Again, More on the Minimum Wage

by Don Boudreaux on December 8, 2013

in Economics, Reality Is Not Optional, Science, Seen and Unseen, War

“McQuery” e-mails the following question.  It’s one that’s asked frequently – usually as an accusation rather than in a genuine spirit of inquiry – and it’s one that I’m sure that Russ and I have addressed in the past, in one way or another, here at the Cafe.  Many other scholars have addressed this question accusation too, for it’s an instance of a perennial question accusation hurled at economists by those who dislike the conclusions of economic reasoning.

As “McQuery” puts the inquiry to me:

It’s intolerable that you [Boudreaux] a college professor insist that the minimum wage must raise unemployment. Your arguments all smack of religious devotion to a dogma and not of a scientist searching to understand without any biases….  How can you call yourself objective?  My students are warned to ignore everything you write.

First, neither I nor any other economist insists “that the minimum wage must raise unemployment.”  Raising unemployment is a possible – indeed, likely – effect of a higher minimum wage; it is not, however, a necessary effect.  The argument is that a higher minimum wage reduces the full range of the attractiveness of employment options open to low-skilled workers.  The effects of a higher minimum wage might play out exclusively in the form of more-intense demands on workers – that is, a demand by employers that workers work harder and produce more output per hour.  The effects of a higher minimum wage might play out exclusively in the form of reduced fringe benefits for workers.  The effects of a higher minimum wage might play out exclusively in the form of fewer paid hours of work per year for low-skilled workers who nevertheless all keep their jobs (and who continue to be hired).  The effects of a higher minimum wage might play out exclusively in the form of fewer jobs for low-skilled workers.

In reality, the effects of a minimum wage play out in some or all of the above ways.  And all of the above ways are harmful to low-skilled workers.  All of these effects are harmful to the very people who minimum-wage proponents seek to help by restricting the range of contracting options open to low-skilled workers in their negotiations with employers.

Note that to the extent that the effects of a minimum wage play out in ways other than a reduced number of jobs for low-skilled workers, the actual and measured effects of the minimum wage on job losses will indeed be reduced.  These effects might even become statistically insignificant.  But this fact means neither that the harm to low-skilled workers from minimum-wage legislation is small nor that the standard economics criticism of minimum-wage legislation is mistaken.  It simply means that some, perhaps much, of the harm to low-skilled workers from minimum-wage legislation takes forms other than job losses.

Perhaps economists overemphasize the effect of minimum-wage legislation on the number of jobs, while underemphasizing the effects of such legislation on other features of low-skilled workers’ employment experiences.  If so, there are two reasons that excuse this overemphasis (if overemphasis it really be).

First, job losses are not only one of the likely effects of minimum-wage legislation, but also one of the most likely effects.  Contrary to the suggestions of many prominent politicians and pundits, there is in fact a great deal of empirical evidence that minimum-wage legislation does indeed reduce the number of jobs available to low-skilled workers.

Second, when doing their analyses economists make ceteris paribus assumptions – and typically among these assumptions is that a change in the price of the good or service in question does not cause the good or service itself to change.  (All serious thinkers, in any field, make ceteris paribus assumptions.)  If an economist is asked to list the effects of, say, a legislated price ceiling on tomatoes, he or she will predict that the result will be a shortage of tomatoes.  Most obviously, the economist takes for granted that the imposition of the price ceiling will not simultaneously be accompanied by a coincidental increase in the supply of, or decrease in the demand for, tomatoes such that the new market equilibrium price for tomatoes is at or below the legislated price ceiling.  But in addition the economist also assumes that the quality of tomatoes will not change sufficiently to nullify the prediction.  This economist of course recognizes that among the ways that tomato growers might respond to a legislated prohibition on their raising the price they charge for tomatoes above a certain level is for those growers to reduce the quality of their tomatoes.  Such a reduction in tomato quality enables growers to grow any given quantity of tomatoes at lower costs; such a reduction in tomato quality also causes the demand for tomatoes to fall.  (Consumers aren’t willing to pay as much for lower-quality tomatoes as they are willing to pay for higher-quality tomatoes.)

Technically here (and this point is important), the supply of tomatoes doesn’t really rise and the demand for tomatoes doesn’t really fall.  Technically here, the price ceiling caused the good itself to change.  A new good – a good different from the former good – is now being bought and sold.  Both the new good and the former good, in this example, are called “tomatoes.”  But the lower-quality tomatoes are not the same good as are the higher-quality tomatoes.  Because straightforward supply-and-demand analysis is built on the assumption that the good in question remains unchanged when the price of that good rises or falls, straightforward supply-and-demand analysis causes the economist’s focus to be on the shortage that results from a price ceiling rather than on other possible consequences of such an interference with market pricing.

A similar analytical bias (for lack of a better term) arises in discussions of minimum-wage legislation.  The assumption – consistent with straightforward supply-and-demand analysis – is that that legislation does not change the good (hours of low-skilled labor) being bought and sold.  And so the first effect that the economist ‘sees’ when analyzing a hike in the minimum wage is a reduction in the quantity of hours of low-skilled work that employers purchase – that is, the first effect the economist ’sees’ is a decline in the unemployment of low-skilled workers.

This assumption that the good “hours of low-skilled labor” remains unchanged is unlikely to hold strictly true in reality.  In reality, some, perhaps many, employers will indeed work their employees harder per hour, thus changing – because of the legislation – the nature of the good being bought and sold.  The unemployment effect will thus be muted as the ‘overworked’ effect kicks in.

….

Having said all of the above, let me return to what I take to be the heart of McQuery’s accusation: that my criticism of minimum-wage legislation is dogmatic and unscientific.  I believe that it is not.  I believe that my criticism of minimum-wage legislation is no more dogmatic and unscientific than would be the criticism offered by a physicist against the claim that the law of gravity does not operate on some children’s playthings.

Suppose that a clown announced to the world that he’s discovered an exception to the law of gravity – an object that does not obey the law of gravity.  ”Drop this object and watch it levitate, or even rise!” proclaims the clown.  ”This unique product is an exception to a law that applies to everything else!”

What would a physicist think?  What should a physicist think?  He or she would be skeptical to the point of knowing that that clown’s claim is mistaken.  And if the physicist witnessed a large number of people buying the clown’s claim, that physicist would warn the public to avoid falling for the falsehood.  And I submit that the physicist would be behaving unscientifically if, instead, he or she said, upon hearing the clown’s proclamation, “Hmmm…  Perhaps the clown is correct.  It’s an empirical matter.  Maybe there is indeed a mass substance that is unaffected by gravity.”

The physicist, upon conducting empirical investigations of of the ‘ungravitied’ substance, might find, say, a balloon filled with helium.  And, lo! and behold, the balloon does not fall to earth as would a rock or a pinto bean if the person holding it lets go of it.  But helium-filled balloons are no more an exception to the law of gravity than are, well, low-skilled workers exceptions to the law of demand.

When the costs of hiring workers rise, employers will seek more intensely to economize on their use of labor.  Depending on the time frame under consideration, as well as upon many other empirical factors, the extent to which employers do such economizing – the “elasticity of demand for labor” – might be great, middlin’, or minuscule.  But to insist that the demand for low-skilled workers obeys rules different from the rules that apply to the demand for all other goods and services makes no scientific sense.

As with a latex balloon filled with helium, any real-world object might be under the influence of forces in addition to gravity that cause gravity’s effects to be overridden in particular cases.  The market for low-skilled workers might in fact be under such heavy influence of monopsony that a legislated minimum wage causes the number of hours employers demand to hire of such workers actually to increase.  Or, a different possibility, the change in the nature of the work demanded from low-skilled workers might result in more such hours of work being hired.  But none of these possibilities means that, ceteris paribus, a higher cost of labor will not cause the quantity of labor demanded to fall.

So then the question becomes: Are conditions in the real-world market for low-skilled workers so generally likely to be so different from conditions in the real-world market for nearly every other good and service that economists should always treat every argument and call for a higher minimum wage “as an empirical question”?

No.  Not only is the empirical evidence against the standard prediction of the effects of minimum-wage legislation far too weak to support such a unique treatment of low-skilled labor, but – apart from the monopsony argument – there is absolutely no good theoretical reason (unlike with a helium-filled latex balloon) to believe that the demand for low-skilled workers is an exception to the standard prediction.  (And because the monopsony argument is so entirely unbelievable on its face in modern America, we can dismiss it, too.)

And there’s yet a third reason for dismissing as plausible any claim that the demand for low-skilled workers is a real-world exception to the general law: most popular arguments in favor of the minimum wage are classic revelations of base economic ignorance.  Most people, being ignorant of the economic way of thinking, simply do not bother to think beyond the most obvious consequences of any policy.

For most people, a higher minimum wage means higher pay for low-skilled workers.  Period.  If asked to explain, most of these people will insist that the higher wage costs will be paid out of the assumed-to-be excessive and idle profits of employers, or that these wages will be paid out of the revenues from higher prices of outputs.  Negative consequences on low-skilled workers are almost never even considered – a reality that justifies economists’ vigilance in explaining that there will indeed, almost certainly, be negative consequences.  So when economists such as Paul Krugman cavalierly dismiss the standard case against the minimum wage, these economists do a great disservice to the public.  These economists reinforce the public’s bad habit of looking only at the ‘seen’ and ignoring the unseen; these economists – and, today, Mr. Krugman is by far the most notable and aggressive of these economists – specialize in assuring the general public that their, the general public’s, untutored instincts are generally trustworthy guides to the economy and to public-policy making.

Be Sociable, Share!

Comments

comments

Add a Comment    Share Share    Print    Email

Previous post:

Next post: