Quotation of the Day…

by Don Boudreaux on November 23, 2015

in Economics, Reality Is Not Optional, Seen and Unseen, Work

… is from page 230 of the 1975 collection of some of Harry Johnson‘s essays, On Economics and Society; specifically, it’s from Johnson’s 1973 contribution “Inequality of Income Distribution and the Poverty Problem”:

One way of attempting to transfer incomes toward the poor, which is obvious and appealing to the non-economist, is to allow or legislate tinkering with the market mechanism in order to provide prices more favorable to the poor.  Previous analysis suggests that programs of this kind are not likely to be promising.  As economic theory shows, neither trade unionism nor minimum wage legislation is likely to benefit the working class as a whole; on the contrary, both are likely to ensure adequate incomes for a favored group at the expense of a large degree of poverty for the disfavored group.  This is particularly true of minimum wage laws, especially if as in the United States the minimum wage is set regardless of the age and position in the labor force of the workers covered.

The ‘new’ minimum-wage research that commenced in earnest in the mid-1990s is highly appealing to non-economists, for it supports their economically uninformed understanding of markets in general and of prices in particular.  This research is an instance of credentialed economists, in effect, assuring the economically ignorant man-in-the-street that he is indeed correct in his simplistic understanding of the economy, while all those economists who are forever warning about ‘the unseen’ and about unintended consequences are the wrong-headed and unscientific ones.

And it didn’t take long for the credulous media to portray the ‘new’ minimum-wage research as if it were the unquestioned gold-standard of economic science.  A mere four months after the publication of David Card’s and Alan Krueger’s “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” the New York Times proclaimed that “economists beg to differ” with anyone who argues that minimum wages price some low-skilled workers out of jobs.  (Ironically, the person the NYT here singled out to scold for being unaware of this alleged new discovery by economic scientists was then-U.S. Rep. Dick Armey – a PhD economist.)  The implication of this NYT ‘report’ is that the science of the minimum wage has been settled in favor of the man-in-the-street notion that wages are arbitrary figures that can be forcibly raised by government without any harm being inflicted on workers who are thereby prevented from competing for jobs by offering to work at wages below the politician-established minimum.

Because economics – good economics – is very much the science of making that which is unseen seen, economists, of all people, should be keenly aware that much of what occurs in an economy is difficult, and often practically impossible, to detect – difficult or impossible to detect not only with the naked ‘eye’ but also with even the best quantitative data.  This fact is why the burden of proof should weigh especially heavily upon those who claim to find in the empirical data evidence that foundational principles of economics do not apply or are consistently suspended in this or that particular market.  And the weight of this burden of proof should only further increase if popular and political sentiment runs strongly against the conclusions of foundational economics (as it does in the case of the minimum wage).

Bottom line: the empirical evidence against the standard economic analysis of the minimum wage is relatively scant and questionable, and the theoretical reasons offered in support of this ‘new’ minimum-wage research are even more questionable.  The case that minimum wages have no negative employment effects for low-skilled workers is about as plausible as is the case for homeopathy or healing with crystals.


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