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More Reich Confusions

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My goal when I sat down to write this post – a post which is in my series devoted to exposing the many errors in Robert Reich’s case for raising the national minimum wage to $15 per hour [2] – was to fulfill a promise made in this earlier post [3].  That promise is to point out an important conclusion that Reich failed to draw from his correct observation that “when the minimum [wage] is raised, more people are brought into the pool of potential employees, so employers have more choice of whom to hire.”

But in setting the stage for describing the conclusion that Reich should have, but didn’t, draw, I encountered yet another confusion in Reich’s reasoning.  I’ll here, therefore, deal with this newly encountered confusion and save my description of the ‘missed conclusion’ for a later post.

During my appearance as a guest on this past Sunday’s Bob Zadek Show [4], James from Peoria called in to note that Reich unflinchingly (and correctly) understands that workers respond to higher prices in the way predicted by basic economic theory: the higher the offered pay, the more willing people are to work.  In econ-speak, Reich understands that the supply curve of labor slopes upward to the right.  Reich understands that there’s a positive relationship between hourly pay and the quantity of work-hours people are willing to supply to employers.*

But although Reich recognizes that the supply side of the labor market operates as standard economic logic predicts, he rejects the standard prediction that economics offers about the effects that higher wages unleash on the demand side of the market.  While Reich doesn’t exactly deny that demand curves for labor slope downward to the right, he insists that in practice higher minimum wages cause demand curves for labor to shift outward as a result of the higher spending that the rising minimum wages themselves make possible.  (I will not here further analyze Reich’s presumed economic perpetual-motion machine, except to note that there’s no reason why this analysis – if it supplies an accurate prediction of what occurs in reality – should be restricted to low-wage workers and their employers.  If Reich is right, government should forcibly double the wages of all workers – or at least of all workers whose yearly earnings are in, say, the bottom 90 percent of the income distribution.  If simply arranging for workers to be paid more money without any corresponding increase in productivity sparks a “virtuous cycle” of spending that makes everyone who is party to this higher spending materially better off, why limit such miraculous juicing to those workers who are low on the pay scale?  [Even trying to describe Reich’s bizarre “virtuous cycle” is challenging; it’s like trying to describe the contents of a bag of three apples that has more apples in it than does a bag of four apples.])

Anyway, according to Reich, raising the minimum wage increases the quantity supplied of workers while it simultaneously increases the demand for workers such that no unemployment is caused by the higher minimum wage.  So raising the minimum wage not only does not decrease total employment; it actually increases total employment.  (As Reich says: “more demand for goods and services … means more jobs.”)

But wait – if the demand for workers rises sufficiently to ensure that all of the larger number of workers who want to work at the higher minimum wage are able to find jobs at that wage, then employers do not, contrary to Reich’s assertion, “have more choice of whom to hire.”  Employers cannot, contrary to Reich’s assertion, be more picky about whom to hire.  The reason is that, while there are indeed more people applying for such jobs, the number of such jobs has expanded pari passu with the number of workers seeking such jobs.  If, instead, the number of jobs increased by less than did the number of workers seeking such jobs (and thus indeed giving employers “more choice of whom to hire”), the higher minimum wage in this case did, alas, raise the rate of unemployment (if not necessarily the absolute number of people currently out of work**).  (Keep this last sentence in mind, as it will be key to the later post on Reich’s ‘missed conclusion.’)

Note that one reason why a higher minimum wage might reduce employee turnover is that the higher wage makes employees more content with their jobs.  (This topic was discussed in this earlier Cafe Hayek post [3].)  Another, different reason that raising the minimum wage might cut down on employee turnover is that employers, having a larger pool of job applicants to choose from, can be more selective in which workers to keep and to hire.  With the ability to be more selective in choosing employees, employers presumably (and quite sensibly) screen job applicants more carefully in order to find employees who are less likely to be malcontents, immature, unqualified, or otherwise ill-suited to their jobs.  Although Reich doesn’t specify which of these two reasons he has in mind, I believe that the reason he has in mind is the second (which, of course, does not imply that he would, or should, discount the reality or the importance of the first reason).

Either way, to the extent that Reich argues that employee turnover is reduced because the higher minimum wage gives employers “more choice of whom to hire,” his argument that a higher minimum wage causes no unemployment is very difficult to maintain without yet further analytical contortions.  “More choice of whom to hire” implies “more choice of whom not to hire.”

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* Note to pedants: Please don’t here accuse me of forgetting about the backward-bending supply curve of labor.  Even on its own terms, that theory applies only to very high-wage workers.

** Even if we grant that raising the minimum wage will cause such a significant increase in consumer spending that firms’ demand for low-skilled workers will noticeably increase, raising the minimum wage by 107 percent, as Reich proposes, will, if not necessarily reduce the absolute number of low-skilled workers who are out of work, almost certainly in practice do so.

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