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A Theme I’ve Sounded Before About Minimum Wages

This past weekend, my son, Thomas, and I were in Rochester, New York, visiting the Rochester Institute of Technology.  (R.I.T. is high on Thomas’s list of colleges to attend after he graduates from high school in May.)  During some down time on Friday, we drove to the shore of Lake Ontario.

While walking along the shore, I threw a small pebble into the lake.  I hurled it so far out that there was no splash on shore.  “I just caused the water level of the world’s oceans, lakes, and rivers to be higher than it would otherwise be,” I informed Thomas.

“That’s true, dad,” he replied in a tone that said “Tell me something that I don’t know.”   He then added, after a brief pause: “But maybe not.  If the pebble sank completely into the sand at the bottom of the lake, then your throwing that pebble into the lake ultimately did not cause the water level of the world to rise to be higher than it would otherwise be.”  (A boast: my son really does talk like this.)

I could only confirm the truth of Thomas’s analysis.  But then he and I both agreed that the chances of the pebble sinking fully into the sand are too small to take seriously.  So, in fact, my throwing that tiny pebble into Lake Ontario did indeed cause the water level of the world to be higher than it would have been had I not thrown the pebble in to Lake Ontario.

“What are the prospects of some scientist detecting the effect on the water level of my tossing of the pebble into the lake?” I asked Thomas (admittedly rhetorically).  Thomas immediately replied “Zero.”  And then he added – I report as a proud papa – “Obviously, that fact doesn’t mean that the pebble has no effect on the world’s water level.  The laws of physics require that the water level rise to a height greater than it would otherwise have reached.”

Thomas is correct, of course.  Data generated by the inadequacy of measurement tools (be they physical instruments or statistical methods) should never mislead us into abandoning the logic of what we (believe that we) know about reality.  Being alert to the limitations of measurement tools is part of what is required to be a good scientist.

No measurement tool available today could possibly detect the effect on the world’s water level of a small pebble being tossed into a body of water such as Lake Ontario.  Even if ceteris were indeed paribus – that is, even if there were no offsetting or reinforcing events such as evaporation or swimmers jumping into the water – the size of the pebble is so small relative to the volume of water on the earth’s surface that the effect would be practically impossible to detect, even with the most precise and sensitive measuring tool.

Yet the failure of any such tool to detect the effect does not permit us to conclude that a pebble tossed into Lake Ontario has no effect on the world’s water level.  Such a conclusion, while perhaps appearing to be scientific to people who are only passingly familiar with the scientific method, would in fact be deeply unscientific unless and until someone offered a compelling theory for why pebbles tossed into Lake Ontario do not displace water.

One theory might be that pebbles tossed into Lake Ontario dissolve into airborne molecules the moment they first touch the surface of the lake, despite giving human observers the impression that the pebbles actually sink into the lake.  Another theory might be that all such pebbles (as Thomas suggested) sink fully into the sand at the bottom of the lake (and, further, that the resulting displacement of the sand causes no rise the water level).  Such occurrences must be admitted to be possible.  But no serious person would take such possibilities seriously.

And so it is with minimum-wage legislation.  It’s child’s play to tell stories (“theorize”) about how a government mandated minimum wage above the market-clearing wage will have no negative effects on any low-skilled workers.  But in order for such stories to be taken seriously by serious economists, the stories must be both theoretically and empirically plausible.

I’ve encountered no such plausible story for why a hike in the minimum wage does not cause the law of demand to operate in standard fashion for the demand for low-skilled workers. The monopsony story doesn’t work for reasons obvious to anyone who is not blinded by textbook definitions of “monopsony.”  Even more implausible is the skyhook-like story in which minimum-wage workers spend so much more money after the minimum wage is raised that the demand for their own labor rises as a result.

And the story that is the one that I think is implicitly believed by most non-economist supporters of the minimum wage – namely, that employers simply absorb the costs of the higher minimum wage – is also unbelievable; it’s the equivalent of the argument that a pebble tossed into a Great Lake has no effect on the water level because that pebble is alleged to be absorbed completely into the sand at the bottom of the lake.

Yes, yes, yes.  There are empirical studies that purport to find no negative effects of the minimum wage on the employment prospects of low-skilled workers.  But such studies are the equivalent of measuring sea levels at 5:00pm after a pebble is tossed into Lake Ontario at 4:30pm.  Control as much as is humanly possible for all the offsetting and reinforcing changes; the systems of water and atmosphere are simply too complex to allow a trustworthy measurement.  Some researchers will find no negative effects; other researchers – controlling differently for different effects – will find the negative effects.

Given the centrality of the law of demand to economics – given the ready acceptance and use of this law, by everyone, in nearly every other facet of life, law, and policy-making – given the smallness of minimum-wage hikes and the number of minimum-wage workers relative to average wages and to the number of total workers in the economy – given the many different margins on which employers and employees can adjust the terms of employment to a forced change on one of those many margins – and given the dynamism and vastness of the global economy (of which each country is only a part, as Lake Ontario is only a part of the world’s seas) – and it becomes naive in the extreme for any economist who accepts the general validity of the law of demand to conclude that raising the minimum wage does not harm some of the very workers that it is ostensibly meant to help.