A deeply, deeply stupid debate

From a great piece by Kevin D. Williamson at National Review.

Right now, we are embroiled in a deeply, deeply stupid debate over whether to raise the statutory minimum wage to $15 an hour. (I write “statutory minimum wage” because the real minimum wage is always and everywhere $0.00 an hour, as any unemployed person can confirm for you.) Because everything in the economy is in reality priced relative to everything else, using the machinery of government to monkey around with the number of little green pieces of paper that attaches to an hour’s labor manning the register at 7-Eleven or taking orders at Burger King is, necessarily, an exercise in futility. The underlying hierarchy of values — the relative weighting between six months’ work washing dishes and six months’ tuition at the University of Texas — is not going to change. Prices in markets are not arbitrary — they are reflections of how real people actually value certain goods and services in the real world. Arbitrarily changing the dollar numbers attached to those preferences does not change the underlying reality any more than trimming Cleveland off a map of the United States actually makes Cleveland disappear.

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.

Romney is wrong on minimum wage

Not that anyone cares what Mitt Romney says anymore, but he came out in support of minimum wage on MSNBC’s “Morning Joe” this morning. His reasoning: “[The GOP] is all about more jobs and better pay.”

That’s too bad, because minimum wage does anything create more jobs and better pay. In fact, it does just the opposite. I once wrote about minimum wage for the Mises Institute. I explained why minimum wage outlaws employment below a certain wage rate, leading to unemployment for all workers whose marginal value product — that is, their contribution to their employer’s firm — is below the legal minimum. This hits the lowest-skilled workers hard. Murray Rothbard writes in Making Economic Sense:

If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to disemploy, permanently, those who would have been hired at rates in between those two rates. Since the demand curve for any sort of labor (as for any factor of production) is set by the perceived marginal productivity of that labor, this means that the people who will be disemployed and devastated by the prohibition will be precisely the “marginal” (lowest wage) workers, e.g. blacks and teenagers, the very workers whom the advocates of minimum wage are claiming to foster and protect.

I also note in my article at the Mises Institute that minimum wage is anything but an innocent idea proposed by those with only the best interests of working people in mind. It’s a tool whereby unions can discriminate against laborers willing to work for lower wages — especially against teenagers and immigrants.

So think twice before assuming not only that minimum wage helps poor laborers, but also that it’s advocates have good intentions in mind.

Minimum Wage: Good Intentions, Bad Policy

This article was originally published by ValuesandCapitalism.com on February 15, 2013.

Minimum wage is supposed to help poor people. That’s why two out of three Americans support raising it to $10 an hour. And that’s probably why President Obama, during his State of the Union Address last Tuesday, called for raising it by more than 20 percent.

But as any logician knows, public support for an idea doesn’t make it true.

Minimum wage has always had public support. When the first federal minimum wage legislation—the Fair Labor Standards Act—was passed in 1938, it was thought to be a major victory for the working class. The idea of protecting workers from the profit-motives of their employers was thought to be humane. But the slightest bit of economic investigation tells a more complex story.

Henry Payne cartoon

Cartoon by Henry Payne

Wages are the price for labor. They are the compensation workers require for their time and efforts. As with any price, regulatory controls—whether a price ceiling or a price floor—distort the market, creating either a shortage or a surplus. If the price of milk is capped at $1 per gallon, grocers will soon run out, as customers buy more than they need while prices are low. If the price of bread is not allowed to fall below $10 per loaf, grocers won’t be able to sell their stock as consumers will wait until prices drop to buy bread.

In the same way, minimum wage—a price floor on labor—creates a surplus of workers. At a price of $7.25 per hour, workers who are willing to sell their labor outnumber business-owners willing to hire them. There is only so much money to go around, and—like the grocery store’s customers—businesses cannot spend more on wages than they earn in revenue. And of course, not every type of labor is the same—some jobs simply aren’t worth paying someone $7.25 an hour to complete.

The result: Fewer jobs and permanent unemployment for those unable to produce more than $7.25 worth of goods for their employers. Hardly a means to help the working class.

Now in real terms, $7.25 an hour is a low wage. In fact, workers earning minimum wage today earn less than those did in the 1950s—before the age of quantitative easing and rapid monetary inflation. But that doesn’t make a minimum wage hike any more justifiable.

Despite the good intentions of its modern-day propagators, minimum wage is a questionable policy that should raise eyebrows for anyone concerned with the plight of the poor. At the very least, think twice before supporting a minimum wage hike. History suggests it might not have Mr. Obama’s intended effect.

Read the article at ValuesandCapitalism.com.