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Here’s a letter to a long-time Cafe Hayek reader who is also a friendly and thoughtful critic:
Mr. Raymond Polk
Dear Mr. Polk:
Thanks for sending Adam Ozimek’s essay “Sorry, Advocates, The Minimum Wage Debate Is Not Over [2].” I strongly agree with nearly all that Ozimek writes there, yet I disagree with his main conclusion.
Ozimek is correct that, in some circumstances, small hikes in the minimum wage might leave no one who wants a job without a job. I have myself acknowledged this possibility. Most notably, monopsony power that creates situations in which minimum-wage hikes cause no job losses are possible (although, in the U.S., extremely unlikely). Likewise, as Ozimek says, the employment-destroying impact of minimum wages is muted, or possibly completely overcome, if employers respond to minimum wages by demanding more hourly output from low-skilled workers. However, none of these points, or any other that Ozimek makes, supports his claim that the supply-and-demand framework isn’t always useful for analyzing minimum wages.
Every skilled user of supply-and-demand analysis understands that it ‘works’ only if the good or service in question doesn’t change when the price (or wage) of that good or service changes. But employers who make jobs more arduous in response to minimum-wage hikes change the service that is being supplied and demanded. The result might be no loss of employment, but that’s only because employers demand, and workers supply, now a different service. Yet for the original service that was supplied and demanded (and for the new one), a supply-and-demand graph shows clearly and accurately the negative effects of a forced increase in the wage. Thus, in the hands of a skilled economist, supply-and-demand analysis remains useful for busting the widespread myth that holds that a hike in the minimum wage merely transfers income from employers (or consumers) to low-skilled workers.
A deeper problem is that Ozimek’s conclusion – namely, that the debate over the effects of minimum wages remains open – rests on theoretical and empirical possibilities that are too contrived and rare to justify such a conclusion. Consider an analogy with freedom of the press. It’s easy to describe scenarios in which restrictions on press freedom cause none of the ill consequences that defenders of the First Amendment correctly warn will arise from such restrictions. And I’m sure that it’s possible to find real-world examples of such restrictions that, in fact, caused none of the predicted ill consequences. But who would therefore conclude that the debate over the merits of government restrictions on press freedom remains open? I think no thoughtful person would reach this conclusion. And so it should be also with minimum wages.
The proposition that people respond to higher costs by reducing their exposure to sources of those costs is theoretically overwhelming and empirically well nigh universally observed. Because there is no good reason to believe that employers of low-skilled workers fail with any regularity to respond in this way – and because the one theoretically coherent argument for the minimum wage (monopsony power) is virtually inapplicable to empirical reality – the best scientific conclusion is that hikes in the minimum wage will so routinely worsen low-skilled workers’ job-market prospects that a hard-and-fast rule against minimum-wage legislation is warranted. Case closed.
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