A Misguided Controversy

Recently debates over minimum wage laws have flared up again. The starting point was president Obama's State of the Union speech, in which he announced that he would push through a higher minimum wage (among other things) regardless of the objections anyone in e.g. Congress might have.

Thereafter there was a 'pro/con' debate on the Daily Show that ended up making some waves. Mish has amply documented the controversy in 'Schiff vs. Ritholtz: Political Correctness vs. Law of Supply and Demand'.

There can actually not be any controversy over the basic economic laws involved, and yet the debate continues to be revived again and again. The promoters of labor market intervention are certainly not above employing “outrageous political statements dressed up as economic theory” as Caroline Baum has pointed out.  As an aside, Ms. Baum cites a number of empirical economic studies in her article that thoroughly debunk the idea that wages are magically exempt from the law of supply and demand, but as a matter of fact, no such studies are required to explain the economic effects of instituting minimum wages.

Institutional unemployment will be the inevitable result, and all that is needed to prove this is economic logic. There is no quantum theory of employment according to which cause and effect are only tentatively ascertainable. No empirical testing of a 'minimum wage hypothesis' is necessary to establish what the effects of the policy will be.

As Mish correctly noted, the fact that Mr. Schiff was shown in the most unfavorable light possible on the Daily Show has no bearing whatsoever on the facts or on the economic laws on which they are based. Those will continue to apply, regardless of whether Schiff is presented as a cruel and heartless capitalist exploiter. By the way, Schiff certainly took  exception to the manner in which his interview was edited. Robert Murphy's comments on Schiff's interview on the Daily Show may also be of interest; as it were, we agree with him that the show is usually quite funny, regardless of its political bias.

How to Properly Think About the Problem

Minimum wage laws invariably create institutional unemployment, hit the lowest skilled workers (and hence the poorest members of society) the hardest and infringe on people's freedom to enter into contracts. After all, a low-skilled or unskilled worker who wants to work for less than the minimum wage is no longer allowed to offer his services at a price the market will bear.

There is a very simple and effective way of demonstrating that the pro minimum wage arguments are flawed. Consider the president's proposal from the SotU speech:

“Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.”

One thing we were immediately wondering about was why no-one stopped to ask: “Why only nine dollars per hour? Why not ten? Or eleven? Wouldn't that be even better?”

It would be a very good question and we'd be extremely curious to hear the answer. Indeed, for those earning the minimum wage, $9 must surely sound like a better deal than $7.50. But $10 would sound even better and $11 even more so. So why does the president not want to impose a raise to $10 or $11?

Obviously, the only thing that can possibly stand in the way of an even bigger increase in the minimum wage is some vague recognition, even if it only exists on a subconscious level (or is not admitted to), that economic laws do indeed exist. The 'good deal' would turn into a very bad deal if people were to begin losing their jobs left and right because keeping them employed had become uneconomic.

In fact, it is easy to test the limits of the belief in the efficacy of minimum wage laws to raise the standard of living by proposing some obviously absurd number. After all, if $9 is better than $7.50, $10 is better than $9, and $11 better than $10, then why not go all the way and raise the minimum wage to $100 or $1,000?  Surely almost everyone would regard such a proposal as absurd – at which point it would undoubtedly be highly illuminating to hear the supporters of minimum wage laws explain why exactly it would be absurd.

Lastly, often pro-labor type legislation of this sort is actually a bit of a political trick, designed to pull the wool over voters' eyes (mind, we have not done any calculations or considered any studies on the $9 demand specifically). Since it is not possible for governments to wave a magic wand that suspends economic laws, one will often find that the height of a proposed new minimum wage is in the vicinity of what is already paid in the marketplace for low-skilled labor, due to a combination of inflation effects and rising productivity as a result of capital accumulation.  After all, businesses cannot simply offer any arbitrary price for labor, contrary to what many leftists seem to think. Labor remains a scarce resource for which businesses must compete. So while it is certainly not possible to pay absurdly high prices for unskilled or low-skilled labor, it is also not possible to offer absurdly low wages, as one's offers must be competitive.