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Minimum Wages Supported by Minimal Scientific Sophistication (Though With Maximum Scientific Pretension)

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Here’s a response to a young man who either is, or will soon be, pursuing a PhD in economics:

Mr. Scott Johnson

Mr. Johnson:

Thanks for your e-mail.

You accuse me of “assuming dogmatically [that] higher [minimum] wages lower the quantity demanded of workers.”  You then insist that “it is a factual question that needs answering with facts, not armchair abstractions….  It violates scientific integrity to talk of minimum wage effects in the abstract, not knowing what the data [are] in each situation.”

I agree that the question of the effects of minimum wages on employment is ultimately an empirical one.  But I disagree that what you call my “talk of minimum wage effects in the abstract” is dogmatic and non-empirical.  The empirical fact is that we have enormous – indeed, overwhelming – empirical evidence that the law of demand operates in reality.  Moreover, everyone over the age of three understands the law of demand in practice (if not as a theoretical construct) and acts as if it holds in all aspects of life.  Everyone understands that raising someone’s cost of taking a particular course of action prompts that someone to alter her actions in ways that minimize the ill effects that she suffers from the higher cost.  An understanding of the law of demand is why parents discipline misbehaving children; it’s central to why teachers give poor grades for poor student performance; it’s central to why society punishes criminals; it’s central to why defendants who are found negligent in tort suits are required to compensate their victims; it’s central to why wives and husbands express anger at their unfaithful spouses; it’s central to why homeowners display “Beware of Dog” signs; it’s central to why police officers carry unconcealed weapons; it’s central to why fewer people sunbathe on the Jersey Shore in January than in July.  It’s central to human existence.

The law of demand, in other words, is not a law that applies to the particular goods and services – such as lemons, lollipops, and labor hours – that are demanded.  Instead, it is a law that applies to human action.  Until and unless someone offers compelling reason to believe, and overwhelming evidence to show, that when people employ low-skilled workers they act fundamentally differently than they and other people act in all other aspects of life, predicting that higher minimum wages reduce the quantity of low-skilled labor demanded by employers is every bit as legitimate – indeed, every bit as scientifically required – as predicting that higher airfares reduce air travel, higher tariffs reduce imports, and higher carbon taxes reduce carbon emissions.  Again, the reason is that we have a staggeringly, mind-bogglingly large amount of empirical evidence that among the ever-present forces that govern human action is the law of demand.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercator Center
George Mason University
Fairfax, VA  22030

And just as a feather blowing upward (or otherwise not falling downward) in a brisk wind is not correctly regarded as evidence that the law of gravity doesn’t always apply to feathers, a real-world instance of increased (or not decreased) employment of low-skilled workers that follows an increased minimum wage is not correctly regarded as evidence that the law of demand doesn’t always apply to labor.

Some people will object to the above by saying that economists who argue that raising the minimum wage does not reduce the employment prospects of low-skilled workers do not claim that the law of demand does not apply to employers who employ low-skilled workers.  The argument, rather, (the objection continues) is that real-world monopsony power or the active presence of some forces that run against the implicit assumption of ceteris paribus are in play in reality to override or overwhelm the operation of the law of demand.

To this objection I say: some economists’ do indeed argue as such – that is, not all economists who insist that raising the minimum wage does not necessarily reduce low-skilled-workers’ employment prospects reject the universality of the law of demand.  (Good for them!)  But I’ve encountered enough economists who at least talk and write as if the application of the law of demand to the market for low-skilled workers is so iffy that it is to be treated as an open, empirical question in every case whether or not raising the minimum wage reduces low-skilled workers’ employment prospects.  Young Mr. Johnson seems to be of this mind.

Now consider the undeniable theoretical possibility that the real-world presence of monopsony power in the labor market might result in higher minimum wages not reducing (or even in increasing) low-skilled workers’ employment prospects.  Again, not only is such monopsony power a necessary but not sufficient condition for minimum wages not to reduce low-skilled workers’ employment prospects – and not only does reality in modern American labor markets make assertions of the presence of such monopsony power extraordinarily dubious* – an empirical showing, under such circumstances, that a higher minimum wage did not reduce low-skilled workers’ employment prospects cannot legitimately be generalized into a case for minimum wages.

Because this argument for the minimum wage depends on pockets of reality being distorted such that the standard prediction of the law of demand doesn’t empirically play out in those specific pockets of reality, a finding that a particular hike in the minimum wage, imposed in some particular place at some particular time, caused no reduction in employment in that particular place at that particular time gives us no reason to suppose that even the same real-sized hike in the minimum wage in some different place – or in the same place but at a different time – will not reduce the employment prospects of low-skilled workers.

Put differently, the true dogmatists are those economists who, conceding that the law of demand is universal and finding in an empirical study or studies evidence that a past hike in the minimum wage caused no reduction in low-skilled workers’ employment prospects, conclude that other hikes in the minimum wage will have the same happy consequences.  Any such conclusion is one based not on reason but on an unreasonable presumption that the monopsony power is so strong and so permanent that legislated increases in minimum wages are justified.  But, again, because the conditions under which the standard predictions of the law of demand do not hold are relatively rare and likely fleeting in reality, even a correct empirical finding that a $X hike in the minimum wage at place N and at time T caused no reduction in low-skilled workers’ employment prospects supplies no good scientific justification for concluding that a $X hike in the minimum wage at place M is justified – or even for concluding that maintaining the minimum wage at place N beyond time T is justified.

……

* It’s as if the presence of monopsony power is asserted simply as a means of saving theoretical face for those economists who are determined to apologize for minimum wages.

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