Argumentum ad populum

Of the various flavors of government interventionism in our lives, the minimum wage is perhaps the most welcomed. It appeals not only to our innate sense of “fairness” but also to our self-interest. It’s allure may erroneously lead us to the conclusion that because “it is popular” ergo “it is right”. Arguments for the minimum wage that are predicated on such popularity succumb to the logical fallacy known as argumentum ad populum (appeal to popularity). Mere popularity does not translate into legitimacy. The truth of this statement should be apparent to any citizen of a country that at one time exhibited popular support for prohibitions on biracial marriage and women’s voting, Jim Crow laws, and of course, slavery itself.

Even if we accept the assumption that an essential function of government is to make all human interactions “fair” and thereby enhance the outcomes of those interactions, it is still prudent to examine the principals and methods employed towards those ends to see if they are in fact achieving those goals.

 

A Priori Principals

Prior to examining the empirical evidence resulting from employing these methods we should first examine the principals behind them in order to determine if what we are trying to achieve is even theoretically possible. Although some principals must be verified by empirical evidence to confirm their validity, there are some that are immune to such testing. For example, the geometric axiom that the ratio of a circle’s circumference to its diameter equals “pi” is a priori true (meaning the truth of the statement does not depend on experience or examination). Measuring one circle or a million circles to test that principal cannot alter its universal validity. Likewise, there are economic principals that are also a priori true. One of these is that given two parties, the total wealth of both parties cannot be increased by transferring wealth between parties (this economic reality is a corollary to the Law of Conservation of Mass). To the extent one party gains, the other party loses, and the net remains zero. It is immaterial whether one believes this process is right or wrong, the simple fact is this process cannot increase total wealth. Owing to the subjective nature of value it is impossible to say that $1 in the hands of Person A has more value to him than it would in the hands of Person B. People’s value scales are different and can not be added or subtracted any more than one can add dollars and pesos.

 

Empiricism tested – The seen and the unseen

So, given the truth of this a priori economic principal, how is it that so many empirical studies show no deleterious effects or even positive effects of redistributive policies (e.g. minimum wage increases, redistributive taxation, fiat money inflation, etc)? Has an a priori principal been disproven? Not at all. Such programs appear to work for the same reason we are fooled by magic: misdirection. Economic misdirection illustrates the principal described by 19th century economist Fréderic Bastiat, namely that of the “seen and the unseen.” Magic appears to work because we “see” the surface illusion, but we do not see the action behind the surface, the gears, as it were, that are driving the illusion. Similarly, empirical studies of the effects of the minimum wage observe only the positive benefits while turning a blind eye to the unseen harms. As Henry Hazlitt wrote in “Economics in One Lesson”1.

 

“the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups”

 

Studies that show no effect from such redistributive policies such as a minimum wage are guilty of violating Hazlitt’s axiom: they examine the consequences only for one group, or only the immediate effects.

The more astute proponents of minimum wage laws often grab the metaphorical bull by the horns and address its most obvious conceptual flaw, namely that a $1,000/hour minimum wage would be unequivocally detrimental. However, the argument quickly turns to dismissing this fear by demonstrating that empirically no such job loss occurs when minimum wages are slowly raised. This is akin to saying that although fire can boil water, a small fire small won’t heat it up.  The support for this assertion is the oft-cited 1994 study of Card & Krueger2 showing a positive correlation between an increased minimum wage and employment in New Jersey. Many others have thoroughly debunked3,4 this study and it is not my intent to engage in a “weedy” deconstruction here, but suffice it to say even the original authors eventually retracted their claims.5

The problem with such “studies” that purport to demonstrate a neutral or positive effect from a rising minimum wage is that there necessarily must be a positive bias even from the most careful and fair-minded researcher. Why is that? The “seen and unseen” effect. It is quite easy to count individuals whose pay went up. What is more challenging, if not impossible, is to count the people that would have been hired but were not. This has the effect of masking increased unemployment: if the unemployment rate remains the same but would have dropped absent a minimum wage increase then this is a net increase in unemployment even though the absolute rate did not change. Likewise, offsetting reductions in non-monetary compensation will not show up in a monetarily focused analysis. Additionally, unemployment may also slowly rise without any direct job loss. How can this be? New positions will become constrained due to either stretched payroll budgets or a shift toward automation, which at a lower wage was not economically viable but is so at higher wages. Someone new to the employment market that cannot find work is seeking work and is thus counted as unemployed even though they have never been “fired”.

 

Empiricism supports prediction of youth unemployment

If we believe that those who will be most negatively impacted by a minimum wage should be those with the least amount of experience and skills then that that would lead us to predict higher unemployment among such a class of individual as compared to those with more experience and skills. To test this prediction we can then examine unemployment data for those aged 16-24 (less experience) as compared to those 25 and above (more experience). Indeed, if we look at the data6 from the Bureau of Labor Statistics (www.bls.gov) we find that the unemployment rate (June 2013) among 16-19 year olds is 24% and among 20-24 year olds is 14%. These values far exceed the unemployment rate (6%) of those workers with sufficient experience and skills to make them largely immune to minimum wage pay scales, namely 25-54 year olds. But it gets worse. Even when there are jobs to compete for, the young are at an experience disadvantage. Again the empirical evidence bears this out since were this not the case youth unemployment should slowly decline following minimum wage increases as the two groups equally compete for the same jobs. However we do not see this, youth unemployment is consistently higher across decades.7 The reasons for this are born out by the following analysis: At a given wage X (minimum wage) it is difficult for inexperienced worker A to compete with experienced worker B. However, Worker A could be competitive at wage X–Y. Think of it this way. If the government mandated a minimum haircut price of $200 per haircut whom would you hire for the task? The person who had been cutting hair for years or the person who had never done so? If you have to spend a $200 you might as well get the best you can get. However absent such a mandated wage you might be willing to try the neophyte for $5. You get a cheap, albeit imperfect haircut; the neophyte gains experience and improves his skillset.

 

Deleterious effects of youth unemployment

Although the redistributive effects of a minimum wage may be economically neutral in terms of wealth transfer between parties, it is definitely not neutral in terms of its non-economic effects, namely the prevention of free people doing as they please (i.e. gaining experience and contributing to society through work). People whose productive value is less than the minimum wage are de facto unemployable. They are denied the opportunity to gain experience and skills. Their exclusion from the job market is a net loss to society.

Minimum wage laws are a misguided attempt to help “the poor” by presuming all workers are similarly situated, i.e. that the vast majority of hourly employees earn minimum wage and that they are uniformly composed of heads of households. In fact the opposite is true. Only 2.1% of hourly employees earn minimum wage and of that 2.1% over half (55%) are 16-24 years old.8

If the intent were to help the poor, it would be better from a strict economic standpoint to simply eliminate the minimum wage and concomitantly expand social support for that tiny 1.2% of workers at the bottom if needed. The vast increase in youth employment resulting from a minimum wage repeal would expand the productivity of the economy thereby resulting in lower prices for goods and services, which would help “the poor” by giving them a stronger dollar.

 

There’s no free lunch – the many pay to support the few

If the wealth transfer effects of the minimum wage are economically neutral (in terms of strict monetary transfers) then who is gaining and who is losing? Obviously the people who get raises gain the most. Who loses? Everyone else. We lose in terms of higher prices resulting from cost increases being passed on. We also lose due to higher costs resulting from the withholding of labor of the unemployed, which reduces productivity relative to what it would have been. How much will prices go up? It depends. Do not be fooled by citations of a single study that demonstrates prices would not go up or if they did it would only be nominal. The truth is if you got twelve different studies you’d get twelve different answers. There are a multitude of variables because every company and industry is different. Some of those variables include: percentage of labor cost in the goods, percentage of workforce that will be affected, presence or absence of unionization, and elasticity of demand for the goods (i.e. will consumers pay more or not). Even if the effect is small, it still exists. Justifications based on the size of the cost are no different than justifying a new tax because it is proclaimed to be “nominal.” Whether the reason 100 million people pay an extra $1 so that 1 million people may be given $100 is the result of a tax or a law, the outcome is the same: redistributionary theft of the many to the few. It is wrong when corporations benefit from such practices and it is wrong when an individual benefits. Morality does not turn on the numbers engaging in the act. Just because the effect may be small at the individual level does not mean we just found our free lunch.

Even when costs are not passed on (due to inelastic demand) the owners of the company are “paying” in the form of decreased profits. Some may be inclined to argue that the workers “deserve” it more than the owners, however what one may not argue is that there has been a net benefit to the economy. It is often argued that if workers have more money they will spend it, all the while ignoring the fact that if the original owner of that money still had it they would have spent it as well. If one wishes to argue that some are more deserving, then simply be honest about that assertion and own up to the fact that one is advocating theft in order to rectify perceived social injustice. Do not attempt to shroud your motives behind a façade of economic utilitarianism (i.e. theft is ok because the economy benefits). These firms with inelastic demand for their product that are made to endure multiple bouts of minimum wage hikes will eventually go out of business as profit margins are squeezed down to 0%. Or if they are fortunate they will be in a position to automate most processes (think self-checkout lines). Automation or bankruptcy increases unemployment. Surely this is incontrovertible harm to those workers (the newly unemployed) that must be suffered in order that some workers at other firms may enjoy a small increase in pay.

 

No one earns minimum wage for life

Even those who start out making minimum wage do not continue to make minimum wage their whole life. They gain experience and skills and move up the pay scale in a company or they may move onto other employers who have a vested interest in acquiring such skilled labor. Just because you’re stuck at McDonalds making minimum wage does not mean you will be working there at minimum wage your entire life. You will at some point decide you want to make more and you will seek out a new job at a higher wage. And you will be able to do so precisely because of the skills and experience you acquired at your prior lower wage job. Low wage jobs serve a function in an economy. They should not be outlawed. They provide the opportunity for the inexperienced and unskilled to acquire both. They also offer those not looking for a career or who are not supporting themselves the means to engage in remunerative short-term work. Low wage jobs exist in those industries where job duties do not require any particular skill set and where consumers are sensitive to the price of goods in that industry. For example, McDonalds could pay all their employees $50,000 a year however the market for $50 Big Macs would necessarily be much smaller than it is today. At some point it is not the employer that sets the wage but rather it is the consumer. If the consumer will not spend more than X on a product then the wages to make such a product must necessarily be some fraction of the cumulative sales of X.

 

How did we get here? The subsidization of poverty.

Why are we even having this discussion? Do we really need the government to tell people to not work for less than they can survive on? Surely if people were working below a true “living wage” they would be dying in droves. Why is that not the case? Why are the streets not littered with the corpses of minimum wage workers? The key to this question is to understand that workers earn two wages: one from their employer and one from the state. Such workers are provided with the full panoply of government assistance. For example, someone making the current full time minimum wage earns $15,000/year, however they are also eligible for additional government benefits that bring their total remuneration to approximately $35,000/year if they are childless, or up to $52,000 year if they have children.9 In fact, earning more does not get one out of this situation as government assistance drops off slowly or precipitously depending on how much income has increased. These decreases in benefits actually incentivize the worker to not make more lest their higher income disqualify them for various aid programs. These benefits include the earned income tax credit, refundable tax credits, food stamps, housing, energy, and childcare assistance. These safety net systems, although started with the best of intentions, have resulted in the perverse incentive of encouraging the very thing we are trying to eliminate. Both the employer and the employee are aware of these safety nets, so each is willing to offer less and accept less given the assurance that society will pick up the tab. In other words, absent such subsidization, taxes supporting these programs would necessarily fall and wages would necessarily rise. Not out of generosity of an employer but as a result of the fact that absent any assistance no one could live on $15,000 a year, therefore no one would accept that wage any more than they would accept $100 a year. The young who make up about 20% of the labor pool8 would quickly fill in all the low wage job demands and once that pool was consumed employers who wanted more employees would have no choice but to pay the higher market wage.

 

Summary

Minimum wage laws should be understood for what they are: an unwarranted interference by Tom, Dick and Harry into the private trade negotiation of Dave and Fred. At its core, labor is just like any other good. The laborer would like to acquire money and is willing to sell his labor. Likewise the employer has money and would like to acquire labor. The two parties come together in order to reach a mutually agreed upon price. If that price is lower than you would like don’t blame the employer, blame competition. There are too many others willing to do the job for that price. Do stores blame their customers or the competition if they lose a sale? Blaming your employer for too low a wage is as silly as a store blaming its customers for not buying from them.

Minimum wage laws are simply price fixing by another name. They allow the public to intervene in employee/employer negotiation and tell the employer “It is illegal to pay less than X for this labor” and likewise tell the laborer “It is illegal for you to sell your labor for less than X”. When it comes to handling your own affairs, your neighbors do not know better than you. We should all be free to make such decisions for ourselves without outside interference.

Regardless of our current pay, everyone always wants more. There are two routes though to obtain more. There is the unethical route of using force (government) to extract what we want. This method is appealing in that it requires little effort, in the same way that picking up a gun and robbing someone requires little exertion. Theft is the time-honored tradition of obtaining goods with less effort than would have been expended in their honest production. But as with any theft, it is a zero sum game, there is always a winner and there is always a loser. The pie stays the same size because the thief has added nothing to it; pieces have merely been shuffled.

However, there is another method to achieve higher wages. Improve yourself so that you have a basis for negotiating. Differentiating yourself from the competition means you have less competition. You are capital that owns itself. You have it in your power to enhance the value of that capital. Wages correlate directly to the value society places on the tasks we perform. If we acquire those skills that society values more highly then we will necessarily produce greater value for society and this in turn will be reflected in the higher wage we are able to demand. These gains are not a zero sum game. The pie gets bigger because your enhanced productivity adds to the pie. Your employer pays you more not out of generosity but because you are able to give him more than you used to.

We each hold in ourselves the ability to improve our circumstances in a way that benefits us as well as society. Self-improvement through education and/or work experience is the answer to the question: how do I earn more? Elimination of the minimum wage is a necessary, although not sufficient, condition for improving the economic value of the inexperienced or unskilled.

A version of this article also appeared as a Mises Daily on January 16, 2014.

References

1. Hazlitt, Henry. “Economics in One Lesson”, (1946), p.5,

2. David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review 84, no. 4 (1994): 792. A later book expanded on these results, see David Card and Alan B. Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton: Princeton University Press, 1995). (this reference cited here)

3. David Neumark and William Wascher, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment,” American Economic Review 90, no. 5 (2000): 1390. Researchers from the Employment Policies Institute also reported finding data errors in the Card and Krueger sample. In one Wendy’s in New Jersey, for example, there were no full-time workers and thirty part-time workers in February 1992. By November 1992, the restaurant had added thirty-five full-time workers with no change in part-timers. See David R. Henderson, “The Squabble over the Minimum Wage,” Fortune, July 8, 1996, pp. 28ff. (this reference cited here)

4. Block, Walter. “The Minimum Wage Once Again”, Labor Economics from a Free Market Perspective, (2008), pp 147-154.

5. David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply.” American Economic Review 90, no. 5 (2000): 1419. (this reference cited here)

6 http://www.bls.gov/web/empsit/cpseea10.htm

7. http://www.americanprogress.org/issues/labor/report/2013/04/05/59428/the-high-cost-of-youth-unemployment/

8. http://www.bls.gov/cps/minwage2012tbls.htm#1

9. http://www.aei-ideas.org/2012/07/julias-mother-why-a-single-mom-is-better-off-on-welfare-than-taking-a-69000-a-year-job/