

  • Keith Weiner:

    Suspension of economic law and why not $1000 indeed. Good points!

    I’ve been running a little experiment. Every time I’ve encountered proponents of minimum wage laws online recently, I have been asking them a simple question.

    “Would you pay someone $15 to produce $10 worth of burgers?”

    I guess it should not be surprising that I get NO ANSWER to this. At all. The min wagers evade the question entirely, and often jump straight into the personal attacks. Or they sneer and blame the foolish businessman who “deserves” to go out of business, etc.

  • No6:

    To the degree that minimum wage laws strengthen the black market could be seen as a positive unintended consequence.

  • Mark Humphrey:

    Thanks for this and many other fine articles.

    John Stossel had a great program debunking the left’s minimum wage fantasies, featuring Tibor Machan who–as always–was laser sharp and unapologetic. After the Machan segment, though, Stossel gave away the argument to the left with a misdirected response. A leftwing lunkhead said something about $1.00 an hour in a free market, and Stossel responded, well what’s wrong with a buck an hour if its voluntary. That’s true but misleading, since wage rates are established through a process of competitive bidding for a scarce factor. Competition for factors of production–free bidding for the means of productivity–is what assigns value to work in the market place. But people have been taught to believe that there is no natural limit to the power of business to command away resources from others. Instead of challenging this absurd myth, Stossel gave away the argument.

    I was really surprised to read comments on Seekingalpha in favor of minimum wage legislation from people who on other issues are sound thinkers. The myth of capitalist exploitatiojn runs deep.

    • Thanks for the kind words.
      This type of thinking is a remnant of the Marxian ‘iron law of wages’ argument, which posited that workers would forever be kept in penury by capitalist exploiters and never be paid more than a subsistence wage. In fact, Marx went as far as asserting that under capitalism, the incomes of workers would gradually become worse and worse. These fallacies were subsequently thoroughly refuted on a theoretical level by Boehm-Bawerk and Mises and economic history of course speaks for itself: over time, the capitalist system has delivered an unceasing rise in the living standard of workers. Marx and his ideas really need to be chucked overboard once and for all, and it remains astonishing how much influence they continue to wield to this day.

  • zerobs:

    The only reason Democrats continually harp about raising the minimum wage is because the minimum wage rate is used in all sorts of labor union calculations. In other words, it is merely a gift to labor unions who have in the last 40 years never given a damn about people losing their jobs, it’s simply about pay scales and the associated pay of union executives.

    The cynical people who propose such wage increases (and lie about the reasons) know damn well that if the minimum wage were to merely DOUBLE there would be a mass closure of any business that employs union labor.

    Additionally, the minimum wage discourages citizens from offering their labor at an illegal rate, which means the only people who WILL offer their labor at such rates are either citizens working for cash and avoiding the income tax (and FICA) OR workers who are in the country illegally to begin with. In other words, minimum wage laws increase the insolvency of welfare programs and increases the number of illegal aliens.

  • Crysangle:

    Inflationary and will reduce competition with abroad until the dollar devalues further, maybe just an attempt to offset deflationary competition from abroad, in which case it would be either be followed by trade restrictions or vaunted as increasing US household purchasing power (but to the detriment of national production) .

    • The argument that it will ‘increase demand’ has been bandied about by Hoover and his advisors in the Great Depression already. They erroneously believed that businesses had to be encouraged to keep wage rates high in the middle of a major deflation of the money supply. This was ultimately the main reason why unemployment soared during the depression. FDR then simply continued all the worst policies of Hoover and augmented them by even worse policies of his own. Ever since that time, this demand fallacy has refused to die.

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