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Antony Davies on Legislated Minimum Wages

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In this short LearnLiberty video from April 2012, Duquesne University economist Antony Davies explains clearly some of the basic economics of the minimum wage.

The more clever champions of legislated minimum wages might console themselves by hoping that the existence of monopsony power among employers of low-skilled workers causes legislated minimum wages not to work in reality the way that standard and foundational economic theory – and Prof. Davies – explain.  But such consolation is built only upon empty hope, for the empirical record is not remotely close to being solid enough to cause us to ignore the straightforward prediction of basic economics.

Yes, there are some empirical studies [2] that find that legislated minimum wages do not reduce the employment prospects of low-skilled workers.  Yet there are many more empirical studies that find quite the opposite effect [3] – the effect that is consistent with standard economics and that does not require the imagination-stretching assumption that meaningful monopsony power in the market for low-skilled workers somehow characterizes labor markets with millions of actual, and countless other potential, employers of low-skilled workers.

One narrative that is bouncing around today – or, at least, bouncing into my e-mailbox – is the accusation that those of us who argue against the minimum wage are ignoring the evidence.  That accusation is without merit.  I know much (although not all; few people do) of the empirical research on legislated minimum wages.  My reading of that research is that the bulk of it – a sizable bulk – points to consequences of arbitrarily raising the minimum wage that are fully consistent with the predictions of standard microeconomics, namely, reduced employment prospects for low-skilled workers.

When the predictions of standard theory are so clear and reasonable and are grounded in so foundational a proposition of the science as the law of demand; when the most plausible theoretical reason for these predictions not to hold is an empirical assertion (monopsony) that flies smack in the face of everyday observation and basic features of reality; when the bulk of empirical studies of legislated minimum wages finds that that regulation reduces the employment prospects of low-skilled workers; and when powerful special-interest groups are especially keen that the minimum wage somehow be portrayed as being scientifically justified, then sound scientific judgment counsels that we rely upon the predictions of the standard theory as confirmed by the bulk of empirical studies.

Until overwhelming empirical evidence arises – from sources as disinterested as possible – that legislated minimum wages cause no reduction in the employment prospects of low-skilled workers, and until an explanation for this result more empirically plausible than monopsony power possessed by employers of low-skilled workers is offered, there is no reason to take seriously the argument that government prohibitions on low-skilled workers accepting jobs at hourly wages below ones deemed acceptable to government officials do anything other than reduce the employment prospects of low-skilled workers.

I’m quite certain that an intellectually adroit geologist could assemble some facts in order to support the claim that, say, the earth is only 4,000 years old.  Yet few would take any such claim and finding seriously, or insist that this study requires that geologists rethink the very foundations of their discipline.

The economy being a far more complex phenomena than the geology of the earth, assembling such facts to contradict the basic, foundational propositions of economics is much easier than is the assembling of such contradictory facts in geology and the other natural sciences.  But this reality is all the more reason, if we have sound justification for being confident in the basic propositions of economics, not to toss out the if-then predictions of those propositions simply because some (only some) empirical studies contradict those propositions.

And to those who might reply, “Well, perhaps we ought not be so confident in the basic propositions of economics,” I ask only this: When you are next in a supermarket and see, say, paper towels on sale, do you expect that the lower price of paper towels will cause customers to want to buy more or fewer rolls of such towels?  Or: what effect do you believe the supermarket management expects to result from its lowering the price of the paper towels it offers for sale?