In light of the recent “national” strike conducted by 0.09% of fast food workers in the US, many op-eds and commentaries have been penned by economists trying to justify the strikers’ demands. Most of the arguments for minimum wage are easily dismissed by Econ 101 references to supply and demand graphs. However, given the immense popularity of the minimum wage, proponents have been developing more and more convoluted defenses of the law.
This blog post will look at a few of the most absurd arguments made on behalf of the minimum wage law this year:
1. “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. This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher. So here’s an idea that Governor Romney and I actually agreed on last year: let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.” – Barack Obama.
There is almost too much wrong here to unravel. Virtually every statement is inaccurate, misleading, or founded on faulty claims.
First, a full time worker making $7.25 per hour (the federal minimum wage) earns $14,500 per year with two weeks of vacation. That puts him $3,010 above the federal poverty line for an individual adult living alone at $11,490. A family of four, in which both parents make minimum wage, earns $29,000 per year, putting it $5,450 above the $23,550 poverty line for a four person house hold. To say that an individual literally cannot live off minimum wage is blatantly false by the government’s own welfare standards, and the fact that millions of minimum wage workers don’t die off every year.
Second, the idea of being able to “declare” away an economic reality should make every economist shudder. Why does Obama stop there? He should implore us to declare away poverty, disease, war, laziness, stupidity, and death.
On a more realistic level, this “declaration” language plays into the progressive conception of politics and economics. Obama does not see the market as a network of organic, voluntary human interaction, but as a machine which can be reached into and tweaked with scientific precision. Annoying things like, “supply and demand” and “individual desire” are merely byproducts of the machine, not its foundation and fuel. If millions of individuals can be helped by “declaring” higher wages, than why not do so?
2. “Our women [business owners] who pay a living wage have an advantage over their larger counterparts who don’t. Whether Obama’s proposal is high enough or the time frame is fast enough is the question.” – Margot Dorfman, CEO of the US Woman’s Chamber of Commerce.
This statement should immediately set off alarms in any economist’s head. If paying “living wages” is automatically better for business than paying “dying wages” (or whatever), then why aren’t all businesses paying living wages? Surely corporate greed compels big companies to maximize profits, and if paying higher wages will maximize profits, then why is this even an issue?
This is not to say that businesses could never benefit from a wage increase. However, I tend to believe that individual business owners, whose livelihoods depend upon their bottom line, are better equipped to handle the financial structure of their own companies than anyone else, especially government bureaucrats.
3. “[If the minimum wage was raised] I would pay a couple of dollars more for products, but the question then is, do I get a raise too? If my salary goes up, I will be willing to pay even more for my products,” – R.B. Barrett, pro-minimum wage protester.
In July, the Huffington Post published a story on an economic analysis which revealed that if McDonald’s doubled its minimum wage pay, it would only have to increase the cost of its signature Big Mac burger by 68 cents to maintain current margins. In its zeal to attack corporate America, Huffington didn’t realize their prestigious research came from an undergrad student at the University of Kansas who incompetently omitted crucial data which drastically affected the outcome. When this information came to light, Huffington admitted the error and removed the original article. Regardless of the research presented, an economist should have been able to dismiss the entire study with little analysis.
Prices determine costs. Costs do not determine prices.
Prices are determined by the supply and demand of a specific product. The cost of production is then calculated in relation to the revenues generated by the product’s price. If the product’s variable (non-fixed) costs cannot be brought below its price, then the product is uneconomical and should not be produced. By extension, the minimum wage has no direct impact on prices, but only an indirect impact via wages as a component of variable costs. Due to the circuitousness of this connection, any analysis which claims that it can predict minute price changes as a result of minimum wage increases should be automatically tossed aside as junk economics. Unfortunately, anti-minimum wage advocates often make this error as well.
I have no doubt that under very specific circumstances, in very specific times and places, raising the minimum wage can benefit poor workers. Given that such an occurrence seemingly violates the law of supply and demand, does this mean that we should all throw out our economics textbooks and start the whole science again?
No, fundamental laws of economics like supply and demand do not need empirical testing to be validated. It is common sense that the more costly an action is, the fewer times the action will be performed. One does not need a peer-reviewed, double-blinded research analysis to determine this. Supply and demand are inherent components of human action, not wild variables that change by the week.
The empirical tests which demonstrate the efficacy of the minimum wage law invariably leave out the unseen costs of economic manipulation, including the variables altered by the test itself. Imagine if a test shows that raising the minimum wage doesn’t increase unemployment, as a conventional classical economist would predict. This leaves two options: either the market actors are irrational and violated the law of supply and demand, or the minimum wage increase coincidentally coincided with a natural increase in business which canceled out the negative effects of the minimum wage increase.
Either option is possible. If the market actors are irrational, then the study is merely looking at an anomaly (if it is not an anomaly, then economics would effectively not function, and we would still be living in caves). If the market actors are rational, then there are unseen forces which created the false impression that the minimum wage is harmless.
Too many commentators pretend that economics is no different from physics or chemistry in its methodological approach, but nothing could be further from the truth. A glass of water will always freeze at 0°C under standard conditions, but a human will not always buy more of a product if its price falls for a variety of possible reasons. Economic laws are predictions of human behavior generated by individuals with free will, not analyses of the reactions of inanimate rocks and molecules.
Clumsy critics will attempt to wield empirical studies as a weapon without understanding their true nature. Don’t be fooled by their attempts.