At first glance, the core insights of economics seem mundane. As something’s cost rises, consumers buy less of it. Producing more clothing requires transferring more resources to textile factories and, hence, away from other uses. When Jen buys a pear from Al for a dollar, she does so because she values the pear more than whatever she otherwise would have purchased with that dollar — and Al values what he will buy with that dollar more than he values the pear.
Pretty straightforward. But what economists do with such “obvious” observations is often mind-blowing.
An important counterintuitive insight was vividly conveyed long ago by my late colleague Gordon Tullock. Asked in the 1960s what government should do to maximize reduction in traffic fatalities, he replied, “Mandate that the steering column of each car be mounted with a steel dagger pointed directly at each driver’s heart.” Initially, that sounds crazy. Yet when you think about it, you realize such daggers would cause drivers to dramatically increase the care they exercise behind the wheel.
Instead of really wanting government to mandate mounted daggers, Gordon was warning government against going too far in mandating safety features such as airbags, seat belts and collapsible steering columns. Just as mandated daggers would lead to more-careful driving, mandated safety features lead to less -careful driving. Safety features truly might reduce highway deaths, but keep in mind the possibility that mandated safety features might have surprising opposite effects.
David Friedman explains another counterintuitive insight: “Economists are often accused of believing that everything — health, happiness, life itself — can be measured in money. What we actually believe is even odder. We believe that everything can be measured in anything.”
What Friedman means is that each of us routinely makes trade-offs among things that seemingly can’t be compared. Consider your enjoyment from going to a concert. Getting there conveniently requires driving. Yet by doing that instead of staying home, you raise your chance of being killed in an auto accident. If you nevertheless drive there, you conclude that the added enjoyment you expect from the concert is worth more than the added safety you’d experience by staying home. That is, you compare the experience of a concert to the risks of driving. Obviously, if the risk of being killed while driving there were high enough, you’d decide to stay home.
Another example: You buy a jacket, telling friends it “cost” you $100. But your statement is inaccurate. When you gave, say, five $20 bills to the clerk, what you really gave up wasn’t five pieces of paper engraved with Andrew Jackson’s portrait. What you really gave up is whatever you otherwise would have bought with those five pieces of paper.
Suppose that, had you not bought the jacket, you would have bought a meal at a nice restaurant for you and a friend. In this case, you compared a jacket to that restaurant meal.
We humans constantly compare apples to oranges — and choose sensibly between them.
The labor force participation and employment rates of young adults in the United States have declined sharply in recent years, especially among teenagers. The overall decline in the rate of labor force participation since the Great Recession has received a great deal of attention from researchers and policymakers, who focus in large part on trying to gauge whether this decline is permanent and what it implies about how tight the labor market is. However, the decline in labor force participation of young adults has been going on for much longer and does not coincide with swings in economic activity.
David Neumark and Cortnie Shupe consider three possible explanations for the decline in teen employment in the United States since 2000, with a particular focus on those age 16–17: (1) a rising minimum wage that could reduce employment opportunities for teens and potentially also increase the value of investing in schooling; (2) rising returns to schooling; and (3) increasing competition from immigrants. The higher minimum wage is the predominant factor explaining changes in the behavior of teens age 16–17 since 2000. Additionally, no evidence was found to suggest that higher minimum wages for teens leads to higher future earnings; if anything, the evidence points to the opposite effect.
- Prior literature shows that teen employment has declined much more than the employment rates of those age 20–24 since 2000. These changes were larger for teens age 16–17 than for those age 18–19. The percentage of teens not in the labor force who reported wanting a job fell by almost half between 1994 and 2009, from 24 percent to 13.2 percent.
- The decline in the number of teenagers in the workforce was owing to increases in teens being exclusively in school, rather than combining school and work.
- In new results presented in this paper, the authors find that higher minimum wages are associated with a lower share of teens age 16–17 both in school and employed, and a higher share in school and not employed.
- There is some evidence that changes in the return to schooling and an increase in the share of immigrants employed in the workforce may have contributed to the observed changes in employment and enrollment of teens age 16–17, although these effects are considerably smaller than the estimated minimum wage effects.
- The study found no positive relationship between higher minimum wages for teens and higher future earnings. The evidence, if anything, says that teens exposed to higher minimum wages since 2000 had acquired fewer skills in adulthood. Thus, it is more likely that the principal effect of higher minimum wages since 2000, in terms of human capital, was to reduce employment opportunities that could enhance labor market experience.
NO ONE LIKES to admit having been wrong. It’s especially tough for members of the pundit class, whose job amounts to telling people what to think. So when National Review’s critic-at-large Kyle Smith last week published a piece with the headline “We Were Wrong About Stop-and-Frisk,” people noticed.
Smith and National Review are conservative. Like many conservatives, they had predicted that if New York Mayor Bill de Blasio fulfilled his campaign pledge to end stop-and-frisk — the police practice of stopping, questioning, and patting down people for weapons merely because they seemed suspicious — crime in the city would go up. But that’s not what happened.
In the four years since de Blasio became mayor, conceded Smith, major crime has declined “to the lowest rates since New York City began keeping extensive records on crime in the early 1960s.” The left-wing mayor turned out to be right about stop-and-frisk. The right-wing journal said so, and in so doing, displayed more loyalty to truth than to theory.
Following facts where they lead is a principle easier to state than to live up to, particularly when the facts upend our preconceptions. Some public-policy debates are endless because they are rooted in disagreement over fundamental principles — the question of capital punishment, for example. But other disputes ought to be resolvable, at some point, by facts on the ground. Advocates of an aggressive stop-and-frisk policy were certain the only alternative was higher crime rates. They were mistaken. The honest response is to acknowledge it, and end the debate.
Another controversy that should be laid to rest is the impact of minimum-wage laws.
When government raises the lowest hourly wage at which a worker may lawfully be employed, does it help those at the foot of the economic ladder? The issue has been fought over for decades. Yet reality repeatedly renders the same verdict: Artificially hiking minimum wages makes it harder to employ unskilled workers. Raising the cost of labor invariably prices some marginal laborers out of the job market. Advocates of higher minimums may wish to ensure a “living wage” for the working poor. Yet the result is that fewer poor people get work.
Two years ago, Seattle’s hourly minimum wage jumped to $13, the second hike in less than a year. Before the legislation was enacted, there had been the usual arguments pro and con. But the impact of Seattle’s law is now a matter of facts, not theory. And those facts confirm what opponents of the increase had foretold: Minimum-wage hikes hurt the poor.
In a major research paper last summer, economists commissioned by the city of Seattle reported that the hike to $13 an hour caused a decline in the employment of low-wage workers. For those who remained employed, it caused a sharp cutback in hours. When the gain from higher hourly wages was set against the loss of jobs and hours, the bottom line was stark: “The minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”
Another 2017 study, by Harvard Business School scholars, analyzed the effect of minimum wage hikes on San Francisco-area restaurants. The upshot: Every $1 increase in the mandatory minimum wage led to a 14 percent increase in the likelihood that a median-rated restaurant would go out of business. Decades of empirical research, dating back to the first federal minimum-wage law, have reached similar conclusions.
In 18 states this month, minimum wages are going up. Will those changes make unskilled workers more employable? Will the hours they work be increased? As in Seattle and the Bay Area, these questions will have answers. Soon enough, fresh data will shed even more light on the question of what happens to unskilled laborers when their labor is made more costly. Perhaps that will be the moment when someone more loyal to truth than to theory will publish an essay bowing to reality and conceding, at long last: “We Were Wrong About the Minimum Wage.”
From Henry Hazlitt’s Economics in One Lesson, we learn that “the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence: 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.” Let us begin with a simple illustration: the 18 minimum wage hikes that will take place next Monday on January 1.
As a result of 18 state laws mandating that minimum wage workers will get paid $0.35 (in Michigan) to $1 an hour (in Maine) more on January 1, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant in Maine would make $160 in additional income every month (ignoring taxes). Alex would spend that additional monthly income of $160 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $160 from Alex’s additional spending now have additional income and profits every week, and they can spend some of that additional income and profits on goods and services. Alex’s additional monthly income, therefore, ripples through the local Maine economy with an amazing multiplier effect that almost magically increases spending and income throughout the local economy. The pro-minimum wage crowd points to these many positive income effects from Maine’s pending $11 an hour minimum wage and Alex’s additional income, and many might even suggest that a minimum wage far above $11 an hour would create even greater and more positive benefits for workers like Alex and the local merchants who would be the beneficiaries of an even higher minimum wage. For example, EPI suggests that a $15 an hour federal minimum wage would lift wages for 41 million American workers.
But let us take another and closer look at the situation. The minimum wage crowd is at least right in its first conclusion about Alex’s spending, which is just a small part of the much larger $5 billion in additional wages and spending EPI estimates for next year. The public policy of artificially raising wages through government fiat will mean more business and billions of dollars in greater sales revenues for local merchants around the country. The local merchants will be no more unhappy to learn of the magical spending from 18 minimum wage hikes in 2018 than an undertaker to learn of a death.
However, we haven’t yet considered the situation that will now face hundreds of thousands of merchants and small business owners next year, including Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant in Bangor where Alex works. As a result of Alex’s good fortune to receive $160 in extra income every month (and nearly $2,000 during the entire year) as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $160 less every month (and $1,920 for the year) because she has to pay Alex out of her own income or profits. The Johnson family now has to cut back on their household spending by $160 every month that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $160 each month comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. (And if Mrs. Johnson employs more minimum wage workers than just Alex, she and her family are worse off by $160 per month, and $1,920 per year, for each worker.) If we consider that Alex and the Johnson family are a part of the same local community in Bangor, the community’s income hasn’t changed – rather, there’s only been a transfer of income of $1,920 per year from the Johnson family to Alex; but no net gain in community income, wealth, jobs, or prosperity has been achieved.
For the entire state of Maine, the $80 million in higher wages that EPI’s estimates next year as a result of the $1 an hour increase in the state’s minimum wage have to come from somewhere or someone. And that “somewhere” or “someones” are the thousands of local merchants in Maine like Mrs. Johnson who will be made collectively worse off by $80 million in 2018.
The people in the pro-minimum wage crowd think narrowly of only two affected groups from minimum wage hikes: Alex, the minimum wage worker, and the merchants that gained his business from his artificial increase in income. The minimum wage advocates forget completely about the third parties involved, namely small business owners and their families like the Johnsons in Maine, and the local merchants that now lose their business because the labor costs for small businesses have been artificially increased by government fiat. Minimum wage advocates will easily see Alex’s increased income and spending because it is immediately visible to the eye and easy to calculate ($5 billion next year according to EPI, and $144 billion annually if the federal minimum wage is increased to $15 an hour). They fail to see the lost income and subsequent reduction in spending by the Johnson family that otherwise would have occurred – because it’s less visible and harder to calculate.
The minimum wage example above exposes an elementary fallacy about its alleged positive income effects. Anybody, one would think, would be able to avoid that fallacy after a few moments thought. Yet the minimum wage fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by labor union leaders, by editorial writers and newspaper columnists, by progressive politicians and progressive think-tanks, by learned statisticians using the most refined techniques, and even by professors of economics in our best universities who sign statements in support of the minimum wage. In their various ways, they all perpetuate the minimum wage fallacy.
The minimum wage supporters see almost endless benefits despite the economic destruction that characterizes minimum wage laws. They see miracles of multiplying prosperity, increased income, and more jobs coming from minimum wage hikes, a form of economic magic enacted in state capitals, by city councils, and the federal government. But once we trace the long-term effects of such public policy on all groups in the economy, and analyze both what is seen and what is unseen, we should easily understand that the minimum wage cannot, and will not, have overall positive effects. At best it can only transfer income from one group (business owners like Mrs. Johnson above and/or their customers in the form of higher prices) to another group (low-skilled, limited-experienced workers), but with no net gain. It’s an ironclad law of economics that to stimulate one group with public policies like the minimum wage, protective tariffs, or farm subsidies, another group in the economy has to be equally “un-stimulated.” In the case of the 18 increases next week in state minimum wages, the EPI’s estimate of $5 billion in additional wages will stimulate low-skilled workers next year by the exact same amount that it will “un-stimulate” merchants, businesses, business owners and their families in those 18 states – by $5 billion.
When one considers all of the long-term effects on all groups that would result from minimum wage laws: the economic distortions, the misallocation of resources, the loss of employment opportunities for low-skilled workers and the lifetime consequences of not gaining work experience at an early age, and the businesses that close or are never opened, one can only come to one conclusion: the minimum wage law is a very bad and very cruel public policy that makes local communities and the entire economy overall much worse off, not better off.
MP: Groups like EPI that support increasing the minimum wage do a great job of addressing the benefits of higher wages to low-skilled workers, but then completely ignore the costs of those artificial wage increases. That is, they never answer the most important question of all, posed above: Where will the $5 billion in additional annual wages from the 18 minimum wage hikes next year come from?
For example, in a 60-page document released earlier this year by EPI’s senior economic analyst David Cooper, “Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers,” there is extensive coverage on every page of the estimated benefits of artificially higher wages ($144 billion annually) to various workers by demographics (age, gender, race/ethnicity, education, family status, children, geography, etc.) that would result from a $15 an hour federal minimum wage. But you won’t find a single sentence in the 60-pages of text that explains where the $144 billion will come from if the federal minimum wage is increased to $15 an hour!
There’s not a single mention in the EPI report of the word “business” except for a reference to a $15 minimum wage “spurring greater business activity and job growth.” There’s also not a single mention of what should be relevant terms like “higher prices,” “labor costs,” “profits,” “adjustments” or “reduced hours” that would give us some idea of the costs of a $15 an hour minimum wage, who pays those costs (businesses), and how those higher costs will offset the benefits. And that’s the essence of the “blessings of the minimum wage fallacy” that EPI has fallen prey to — a $15 minimum wage sounds like good public policy only when you count all of the blessings (benefits) to workers while ignoring the costs to businesses.
Bottom Line: We learned from Bastiat and Henry Hazlitt that broken windows and other forms of destruction can’t increase a community’s overall income, employment, and economic prosperity. Likewise, neither can the 18 minimum wage hikes scheduled to take place on Monday have overall, positive net economic benefits next year. Any public policy looks good when you look merely at the immediate effects, but not the longer effects; when you consider the consequences for just one group (workers in the case of the minimum wage) but for all groups (businesses), and only emphasize the benefits (to workers) while completely ignoring the costs (to employers). But that’s not sound economic logic or objective economic analysis on the part of groups like EPI; rather it’s pure partisan political advocacy for an economic fallacy that violates the ironclad law of economics described above. Or as Milton Friedman described it in 1966, support of the minimum wage is “monument to the power of superficial thinking.”
Update: As Not Sure points out in the comment section, there is an additional cost to employers when the minimum wage increases because of the 7.65% payroll tax imposed on employers for Social Security and Medicare. Therefore, the $5 billion in higher wages next year for minimum wage workers would actually cost their employers $5.3825 billion.
This is the great hidden truth about Obamacare. It was never a program for improved medical coverage. It was a program for redistributing wealth by force from the healthy to the sick. It did this by forcing nonmarket risk pools, countering the whole logic of insurance in the first place, which is supposed to calibrate premiums, risks, and payouts toward mutual profitability. Obamacare imagined that it would be easy to use coercion to undermine the whole point of insurance. It didn’t work.
And so the Trump executive order introduces a slight bit of liberality and choice. And the critics are screaming that this is a disaster in the making. You can’t allow choice! You can’t allow more freedom! You can’t allow producers and consumers to cobble together their own plans! After all, this defeats the point of Obamacare, which is all about forcing people to do things they otherwise would not do!
A meme, and a notion, floating around the Internet:
So do these changes really kick-start an economy? Here’s an analysis from the “Being Classically Liberal” Facebook page:
1. Minnesota had ALREADY been experiencing a decent economy prior to the tax increases. As USA today explains, “Minnesota had one of the nation’s lowest unemployment rates in 2012 …and one of its highest GDP growth rates, at 3.5%.” [a] The tax increases came the following year, in 2013. [b] Minnesota continued to maintain its rank of having one of the best unemployment rates, and any further decrease in its unemployment rate simply mirrored national trends. One cannot reasonably conclude, then, that the 2013 tax increases had “caused” the good economy which was already in place before said tax increases even existed.
2. Understand that this controversy is over TWO tax increases; One which increased income taxes on individuals earning above $150,000 a year or couples earning above $250,000. [b] [c] The other which increased the state’s excise tax on cigarette sales by 130%. [d] It’s rather disingenuous for progressives to point to the these two tax increases and declare ideological victory since jobs hadn’t vanished. For one, they’re conflating conerns. Concerns over businesses fleeing to neighboring states are not based on income taxes but more so on a state’s business environment. And in that regard, it’s relevant to point out two key facts:
a. Business taxes have actually been CUT since 2013. [e] This is something progressives don’t seem to be acknowledging.
b. Once analyzed in a 2014 study, the cigarette tax increase has, as predicted, been quite detrimental to sales. [d] We will list the pertinent details below.
THE CIGARETTE TAX:
“In 2013 the Minnesota Legislature passed a 130% increase in the cigarette excise tax and also increased the tax on other tobacco products from 70% of the wholesale price to 95% of the wholesale price.” In 2014, when a study was conducted to measure the effects of this new policy, the following conclusions were found: [d]
• 1,100 jobs were estimated to have been lost or eliminated by 2014 as a result.
• Tobacco sales declined 50% in Minnesota stores along the border.
• Dramatic sales increases of tobacco products occurred in all four bordering states, indicating consumers had merely shifted to out of state purchases.
• By 2014, $38 million of lost sales in non-tobacco products also occurred as an indirect result.
• Nearly a quarter of all cigarettes consumed in Minnesota are now estimated to be purchased in other states.
As you can see, Minnesota may in fact be doing well, but this is due to other variables and not due to an increase in income taxes or cigarette taxes. One must consider the many other relevant variables at play. For instance, Minnesota borders water which automatically benefits ANY region, as it makes it part of a commercial trade route. This alters the conditions that might otherwise push businesses to conduct commerce elsewhere. Consider this. Part of Minnesota’s border is water (beneficial to business), another part is Canada (not appealing to most companies seeking to stay in the US), and the rest of its border are 4 neighboring states, where 3 of which are landlocked. This gives Minnesota an upper hand relative to other states, which is entirely relevant when one’s concern is commerce. Furthermore, Minnesota is home to a major natural resource and produces 75% of the country’s iron ore. [f] The iron-ore industry can’t just pick up and leave. Lastly, there has emerged a rather extensive list of tax CUTS, credits, or simplifications, all potentially offsetting the detriments of the aforementioned two tax increases. [e] They are as follows:
• $230 million in reduced taxes, as well as a simplification of the tax code, for Middle Class Minnesotans.
• The elimination of the “marriage penalty” tax, saving more than 650,000 married couples an average of $115 per year.
• Over 16,000 additional middle class families will qualify for the Working Family Tax Credit.
• Tax Cuts for Parents. More than 25,000 families who qualify for child care tax credits will see an average increase in their tax credit of $74 per year.
• Tax Cuts for Students. More than 285,000 recent college graduates could save up to $190 per year by deducting their student loan interest. Another 40,000 current college students and parents will receive a tuition deduction of $140 per year, on average.
• Tax Cuts and simplification of the tax code for Small Employers as well as an elimination of a requirement to maintain separate records for federal taxes.
• Tax cuts for seniors, teachers, and homeowners.
• A reduction in business sales taxes by $232 million.
• All three business-to-business taxes were repealed.
• The sales tax on repair and maintenance of electronic, farm, and commercial equipment has been repealed.
• The warehousing sales tax was repealed.
• Sales tax on telecommunications equipment has been repealed.
• $3 million in tax CREDITS for “Innovation and Jobs” and specifically “fuel innovation” has been set aside.
• Another $3 million in Tax Credits for startup businesses and entrepreneurs.
• Simplification of the Estate Tax, raising the exemption from $1 million to $2 million.
• Elimination of the Gift Tax; a reduction of $43 million.
• Furthermore, in May of 2014, an additional $103 million in tax cuts for homeowners, renters and farmers was agreed to. [g]
To point to all of this and declare, “Tax increases created jobs!” is MORE than a bit questionable. When you already have a decent economy, and firms see tax cuts for businesses and consumers on the horizon, it shouldn’t be a surprise that they’d likely remain in the state. Minnesota is doing well for many reasons, but their 2013 income tax increase on the top 2% of earners and their 2013 cigarette tax increase are NOT why. Add to all of the Minnesota tax cuts the fact that their government has begun shrinking in size per recent jobs numbers showing the government shed 4,200 jobs in December of 2014 alone [h] and it’s a wonder why Progressives keep proudly waiving this example around.
The problem is, there are a multitude of variables in any economy. In order to claim that any given outcome is due only to one or two changes, you’d really need to have two Minnesotas, one where the changes happened, and one where they didn’t, but are otherwise identical.
This doesn’t exist anywhere in the world.
Thomas Sowell pops out of retirement long enough to address this, once again.
The hardest of these hard facts is that the revenues collected from federal income taxes during every year of the Reagan administration were higher than the revenues collected from federal income taxes during any year of any previous administration.
How can that be? Because tax RATES and tax REVENUES are two different things. Tax rates and tax revenues can move in either the same direction or in opposite directions, depending on how the economy responds.
But why should you take my word for it that federal income tax revenues were higher than before during the Reagan administration? Check it out.
Official statistics are available in many places. The easiest way to find those statistics is to go look at a copy of the annual “Economic Report of the President.” It doesn’t have to be the latest Report under President Trump. It can be a Report from any administration, from the Obama administration all the way back to the administration of the elder George Bush.
Each annual “Economic Report of the President” has the history of federal revenues and expenditures, going back for decades. And that is just one of the places where you can get this data. The truth is readily available, if you want it. But, if you are satisfied with political rhetoric, so be it.
The Untold Story
What is often lost in the short history-class-version of this case is the effort by the company to comply and remove the segregation law. This may appear counterintuitive to some, but the market reality made segregation expensive. Looking at the requirements of the law (see above) makes it clear why securing separate accommodations, either by car or partition, is costly, and when you are in the business of selling seats, increasing the likelihood of empty seats works against that interest.
In the 1950’s the economist Gary Becker at the University of Chicago began to write about the economics of discrimination. His writing was contemporaneous to the Brown case which was decided in 1954. Becker’s book, titled The Economics of Discrimination and released in 1957, began a discussion on discrimination in the market which has yielded counterintuitive results in many instances.
Using economic assumptions to describe discriminatory behavior, Becker observed two basic features of discrimination. First, that discrimination may depress the wages and employment opportunities of those discriminated against and conversely that the discriminator may pay higher wages to avoid hiring a minority.
If for example, a white worker gets paid $2 more an hour than an African American worker, the employer is paying a $2 an hour penalty to maintain his discriminatory preferences. Over time, this is a difficult practice to maintain in a competitive environment. The result is parity when comparing equal, similarly situated people. Most employers or businesses are not willing to pay that penalty in the long run.
Since Becker’s book, others have also observed the impact of discrimination in markets and the tendency to move away from discrimination unless the base is sufficiently broad and the taste for discrimination is rather strong. However, in this scenario discrimination is highly likely to arise via democratic mechanisms as well, as it did in the South unless there is a constitutional constraint to prevent discriminatory democratic results.
Additionally, when faced with strong preferences for discrimination those discriminated against are likely to move to geographic areas with more equal outcomes, much like the movement to the north of about six million African-Americans during The Great Migration, which was certainly exacerbated by Jim Crow.
The Free Market Is the Great Equalizer
What Plessy illustrates is that even in a place willing to legalize discrimination (meaning the democratic taste for it was sufficient to be legislated, even if it failed to reach a true majority due to potential disenfranchisement), the market was pushing toward more equal market outcomes and had to be artificially constrained. Essentially, the Plessy verdict granted a special interest group their preference and arrested the development of the market preventing it from moving away from discriminatory practices.
With the hindsight of Becker and others like him, we see how Plessy set the stage for years of subsidized discriminatory behavior. In practice, the schools and other segregated venues behaved as cartels with the ability to impose costs on an industry and essentially remove it as a matter of competition for certain services. If all market actors faced the same imposed costs, there is no incentive to compete to remove that cost.
The Plessy verdict prevented the market from removing discriminatory behavior and it also created a rent-seeking incentive. With the Plessy verdict, racists and segregationists learned they could implement their preference of a segregated society by diffusing the costs among the population at large. Until Brown, these rent-seekers were able to implement their market preferences and it is no surprise that after Plessy Jim Crow continued to grow throughout the South.
There is also a political reason why markets should be preferred over legislation to remove discrimination. Markets tend to work quietly in the background; there is no grand political movement, no sweeping legislation, and very little reactive backlash against those politics that ingrain, often unintentionally, discriminatory views.
In contrast, the doux commerce thesis suggests markets are institutions that bring about desired social change, peace and cordiality, and anti-discrimination becomes a byproduct of this thesis. Two of the most recent advocates of this view have been Deirdre McCloskey in her Bourgeoise trilogy, and Nathan Oman in his book, The Dignity of Commerce. Markets create more peaceful, less discriminatory communities simply because they penalize discrimination and introduce personal interactions within the market.
The lessons of Plessy, often overlooked, are two-fold. The market removes discrimination in a more peaceful manner if we allow it to do so but the desire to intervene on behalf of one group or another is very alluring (an argument to restrict, maybe chain, democratic governments may be merited to some degree based on this observation).
When we take the stance that intervention is necessary we increase the risk of a less peaceful outcome and increase the incentive for rent-seeking behavior, even when discrimination is not the underlying impetus. Understanding the history of this pivotal Supreme Court case teaches how markets provide more favorable outcomes and dispels the myth that free markets are tools of oppression.
Here’s a letter to the Wall Street Journal:
In “The $15 Minimum Wage Crowd Tries a Bait and Switch” (Sept. 26) David Neumark explains the challenges facing today’s minimum-wage researchers. Yet the difficulty of quantifying the consequences of minimum wages is even more daunting than Prof. Neumark’s excellent essay reveals.
First, because minimum wages in the U.S. have been in place for more than a century (Massachusetts enacted the first American one in 1912) and have consistently risen over time, employers long ago learned to adjust to their existence. Business decisions – especially the choice of how much labor to use relative to machines – are made with the expectation that minimum wages will rise. Thus, because firms adjust the sizes of their work forces in anticipation of minimum-wage hikes, measuring changes in employment after any given minimum wage hike fails to account for the jobs that were never created because employers expected the minimum wage to rise.
Second, while fewer jobs for low-skilled workers is a chief and especially unfortunate result of minimum wages, it isn’t the only negative result. Many other responses to minimum wages are possible instead of, or along with, reduced employment opportunities. My colleague Dan Klein offers some examples: the extent and difficulty of work duties grow; flexibility in employee scheduling lessens; fringe benefits and on-the-job training decrease; lockers, free food, and other amenities for workers are cut; workplace safety, comfort, and amiability decline. Because most of these other possible downsides of minimum wages are practically impossible to capture in empirical data, studies of minimum-wages’ effects almost certainly underestimate the harm inflicted on low-skilled workers by minimum wages.
Joint Economic Committee Republicans
February 15, 1995
For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify. Were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour.
Historically, defenders of the minimum wage have not disputed the disemployment effects of the minimum wage, but argued that on balance the working poor were better off. In other words, the higher incomes of those with jobs offset the lower incomes of those without jobs, as a result of the minimum wage [See, for example, Levitan and Belous, (1979)].
Now, the Clinton Administration is advancing the novel economic theory that modest increases in the minimum wage will have no impact whatsoever on employment. This proposition is based entirely on the work of three economists: David Card and Alan Krueger of Princeton, and Lawrence Katz of Harvard. Their studies of increases in the minimum wage in California, Texas and New Jersey apparently found no loss of jobs among fast food restaurants that were surveyed before and after the increase [See Card (1992b), Card and Krueger (1994), and Katz and Krueger (1992)].
While it is not yet clear why Card, Katz and Krueger got the results that they did, it is clear that their findings are directly contrary to virtually every empirical study ever done on the minimum wage. These studies were exhaustively surveyed by the Minimum Wage Study Commission, which concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%.
The following survey of the academic research on the minimum wage is designed to give nonspecialists a sense of just how isolated the Card, Krueger and Katz studies are. It will also indicate that the minimum wage has wide-ranging negative effects that go beyond unemployment. For example, higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income. For many workers this is a very bad trade-off, but one for which the law provides no alternative.