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Responding to my open letter to Arin Dube [2], University of Maryland economist Ethan Kaplan sent the following e-mail to me:
Dear Donald,
I read your open letter to Arin Dube. What about the risks of not learning that a higher minimum wage (which can dramatically raise the welfare of millions of people) is consistent with minimal negative employment effects (which may or may not be true)? What costs would that have and who would bear those costs?
What if we had never ‘experimented’ because we had known from the iron law of demand that minimum wages caused employment losses as Stigler had predicted? Think, given the absence of even quite small employment losses, about the welfare costs to low income individuals of not having experimented in the past. As it turns out, the iron law of demand has been much more… elastic … than theory would have predicted,
Ethan
Here’s my reply to Prof. Kaplan:
Dear Prof. Kaplan:
Thanks for your e-mail.
Criticizing my opposition to government experiments with higher minimum wages, you suggest that we have learned much from past experiments of the same. You write, specifically, that past experiments with minimum wages have revealed that “the iron law of demand has been much more… elastic … than theory would have predicted.”
I read the empirical literature much differently than you read it. While it’s true that some studies – including those by Arin Dube – find no statistically significant negative effects of minimum wages on the employment of low-skilled workers, a large number of other studies in fact do find such negative effects. Contrary to the implication of your note, therefore, it is not the case that the empirical literature has discovered that the basic law of demand does not accurately predict the negative effect of minimum wages on the quantity of labor demanded.
A proposition as extraordinary as that which claims that the law of demand either does not apply to the market for low-skilled labor or that this law is consistently superseded in this market by some other force, such as monopsony power, requires extraordinary evidence before it warrants our acceptance. The fact that there continues to pour forth numerous empirical studies by well-respected economists who find, consistent with economic theory, significant negative employment effects means that studies that find the opposite give us no good reason to suppose that raising the minimum wage will not create more unemployment among low-skilled workers.
Put differently, the prevailing empirical literature – certainly along with, but even separate from, basic economic theory – tells me that past “experiments” with the minimum wage have indeed shown that this policy fails as a means of improving the welfare of all low-skilled workers. What I’ve learned from such “experiments” is that basic economic theory explains reality quite well. Therefore, continued “experimentation” with minimum wages on the livelihoods of low-skilled workers is ethically atrocious.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030