The Minimum Wage Insanity

Well, here we go:

A deal to raise California’s minimum wage to $15 an hour by 2022 was reached Monday by Gov. Jerry Brown and state legislators, making the nation’s largest state the first to lift base earnings to that level and propelling a campaign to lift the pay floor nationally.

The increase will boost the wages of about 6.5 million California residents, or 43% of the state’s workforce, who earn less than $15, according to worker group Fight for $15. The proposal had been headed to a statewide referendum. It’s now expected to be approved by the state assembly.

This $15 thing is part of Sanders campaign and may be passed into law in New York as well. We’re told that this will increase the earnings of low-wage workers and … somehow … not increase unemployment.

Megan McArdle has a really good must read about why the people proclaiming that minimum wage hikes won’t increase unemployment — a tenet of economics that was proclaimed to be gospel as recently as ten years ago — should worry:

The people confidently proclaiming their ability to see the future are often what I like to call “one-study wonders”: people who have gotten their hands on a single study that confirms what they already believe (or would very much like to) and then proceed to wave it around while ignoring the rest of the vast, conflicting, suggestive but hardly definitive economic literature on the subject.

One-study wonders are always dangerous. A single study, no matter how well done, is never proof of anything. It’s too easy for something to accidentally go wrong.

Because being unemployed, especially for a long time, is about the worst thing that can happen to someone in a modern democracy, short of death or dismemberment. People adjust even to terrible life events such as divorce or widowhood; five years after the loss, research shows that happiness levels recover to about where they were before. But five years in, the unemployed are nearly as miserable as they were on the day they got the sack — and this research was done in Germany, which had a quite generous unemployment compensation program.

Moreover, the people affected are most likely to be low-skilled workers, who are most in need of jobs, not just for the money, but also for the skills that employment provides. The job market is like a ladder, and the lowest rungs are where people gain the critical skills and experience to climb that ladder. If you keep someone off those bottom rungs, studies show that their future employment and salary prospects can be permanently harmed.

The case that minimum wage hikes do not cause unemployment is mostly based on one study — the Card and Kreuger study. In this study, they looked at what happened when New Jersey raised its minimum wage and Pennsylvania didn’t. New Jersey saw a slight increase in employment. Supporters of the minimum wage have proclaimed this to be “the perfect experiment” (ignoring perfect experiments that don’t support their theory). But it’s not. No matter how well done the study was:

  • It’s one study.
  • It measured a relatively small increase in minimum wage.
  • It’s one study.
  • It didn’t look at long-term effects, such as whether people didn’t open new stores as a result of higher wages.
  • It’s one study.
  • It was done in 1992, when regulations were way less burdensome, the economy was in a strong recovery phase and Obamacare did not exist.
  • It’s one study.

The Fight for Fifteen people also cite this letter from “600 economists” supporting a minimum wage. There are only four problems with this seemingly bulletproof letter. One, some of the people on that letter are not economists. Two, most of them work in academia or other fields where they can just ask the government for more money; they’re not running businesses. Three, that letter advocates increasing the minimum wage to $10.10 an hour, not $15. I suspect that many of them would argue that while small wage increases do not affect unemployment, large ones do. Four, their conclusions are theoretical. This is real life.1

Let’s take a step back. As McArdle notes, long-term unemployment can have a damaging lifelong effect on earnings, way more than low entry-level wages do. So the Democrats have decided that they are willing to gamble the long-term futures of millions of people on a theory that the Law of Supply and Demand is magically suspended because … well because they want it to be. And even that theory is stretched. It’s mostly based on one paper for a small minimum wage increase in one specific circumstance. And they are extrapolating that to a massive increase.

In the space of one hundred and seventy six years the Lower Mississippi has shortened itself two hundred and forty-two miles. That is an average of a trifle over a mile and a third per year. Therefore, any calm person, who is not blind or idiotic, can see that in the Old Oölitic Silurian Period, just a million years ago next November, the Lower Mississippi was upwards of one million three hundred thousand miles long, and stuck out over the Gulf of Mexico like a fishing-pole. And by the same token any person can see that seven hundred and forty-two years from now the Lower Mississippi will be only a mile and three-quarters long, and Cairo [Illinois] and New Orleans will have joined their streets together and be plodding comfortably along under a single mayor and a mutual board of aldermen. There is something fascinating about science. One gets such wholesale returns of conjecture out of such a trifling investment of fact. – Mark Twain

This isn’t trivial. This is people’s lives. I’m glad the liberals have a a study that makes them feel good about this. I’m sure that will be comfort to people who can’t find even the most basic entry-level jobs or people who lose their jobs to automation. Maybe they can print copies of the study and burn it to keep themselves warm. Back in reality, let’s check in with those crazy right wing hacks at … Brookings:

In a city like Washington D.C. where unemployment among those with a high school education or less is at a worrisome 15%, jobless rates will almost certainly rise. Many employers will be very reluctant to pay high wages to workers whose skills – including the ability to speak English, in the case of many immigrants – are so modest. A likely result would be not only increases in unemployment but also drops in formal labor force activity (where workers work or search for legal jobs) and perhaps some growth in undocumented work among immigrants.

It’s actually worse in California because they are raising the minimum wage in the entire state. Cities that are in economic turmoil with high unemployment? $15 an hour. Suburbs where the unemployment rate is low? $15 an hour. Minority neighborhoods were unemployment rates for young men can be as high as 50%? $15 an hour.

This isn’t some kind of fancy-schmancy rocket science here. This is math. You simply can not increase wages by 50-100% and not expect there to be an effect. The AEI has now looked at Seattle’s labor market after their big minimum wage hike. Now, granted, it’s only nine months and there are reasons to be skeptical. But the preliminary result is devastating. A full point increase in the unemployment rate.

And let’s suppose, for the moment, that this doesn’t increase unemployment. The money has to come from somewhere. People running business aren’t sitting on giant stacks of money that we can just force them to pay to their employees. So what are they going to do? Increase prices. And what kinds of businesses pay minimum wage? Is it fancy-pants restaurants in Beverly Hills? Is it software companies in Silicon Valley? No. It’s McDonalds. It’s Walmart. It’s Burger King. What do these businesses have in common? They are frequently the choice of the poor and middle class. So we’re going to give them higher wages with one hand and take it away with higher prices on the other. So why bother? Stick a pin in that question.

One frequent justification for raising the minimum wage is that low-wage workers are often eligible for food stamps and Medicaid. However, the eligibility for those programs was expanded specifically to benefit low-wage workers. You can’t expand a social program and then claim that the expansion of the social program proves you need to raise wages. On balance, having workers make less wages but get government benefits is better than having them make marginally higher wages. Because it means less unemployment. It is effectively a government subsidy of the lowest rungs on the economic ladder. Yes, I wish the government just stayed out of the whole thing. But we don’t live in that country.

Now, what is the real motivation here? Why are liberals so hell bent on raising the minimum wage? Why are unions members, who generally don’t make anywhere close to the minimum wage, so supportive of such massive increase? Well, mainly because it will increase union wages, which are frequently indexed to minimum wage.

When you see it from that angle, you see what’s really going on here. Labor unions are limited in their ability to demand more wages by the give-and-take of negotiation and by the constraints of what the market will pay for their products. What this is really about is forcing unionizing businesses to pay much higher wages through the back door (and remember, the Democrats are big supporters of card check, which would make it easier to coerce employees into unions).

So when you really break this down, it comes to this: the Democrats are screwing over the poor, screwing over the working class, screwing over the consumer and screwing over businesses so that their primary source of support — labor unions — can enjoy the benefits. And they are basing this on fuzzy-minded idealism, one-study-wonders and a media that can’t be bothered to question the narrative.

And in five years, California — already enjoying one of the highest unemployment rates and inequality indices in the nation — will be wondering where it all went wrong. They’ll probably blame Republicans. I’m sure there’s one or two left in the legislature they can pin it on.

1. Another point: the Democrats are proclaiming that if the minimum wage were equal to what it was in 1968, it would be $10.66 an hour. They pick that year because it was a peak in minimum wage, a peak way higher than any year before or after. It was right after a huge increase that was enacted to deal with inflation that our government was deliberately creating. These are the same liberals who mock global warming skeptics for saying there has been no warming since 1998 — a huge isolated peak in global temperatures cause by a powerful El Nino. Again: it’s not cherry-picking data that liberals object to; it’s someone else cherry-picking data.

Comments are closed.

  1. RonK

    they can’t create jobs so they raise the minimum wage, will it do any good not really, make it more likely jobs will be shipped over seas, if not import work under H1B and what ever other visa programs exist, or even automate jobs that can be, or for that matter hire illegals, give a big boost to the underground economy.

    Thumb up 0

  2. CM

    The AEI has now looked at Seattle’s labor market after their big minimum wage hike. Now, granted, it’s only nine months and there are reasons to be skeptical. But the preliminary result is devastating. A full point increase in the unemployment rate.

    Devastating? Really?

    I.e. looks to be the same as “there has been no warming since 1998″. The fact that it’s the AEI doing the analysis should have provided a warning though shouldn’t it?

    Thumb up 0

  3. Hal_10000 *

    That’s why I said “it’s only nine months and there are reasons to be skeptical”.  I expect the impact to play out over a much longer time frame.

    Thumb up 0

  4. CM

    Indeed.  However if you were aware of the issues with that study (if that’s what you’re specifically referring to when you say “there are reasons to be skeptical”) then I’m surprised that you included it at all, or at least didn’t specifically note the problems. Certainly calling it “devastating” appears to be a big call.

    Also, Card/Kreuger isn’t the only study at all – see the “Subsequent studies” section here:

    When it comes to the minimum wage there is certainly reason to be very skeptical of what both sides present as evidence.

    Now, what is the real motivation here?

    From that point on you’re speculating and it gets very partisan. It’s totally reasonable for someone knowledgeable to generally support a higher minimum wage for reasons other than what you outline.

    Thumb up 0

  5. Hal_10000 *

    From that point on you’re speculating and it gets very partisan. It’s totally reasonable for someone knowledgeable to generally support a higher minimum wage for reasons other than what you outline.

    Possible for some people, yes.  But not for the unions.  Their interest is very specific.  And they hold a LOT of sway over the Democrats.  If the Republicans pushed some tax loophole that mainly benefit oil companies, I don’t think we’d wonder too much about the motivation.

    Thumb up 0

  6. AlexInCT

    Let us just stop fucking around and make the minimum wage $50 or $75 an hour – a viable living wage – already, and we will solve all our problems! After all, government can and should mandate prosperity and economic reality. It has worked for everyone that tried to centrally plan and run their economies, hasn’t it?

    I can’t wait for the surprised looks on the faces of displaced workers, and the ensuing angry gnashing of teeth and wailing and rending of clothes that will follow that, when businesses replace any and all low skilled labor jobs with robots. The only thing I struggle with is if the political left is actually trying to make this happen faster, in the hope of permanently growing that dependent voter base that they count on to stay in power, or if it thinks it can prevent it by passing more unrealistic economic regulation. With these idiots the answer is always all of the above when the above is downright dumb.

    Thumb up 0