This article first appeared at The McAlvany Intelligence Advisor on Friday, March 21, 2004:
Establishment economists defending interventionist statist policies like the minimum wage really ought to get out more. Weathermen, when they head home after work, are going to be confronted immediately with the reality of their forecasts and the consequences of being wrong. Economists are rarely if ever visited by the consequences of their predictions when they turn out badly.
One such is Jared Bernstein, who has spent his professional life locked up in a cubicle somewhere, building empirical studies, examining economic forecasts built by others also locked away, and drawing conclusions that he then forwards on to people like Vice President Joe Biden. For two years, Bernstein advised Biden on the economic consequences of federal meddling and now is the voice of economic progressivism for CNBC.
When it comes to the minimum wage, Bernstein’s mind is already made up: it’s a good thing, with only modest negatives. And those negatives may safely be ignored when looking at the big picture. He has examined dozens of studies measuring the impact of the minimum wage on employment: “I’ve seen good studies that find small negatives and good ones finding small positives.” But, taken altogether, they justify federal meddling into private agreements:
These results don’t mean that no worker ever loses her job when the minimum wage goes up. But they do mean that the vast majority gets a raise and that anyone blithely citing the classical model [i.e., when the price of something goes up, less will be demanded] is speaking from prejudice, not from the evidence.
Translation: the evidence that raising the minimum wage results in increased unemployment is so small and so tentative that it may be safely ignored altogether. And anyone touting the “classical model” – the one based on irrefutable logic – is “prejudiced.”
But what about the challenge posed by those opposed that asks: if raising the minimum wage is such a good thing, why not go all the way? Why just to $10.10 an hour? Why not $15 an hour? Or $50? Or $90? After all, with the passage of a law, everyone could be rich! Bernstein betrays his argument by claiming that the damage done is so small that it may safely ignored when the raises are modest: “[Past] increases have affected less than 10 percent of the workforce. A $90 minimum would affect about 100 percent. That’s a big difference.”
Besides, employers have other ways of mitigating the federal mandate:
In the real world [where Bernstein has never worked] there is a range wherein businesses can absorb the increase through various channels other than employment, including [raising] prices, [reducing] profits, and [improving] productivity….
History shows … that increases [impacting] less than 10 percent of the workforce … do not generate significant disemployment effects….
Increasing the minimum wage has the intended effect of raising the earnings of low-wage workers who need the raise without harming their employment prospects.
Except that it doesn’t.
Bob Funk, the founder and president of Express Employment Professionals – the largest privately owned employment service in the country, he says – decided to do his own study, in the real world, to find out how real people in charge of hiring and firing other real people would react when the minimum wage is raised:
There’s been a lot of debate and speculation about the impact of a minimum wage increase on job creation. At Express, we decided to go directly to the employers who make those decisions to find out what a minimum wage increase to $10.10 an hour would mean for them specifically and [by inference] for the economy in general.
He surveyed 1,213 small business owners and human resources people – included among them some 230 who pay the minimum wage to their employees.
Here’s what he found: one in five said they would be forced to fire some of their workers, while two in five would reduce future hiring. Half of them said they would be forced to raise their prices to pay for the costs of the mandated raise.
When he asked just those 230 already paying the minimum wage, he learned that four out of ten of them would be forced to lay off some of their workers, while half would reduce hiring new people in the future. And two-thirds would be forced to raise their prices.
This is the real world where economists like Bernstein never tread. This includes Paul Krugman who grandly concluded:
There just isn’t any evidence that raising the minimum wage … would reduce employment.
And this is a really solid result, because there have been a lot of studies.
We can argue about exactly why the simple Econ 101 story doesn’t seem to work, but it clearly doesn’t….
Which means that the supposed cost in terms of employment from seeking to raise low-wage workers’ earnings is a myth….
So a minimum wage increase … is actually good policy.
These canards and false conclusions have been oozing from the cubicles of establishment economists like Bernstein and Krugman for years. Classical economist Murray Rothbard was forced to deal with them 20 years ago, and what he wrote then (in Chapter 36 of his Making Economic Sense) applies still:
In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period.
The law says it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars per hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence there will be a large amount of unemployment.
Remember that the minimum wage law provides no jobs: it only outlaws them….
Never concerned about the real world or the impact raising the minimum wage would have on those about to get pink slips, the president raised the minimum wage for federal workers on February 12, while giving the back of his hand to those who do know how the real world works:
The opponents of the minimum wage have been using the same arguments for years, and time and again they’ve been proven wrong. Raising the minimum wage is good for business, and it’s good for workers, and it’s good for the economy. Put more money in these folks’ pockets … that means they’ve got some money to go shopping, which in turn means the business has more customers [applause], which means they may hire more workers and make more of a profit [applause].
As C.S.Lewis so aptly put it:
Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience.
They may be more likely to go to Heaven, yet at the same time likelier to make a Hell of earth. This very kindness stings with intolerable insult. To be “cured” against one’s will and cured of states which we may not regard as disease is to be put on a level of those who have not yet reached the age of reason or those who never will; to be classed with infants, imbeciles, and domestic animals.
Sons of Liberty: Mondays With Murray: Rothbard vs. Krugman on $9 Minimum Wage
Jared Bernstein: Raising the Minimum Wage: The Debate Begins…Again
Paul Krugman: Minimum Wage Economics