James Kwak on Minimum Wage
By David Henderson
On my to-do list for the last week or so has been to write a detailed response to University of Connecticut law professor James Kwak’s claim that many economists and others have misleadingly and simplistically applied basic Econ 101 analysis to conclude that an increase in the minimum wage will cost jobs.
Cato’s Ryan Bourne has saved me much of the work. His response is excellent. The two corrections I would make, though, are on his points #2 and #3. He uses the term “demand” where instead he should refer to “quantity demanded.” A change in demand is a shift in the demand curve. An increase in the minimum wage does not shift the demand curve; it reduces the amount of labor demanded, moving along a given demand curve.
Rather than cover the ground that Ryan Bourne has ably covered, I’ll focus on a few other problems with Kwak’s article.
In reproducing the argument that critics of the minimum wage make, Kwak writes:
More people want jobs at $7.25 than at $6, but companies want to hire fewer employees. The result: more unemployment. The people who are still employed are better off, because they are being paid more for the same work; their gain is exactly balanced by their employers’ loss. But society as a whole is worse off, as transactions that would have benefited both buyers and suppliers of labor will not occur because of the minimum wage.
Kwak is right that many critics have made this argument, but in doing so those minimum wage opponents have been sloppy. The result is not necessarily more unemployment; it’s less employment. There’s a difference? Yes. The Bureau of Labor Statistics measures as unemployed people who are out of work and looking for work. But what if an unskilled worker, discouraged by his inability to find a job at the new higher minimum wage, quits looking for work? Then he is not employed, but he no longer counts as unemployed.
Also, the gain to those who keep their jobs is less certain than he says, for two reasons. First, the employer might cut their hours. Second, there’s a presumption that the pre-existing arrangement between the employer and the employee reflected the employer’s costs and the employee’s preferences. So there was an optimal mix of wage and non-wage benefits. Raising the minimum wage will cause the employer to reduce the non-wage benefits. So, even for those who keep working and keep as many hours, the gain to them is less than it appears just by looking at the wage rate and is less than the loss to the employer.
The minimum wage has been a hobgoblin of economism since its origins. Henry Hazlitt wrote in Economics in One Lesson, “For a low wage you substitute unemployment. You do harm all around, with no comparable compensation.” In Capitalism and Freedom, Milton Friedman patronizingly described the minimum wage as “about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it.” Because employers will not pay people more money than their work is worth, he continued, “insofar as minimum-wage laws have any effect at all, their effect is clearly to increase poverty.” Jude Wanniski similarly concluded in The Way the World Works, “Every increase in the minimum wage induces a decline in real output and a decline in employment.” On the campaign trail in 1980, Ronald Reagan said, “The minimum wage has caused more misery and unemployment than anything since the Great Depression.” Think tanks including Cato, Heritage, and the Manhattan Institute have reliably attacked the minimum wage for decades, all the while emphasizing the key lesson from Economics 101: Higher wages cause employers to cut jobs.
Certainly there was some sloppiness in some of these statements. Friedman can’t necessarily establish that an increase in the minimum wage increases poverty. It probably does, but a detailed analysis would have to be carried out to establish that. Kwak doesn’t explain, though, why he thinks Friedman’s analysis is patronizing. Patronizing of whom? Wanniski goes overboard by not making clear that he is talking ceteris paribus. Wanniski should have said that real output and employment are lower than otherwise, not that there’s an absolute decline. Ronald Reagan may well have exaggerated also. l would bet that monopoly wages obtained by unions with monopoly power granted by the federal government did more harm than the minimum wage. But I don’t know that.
But, more important, I want to point out a rhetorical step Kwak took that will probably go right by those who are not intimately familiar with the over eight decades of literature on the minimum wage: Kwak left out every single outspoken economist who made these same arguments and who is not either a libertarian or a conservative. These include Nobel Prize winners Paul Samuelson, Gunnar Myrdal, James Tobin, and, more recently, in his textbook, at least, Paul Krugman.
In his 1970 textbook about a proposal to raise the minimum wage to $2.00 an hour, Samuelson wrote, “What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?”
In his classic book, The American Dilemma, Myrdal wrote:
During the ‘thirties the danger of being a marginal worker became increased by social legislation intended to improve conditions on the labor market. The dilemma, as viewed from the Negro angle is this: on the one hand, Negroes constitute a disproportionately large number of the workers in the nation who work under imperfect safety rules, in unclean and unhealthy shops, for long hours, and for sweatshop wages; on the other hand, it has largely been the availability of such jobs which has given Negroes any employment at all. As exploitative working conditions are gradually being abolished, this, of course, must benefit Negro workers most, as they have been exploited most–but only if they are allowed to keep their employment. But it has mainly been their willingness to accept low labor standards which has been their protection. When government steps in to regulate labor conditions and to enforce minimum standards, it takes away nearly all that is left of the old labor monopoly in the “Negro jobs.”
As low wages and sub-standard labor conditions are most prevalent in the South, this danger is mainly restricted to Negro labor in that region. When the jobs are made better, the employer becomes less eager to hire Negroes, and white workers become more eager to take the jobs from the Negroes.
Yale professor James Tobin wrote in 1965:
People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures, or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulations is that the intended beneficiaries are not employed at alL
Ben Powell points out the following quote from Krugman’s 2008 co-authored textbook:
[W]hen the minimum wage is above the equilibrium wage rate, some people who are willing to work–that is, sell labor–cannot find buyers–that is, employers–willing to give them jobs.
Kwak also misleads the reader about a survey of economists on the minimum wage. He writes:
The economists polled in the 2013 Chicago Booth study thought that increasing the minimum wage would be a good idea because its potential impact on employment would be outweighed by the benefits to people who were still able to find jobs.
A supermajority of the economists? Yes. But “the” economists? No. Moreover, take a look at the link and you can see that a disproportionately high percent of those who disagreed actually gave reasons.