Friday, November 7, 2014

#006: Minimum Wage

So you say we should raise the minimum wage? You want to raise it to $15? Why stop there? Why not raise it to $20? Or $25? $50? $75? $100? How about $500? Wouldn’t it be awesome to make $500 an hour flipping burgers? Why bother going to college when you can become a millionaire working at Burger King?

For the sake of argument, though, let’s just propose raising the minimum wage to $25. That was the choice Switzerland was given when they had the chance to vote for a minimum wage. Oddly enough, they voted against the $25 minimum wage. They must really hate poor people! That’s probably why they don’t have a minimum wage.

Yes, believe it or not, Switzerland is one of many European countries that doesn’t have a minimum wage. Other such countries include Iceland, Norway, Sweden, Finland, Denmark, Austria, Germany, and Italy. That’s probably why those countries have their streets overflowing with poor people who are forced to work for pennies.

Oh, wait, that’s not the case at all! None of those countries without minimum wage have massive unemployment or poverty. In fact, most of them have fairly decent living standards. It’s almost as if minimum wage isn't the only thing preventing people from working for peanuts.

But who cares if most of Europe doesn’t have minimum wage laws? That doesn’t mean America shouldn’t raise its own minimum wage. I mean, who could possibly be against raising the minimum wage other than “greedy” business owners?

How about the majority of economists?

Yes, most economists consider raising the minimum wage a bad idea. One survey revealed that 90 percent of economists agreed that raising the minimum wage would inadvertently increase unemployment among low-skill workers.

Even Paul Krugman, who has lauded minimum wage hikes in his columns, admitted in his own economics textbook that there were negative unintended consequences to raising the minimum wage: "So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment."

But who cares what the majority of economists believe? Just because most learned people who study economics for a living believe that raising the minimum wage is bad economics doesn’t actually mean that it is. Popularity doesn’t equal right. That’s an argumentum ad populum fallacy. Consensus does not dictate truth. Only empirical evidence does.

So what does the empirical economic data says about minimum wage? That’s a question two top economists wanted answered.

Two of the world's most prominent labor economists and minimum wage researchers, David Neumark, professor of economics at the University of California at Irving, and research associate at the National Bureau of Economic Research and the Institute for the Study of Labor, and William L. Wascher, deputy director the Federal Reserve Board of Governors, examined 100 prominent minimum wage studies made since 1990.

Their conclusion?
"We see very few--if any--studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model generally predicts disemployement effects. Second, the studies that focus on the least-skilled groups that are likely most directly affected by minimum wage increases provide relatively overwhelming evidence of stronger disemployement effects for these groups."
No matter how you cherry-pick it, study after study contradicts the narrative behind the minimum wage. It does not decrease unemployment. It does not decrease poverty. It does not boost the economy. It only make it more difficult for employers to hire low-skill, entry-level workers, thus preventing them from being employed.

So rather than increase the minimum wage, what then should be done about unemployment and wages? The answer lies in correctly identifying the real source of the problem.

Most left-wing politicians such as Elizabeth Warren bemoan how employee wages have not increased along with inflation. It is true that minimum wage has not kept up with productivity since the 1960s, but instead of asking why minimum wage hasn't risen with inflation, how about asking why inflation has occurred in the first place?

In his refutation of Warren’s remarks on the Bogosity Podcast, Shane Killian succinctly provides a plausible answer:
“In 1960, minimum wage was $1 an hour. If you worked for an hour, you might very well have been paid for your labor with four quarters. In 1960, quarters were 90 percent silver. According to Warren should be about $21 or $22 to keep up with productivity. What are those same silver quarters worth today? About $21 or $22. Isn’t that an amazing coincidence?

Well, maybe not.

This seems to point the finger directly at our monetary policy. If we hadn’t had the current policy of printing up enormous amounts of money to pay for all of these big government programs since the Great Society, not to mention all of these foreign wars, and if our money were still silver-based, you could indeed work for one dollar an hour and be paid the equivalent of $21 to $22 in today’s valued money, and no one would have had to raise the minimum wage. You wouldn’t even had to as much as have to ask for a raise, because it really isn’t a raise that would have been given, simply the dollar retaining its value, negating the need to ask for raises to keep up.”
Indeed. Both unemployment and wage stagnation are merely symptoms of a much bigger problem, and minimum wage hikes are merely a Band-Aid solution to it. The real problem is inflation, and the root cause of that problem has been our reckless monetary policy. It’s not the minimum wage. It’s the money printing, stupid!

But who cares about addressing and solving the real problems that face our economy when simply raising the minimum wage makes people feel better?