More Reflections on the Economics of the Minimum-Wage

by Don Boudreaux on February 18, 2013

in Prices, Reality Is Not Optional, Scientism, Seen and Unseen, Work

Commenting on my recent open letter to Barack Obama – in which I asked, if government-mandated higher prices for imports discourage the purchase of imports, why do government-mandated higher prices for low-skilled labor not discourage the hiring of low-skilled labor? – John Burger writes that “there is ample evidence that increases in tariffs affect imports of said items,” but less-conclusive  evidence that increases in the legislated minimum-wage affect employment rates.

Question: how many studies have been devoted to testing empirically the proposition that higher protective tariffs reduce imports?  I’m not asking for studies that explore the question of how much an x-percent hike in protective tariffs lowers imports.  Instead, I’m asking for studies that admit as reasonable the proposition that higher protective tariffs might in fact not reduce imports at all (or only by amounts too minuscule to detect).  Put differently, I’m asking for pointers to studies whose authors begin by saying something like “Contrary to popular, textbook presumptions that rises in the prices of imports reduce the quantities demanded of imports, let’s look at the actual evidence to test this presumption scientifically.  Perhaps it’s untrue.”

I know of no such studies, although perhaps they’re out there.

The evidence, to which Mr. Burger refers, on tariffs’ depressing effects on imports, seems to me to be established mostly from history and from common sense rather than from the sort of narrowly focused and tightly empirically controlled tests that are the stuff of minimum-wage studies.  (History suggests to me that the minimum-wage hurts unskilled workers: look at the trend over the past 70 years in teenage unemployment, and especially that of the unemployment of black teenagers in America.)

The fact is that no one seriously doubts – and no one has it in his or her material interest to question – the proposition that higher protective tariffs reduce the quantities of imports demanded by domestic buyers.  This straightforward proposition about the effects of government-mandated higher prices on the quantities demanded of imports is simply too obviously true to be the object of much controlled empirical testing.  (If this proposition weren’t generally true, much – perhaps all – of the corpus of neoclassical economics would have to be discarded.)

Moreover, if someone did do a test and found that a higher protective tariff imposed by Uncle Sam on, say, fast-frozen french-fries imported from Canada over the years 2003-2007 in fact was followed by more imports of fast-frozen french-fries from Canada during this time span, I doubt that anyone would seize upon that finding as establishing a “new economics” of trade in which modest increases in protective tariffs have either no effect on imports or have even positive effects on imports.  Everyone of sense would either question the study’s method or recognize that the ceteris in this particular historical instance wasn’t paribus.  A handful of other studies reaching the same empirical result wouldn’t change matters.

The same is true for so-called sin taxes.  No one questions that higher taxes on, say, cigarettes discourage the purchase of cigarettes in the ‘white’ market (that is, outside of the black or gray market in which the taxes are avoided).  Anyone who said “Hmmm….. You say that higher cigarette taxes will discourage their purchase in the white market.  But a real scientist would test that proposition before accepting it.” would be regarded as daft.  Questioning the magnitude of the effect is perfectly legitimate; questioning the effect’s existence and direction is not.

And yet, human labor somehow is exempt from this general attitude.  Of all valuable goods and services bought and sold in markets, human labor is one of the few in which many people seriously believe that the law of demand – the proposition that, ceteris paribus, the higher is the cost of acquiring a unit of some given good or service, the fewer will be the units of that good or service sought to be acquired per period of time – does not necessarily apply.

And so empirical studies are done to test the law of demand as it applies to human labor and, lo and behold, some studies find that it does not apply while other studies find that it does.  So we are to conclude from this fact that employers of workers whose pay is in the range of the legislated minimum-wage might well not seek to economize on their production costs, in the face of higher mandated wages, by reducing the quantities of labor they hire, by working their laborers harder, or by lowering on other dimensions (say, fewer fringes) their hourly costs of employing labor.

Such a conclusion seems to me to be an incredible leap, one born chiefly of the romantic wish to believe that (apparently) well-meaning government mandates aimed (apparently) at ‘the poor’ really are an easy way to help the poor earn more income.

….

One final question for now: suppose that Pres. Obama, in his most-recent State of the Union Show, had also proposed a minimum price for office paper in order to raise the incomes of people who produce office paper, what would have been the reaction among economists?  Suppose that Mr. Obama had said “Businesses use a great deal of office paper – reams of it, actually – to help them earn profits.  But I believe that the incomes of those Americans who produce this paper are too low.  So I’m asking Congress to mandate that the minimum price at which office paper can be sold be raised by 50 percent above its current market price.*  This measure will put more income into the hands of American paper producers.”

Would anyone suppose that the direction of the effect of this mandate on the quantities of office paper demanded is an empirical question?  Would anyone seriously doubt that businesses – large, small, and mid-sized – would all seek and find ways to economize further on their use of office paper, say by switching even more to the use of electronic documents, and by monitoring more closely the use of office paper to ensure that less of it is ‘wasted’ or pilfered?  Would anyone doubt that businesses would buy less office paper as a result of Mr. Obama’s well-intentioned mandate?

I’ll bet not.  So what in the world that is relevant for understanding the way that employers react to higher input costs is different about human labor?  Nothing that I can see.

*The proposed increase in the national legislated minimum-wage is just over 24 percent from the current national legislated minimum-wage.  We don’t know how much higher than the market-clearing wage a $9.00 per hour legislated minimum-wage would be.  I think 50 percent is not a bad guess.

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