50 Years of Research on the Minimum Wage

Joint Economic Committee Republicans
February 15, 1995

Introduction

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.

Exposing the ‘blessings of the minimum wage’ fallacy – AEI

Source: Exposing the ‘blessings of the minimum wage’ fallacy – AEI

As a result of a federal law mandating all workers get paid a minimum of $15 an hour, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant would make $310 in additional income every week (ignoring taxes). Alex would spend that additional weekly income of $310 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $310 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 weekly income therefore ripples through the local 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 the $15 minimum wage and Alex’s additional income, and many might even suggest that a minimum wage above $15 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 like $20 or $25 an hour.

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. The public policy of artificially raising wages through government fiat will mean more business and greater sales revenues for some local merchants. The local merchants will be no more unhappy to learn of the magical spending from a $15 an hour minimum wage law than an undertaker to learn of a death.

However, we haven’t yet considered the situation now facing Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant where Alex works. As a result of Alex’s good fortune to receive $310 in extra income every week as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $310 less every week 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 $310 every week that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $310 each week comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. If we consider that Alex and the Johnson family are a part of the local community, the community’s income hasn’t changed – rather, there’s only been a transfer of income from the Johnson family to Alex; but no net gain in community income, wealth, or prosperity has been achieved.

Debunking Minimum Wage Myths — Radical Capitalist

In the United States, I have noticed increasing amounts of local municipalities instituting minimum wage laws. This is happening in many states across America, with many people supporting it in the hopes of bettering workers’ wages. Unfortunately, minimum wage is economically dysfunctional and unethical, yet so many people who lack economic or ethical knowledge are […]

via Debunking Minimum Wage Myths — Radical Capitalist

Twelve Economic Concepts Everyone Should Know – Foundation for Economic Education – Working for a free and prosperous world

Source: Twelve Economic Concepts Everyone Should Know – Foundation for Economic Education – Working for a free and prosperous world

1. Gains from trade: In any economic exchange, freely chosen, both parties benefit–at least in their own minds.

2. Subjective value: The value of any good or service is determined by the individual human mind.

3. Opportunity cost: Nothing is free, and the cost of anything is what you give up to get it.

4. Spontaneous order: Society emerges not from top-down intention or planning but from individuals’ actions that result in unplanned outcomes for the whole.

5. Incentives: Individuals act to maximize their own reward.

6. Comparative advantage: Cooperation between individuals creates value when a seller can produce a given item or service at a lower cost than the buyer would spend to produce it himself.

7. Knowledge problem: No one person or group knows enough to plan (and force) social outcomes, because information necessary for social order is distributed among its members and revealed only in human choice.

8. Seen and Unseen: In addition to the tangible and quantifiable effects, there are quite often invisible costs and unmet opportunities to any action or policy.

9. Rules matter: Institutions influence the decisions individuals make. For example, property rights extend from the reality of scarcity which demands that ownership must be vested in individuals and not a collective.

10. Action is purposeful: Each person makes choices with the intention of improving his or her condition.

11. Civil society: Voluntary association permits people of all backgrounds to interact peaceably, create value, cultivate personal character, and build mutual trust.

12. Entrepreneurship: Acting on an opportunity to gather underused, misused, or undiscovered resources and ideas to create value for others.

Conflicting Visions – Walter E. Williams

Source: Conflicting Visions – Walter E. Williams

Let’s look at a policy pushed by advocacy groups, politicians and poorly trained, perhaps dishonest, economists — mandated increases in the minimum wage. Nobel Prize-winning economist Paul Krugman claimed in a 2014 interview with Business Insider that there is actually not much risk of significantly higher wages hurting workers. He argued that low-wage workers are in non-tradable industries for which production cannot be moved overseas and are in industries in which labor cannot be easily replaced by technology. Krugman’s vision is one that my George Mason University colleagues and I try to correct.

Those who argue that the price of something can be raised without people having a response to it have what economists call a zero-elasticity vision of the world. For them, labor prices can rise and employers will employ just as much labor after the price increase as before. There is no evidence anywhere that people have no response to the change in price of anything. Plus, the longer a price change remains in effect the greater the response to it.

Let’s examine Krugman’s assertion that low-skilled labor cannot be easily replaced by technology. Momentum Machines has built a robot that can “slice toppings like tomatoes and pickles immediately before it places the slice onto your burger, giving you the freshest burger possible.” The robot is “more consistent, more sanitary, and can produce about 360 hamburgers per hour.” Let’s Pizza is a pizza-making vending machine from Europe that can make four different kinds of pizza in about 2 1/2 minutes.

Kay S. Hymowitz’s recent article “The Mother of All Disruptions,” in a special issue of City Journal, gives numerous examples of jobs loss through technology. According to The New York Times, 89,000 workers in general merchandise lost their jobs between the beginning of November 2016 and the end of March. And it’s not just the U.S. where robots are replacing labor. Foxconn’s iPhone-making facility in China has replaced 60,000 workers with robots.

The economic phenomenon that people who call for higher minimum wages ignore is that when the price of anything rises, people seek substitutes. We see it with anything. When the price of oil rose, people sought ways to use less of it through purchasing more insulation for their homes and fuel-efficient cars. When the price of beef rose, people sought cheaper substitutes such as pork and chicken. The substitution effect of price changes is omnipresent, but do-gooders and politicians seem to suggest that labor markets are an exception. It’s bad enough when do-gooders and politicians have that vision, but it is utterly disgusting and inexcusable for a trained economist to buy into that zero-elasticity vision.

Seattle’s $15 Minimum Wage May Hurt Mentally Disabled

Source: Seattle’s $15 Minimum Wage May Hurt Mentally Disabled

Let’s be clear for a moment — many disabled workers will be unaffected. Physical disabilities may require accommodations, but many of those workers are making well above minimum wage as it is. Those that aren’t do have the potential to learn valuable skills that would make them employable otherwise.

No, this pretty much impacts only the mentally disabled.

At $15 per hour, employers are going to require more from their workers, especially with it being such a huge jump in wages. They’re going to expect people to take on more tasks than those normally associated with minimum wage work.

“But the Americans With Disabilities Act says … “

Doesn’t matter. If the work requires ability that mentally disabled workers can’t provide, the ADA doesn’t mean squat. The ADA calls for “reasonable accommodations” for disabled workers, but if the job requires something that the worker can’t do and there’s no accommodation possible, the ADA allows the person to not be hired.

Seattle thinks it’s doing wonderful things for all workers by refusing to permit employers to dip below the mandated minimum wage. But now the mentally disabled who only want to work, who only want a sense of independence, are out of luck.

‘Free lunches’ like the $15 minimum wage may hurt the people they’re meant to help – The Washington Post

Source: ‘Free lunches’ like the $15 minimum wage may hurt the people they’re meant to help – The Washington Post

On this and other labor issues, says Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, “We need to be debating whether a cost-benefit test is passed, something on which reasonable people can disagree.” Instead, Strain says, a lot of thoughtful, well-meaning people on the left seem to be looking for a free lunch — that is, for policies with all winners, no losers and no costs. (Kinda like the right’s attitude toward tax cuts, I might add.)

Here I confess that I’ve been guilty of this. I’m often drawn to studies and stories about pro-labor policies that “pay for themselves.” And while there often is a pro-business or macroeconomic case to be made for policies that help workers, I pledge to be more mindful about potential unintended costs as well.

Readers, I hope you’ll hold me to this. And anyone else peddling free lunches, too.