More on minimum wage

Yesterday I wrote about minimum wage. I cited what I consider a definitive condemnation of minimum wage as a means to actually raise wages for the working poor. Minimum wage’s true effect is to permanently disemploy everyone whose marginal revenue product is lower than the legal minimum wage.

But I must admit that while the minimum wage seems easy to refute, the idea has widespread support among economists. Not long ago, the Economic Policy Institute published an open letter signed by more than 600 economists asking President Obama and Congress to raise the minimum wage to $10.10. Polls substantiate the legitimacy of this sample — more than half of economists in a recent IGM Forum survey said the alleged benefits of minimum wage outweigh whatever costs it may impose on least-skilled workers.

I must also admit, however, that I’ve yet to see a pro-minimum wage economist level a convincing argument against the policy’s common criticisms (e.g. mine from yesterday). Paul Krugman, for example, stops with saying human relationships are complicated and that raising minimum wage does not automatically result in the laying off of least-productive workers. He writes:

…one theme in all the explanations is that workers aren’t bushels of wheat or even Manhattan apartments; they’re human beings, and the human relationships involved in hiring and firing are inevitably more complex than markets for mere commodities. And one byproduct of this human complexity seems to be that modest increases in wages for the least-paid don’t necessarily reduce the number of jobs.

I agree that these relationships can be complicated, but “relationships” is quite possibly the most insignificant factor in this equation. What about minimum wage’s effect on longer-term employee replacement rates? On profits, and by implication, consumer prices? On capital-labor substitution rates, whereby businesses replace labor with mechanized, non-labor factors of production? Even if employers hesitate to immediately act like the perfectly competitive agents economists often, for better or worse, assume them to be, higher labor costs will affect business decision-making at every level, possibly to the detriment of consumers, business-owners and the working class alike.

Krugman is just one example, of course, but countless other defenders of minimum wage have leveled similar, half-hearted justification for their views. Marxist economist Rick Wolff, for example, abandons the economic debate altogether, saying the issue ought to be made on political and ethical grounds because “we don’t know how raising the minimum wage will play out on employment.” Others, like Nobel laureate Bob Solow and Harvard professor Richard Freeman, make no theoretical argument for their positions, choosing instead to simply cite studies that show minimum wage hikes to have little-to-no effect on unemployment. But as Wolff himself notes, sifting through studies and surveys on the issue is a waste of time — they are largely inconclusive and have, for decades, fueled activism on both sides of the issue.

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