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Economists and the Minimum Wage

Posted By Don Boudreaux On January 6, 2014 @ 2:56 pm In Economics,Scientism,Work | Comments Disabled

The New York Times was unambiguously wrong [1] when it recently wrote [2] that the argument that raising the minimum wage will shrink low-skilled-workers’ employment options is “a party-line theory that most economists agree has been discredited.”  Question number one in this survey of some of the “more elite” ecomomists [3] is powerful evidence against the NYT‘s assertion.  A plurality of economists (34%) at least are appropriately skeptical of the bizarre claim that the market for low-skilled labor is uniquely arranged in ways that cause the law of demand not to apply to such labor.

Alas, though, only a plurality of economists harbor such mature skepticism.  Depressingly, nearly a third (32%) of surveyed economists accept the above bizarre claim, while another 24% are “uncertain” about it.  That is, potentially a majority of economists do accept this bizarre claim that has long been popular only among politicians, pundits, preachers, non-econ professors, and other economic illiterati.

Save for the way we teach and do economics at GMU (and at a handful of other sensible places), economic education, research, and training today appear to be in sorry shape.  It would be as if, say, a sizable percentage of surveyed biologists agree, or at least think it plausible, that while natural selection explains the evolution of almost all species, it doesn’t explain the development of the salamander, and that the evidence mustered to support the case for the alleged ‘salamander’ exception to the operation of natural selection is nowhere near as consistent and as powerful as it should be in order for it to bear the weight of such a startling proposition.  Any such result of a survey of “elite biologists” would quite properly call into question the current state of the biology profession.

Even more depressing are economists’ responses to question number 2, which is:

The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy.

Forty-seven percent of economists either “strongly agree” or “agree.”  Only 11% either “strongly disagree” or “disagree.”

The most important point to note here is that, unlike the first question, this second question is normative.  It’s asking economists’ normative opinions – in effect, ‘Do you think that the benefit that Jones will enjoy as a result of a policy that will inflict harm on Smith is “desirable”?’

How are economists in any favored position to make this judgment?  Why not ask the same question of, say, electrical engineers, deep-sea fishermen, or pet-store owners?  Economists have no special professional competence to weigh the subjective size of Jones’s benefit against the subjective size of Smith’s loss.  Being human beings, economists can well have opinions about such a matter, but their opinions should carry no more weight than does that of any other group of people – such as the opinions, again, of electrical engineers, deep-sea fishermen, or pet-store owners.

Economists might be better positioned than are non-economists to say that the size of Smith’s dollar-denominated losses are smaller, larger, or are about the same as are Jones’s dollar-denominated gains.  But that’s all.  Yet it’s not clear that the economists surveyed had even this relatively weak (“Kaldor-Hicks [4]“) welfare criterion in mind.  (The Kaldor-Hicks criterion says, in summary, that a policy change is ‘socially’ beneficial if the beneficiaries of that policy change could in principle compensate the losers in such a way that all parties are better off with the policy change than without it.  Check out some of Bryan Caplan’s notes on Kaldor-Hicks. [5])  If, as I suspect, most of these surveyed economists did not have such a criterion in mind, then beyond all doubt economists are no better qualified than are any other group of people to judge whether or not the benefits of a higher minimum wage are worth the costs.

But what if these 47 percent of surveyed economists did, at some level, have in mind the Kaldor-Hicks criterion?  No matter, in my view.  The results of this survey are no less depressing.  Using such a speculative criteria such as Kaldor-Hicks to approve a policy that involves restrictions of the range of options over which adults may bargain is especially iffy.  And the iffy-ness deepens when the policy in question is justified principally as one of ‘redistribution’ rather than one that enhances growth.

Is it really true that the net increase in the money incomes of those workers who keep their jobs with a higher minimum wage will likely amount to a sum large enough to allow these ‘winning’ workers to compensate the workers who lose their jobs?  Remember, the compensation must be sufficient to cover not only lost current income, but lost future income as well.  And this lost future income rises over time because the workers denied jobs today are denied not only income today but also the opportunity to learn on-the-job skills and to get work experience – skills and experience that would have enabled these now-unemployed workers to have earned even higher incomes in the future.

Where will this additional money – wealth – come from to allow successful Kaldor-Hicks compensation?  Insofar as a higher minimum wage is redistributive rather than growth-enhancing, Kaldor-Hicks won’t work.  Jones’s gain is Smith’s loss.  Period.

But even if there is somehow, from some mysterious place, some additional wealth generated by a higher minimum wage, it is impossible for even the most elite of elite economists to know with enough assurance that the resulting gains to some workers today will be large enough to all these workers so that they ‘in principle’ could compensate the workers who lose their jobs because of the higher minimum wage.  (Note, by the way, that these last few paragraphs ignore other likely additional negative consequences of minimum-wage legislation – consequences such as a disparate impact of such legislation on minorities [6] and workers who are especially poor; higher prices and lower outputs of consumer goods and services; and worsened employment conditions for the workers who remain employed with the minimum wage.)

In sum, economists have no more business saying that the benefits of a higher minimum wage exceed its cost any more than they would have business saying that the benefits of government imposing an additional annual $1 per-head tax on every American, with the proceeds to be given to me, is a policy whose benefits exceed its cost.  My net worth would immediately skyrocket into the billions as a result of such a tax, while the net worth of each and every other American would fall insignificantly.  Unless you can plausibly identify some total-wealth-enhancing feature of this tax, Kaldor-Hicks won’t work.  And if you as an economist can’t use Kaldor-Hicks (and certainly not Pareto) to justify the welfare assessment that you make when answering “agree” or “strongly agree” to the second question of your survey, then you’re whistling Dixie.  You have no more business offering your opinion on such a matter than you’d have in offering your opinion about your neighbor’s taste in ice cream or in chardonnay.

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URL to article: http://cafehayek.com/2014/01/economists-and-the-minimum-wage.html

URLs in this post:

[1] The New York Times was unambiguously wrong: http://cafehayek.com/2014/01/the-wages-of-journalist-incompetence.html

[2] it recently wrote: http://www.nytimes.com/2014/01/02/opinion/the-campaign-for-a-bigger-paycheck.html?ref=todayspaper

[3] this survey of some of the “more elite” ecomomists: http://economix.blogs.nytimes.com/2013/03/04/what-economists-think-about-raising-the-minimum-wage/?_r=0

[4] Kaldor-Hicks: http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Kaldor-Hicks_efficiency.html

[5] some of Bryan Caplan’s notes on Kaldor-Hicks.: http://econfaculty.gmu.edu/bcaplan/e849/pf1.htm

[6] a disparate impact of such legislation on minorities: http://cafehayek.com/2013/10/modern-discriminatino.html

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