Letter to the Editor and Op-Ed on Minimum Wage Legislation

Here is a letter to the editor that I just submitted to my college newspaper, the LSU Reveille. I’ll update soon on whether it sees print.

[Update: The letter was published in the February 22nd print issue of the paper (see it online here) almost verbatim, with one or two glaring exceptions. The main one is that they changed the clause “for strong theoretical arguments and commentary, do a search on www.mises.org” to “for strong theoretical arguments and commentary, do a search on it.” Out of hindsight, I’ve added some clarifying comments in brackets below.]

Shoddy Economic Journalism
(02-20-07)

Jimmy Garrett’s article on February 16th, 2007 attempts to put on a show of being unbiased but I’m not sure it succeeds. In any case, it is an example of shoddy economic journalism.

He does not tell us of any academic credentials (if any) that his pro-minimum wage “expert” possesses other than the fact that he, Louis Reine, is a high-level member of some pro-minwage organization. The “expert opinion” of Mr. Reine displays appalling ignorance of economic theory and history, which leads one to question the wisdom of including him as the sole pro-minwage expert in the article.

The subtitle of Garrett’s article claims that experts are unsure of the economic effect of minimum wage legislation, but this is patently false when it comes to unemployment. According to economic theory, it is not in the aggregate unemployment statistic that we should expect to find an increase in unemployment. Rather, we expect that minimum wage legislation will lead to an increase in unemployment among low- and unskilled workers, primarily the young and certain minorities. And this is exactly what mainstream economic empirical research has found to be the case. For a good discussion of the mainstream academic consensus on minimum wage effects, see Ehrenberg and Smith’s Modern Labor Economics (2003 Eighth Edition), pp. 110-120; for strong theoretical arguments and commentary, do a search on <www.mises.org>.

Mr. Reine’s argument to the effect that a business won’t [I should have written, ‘will never’] hire four workers if they need five is patently ridiculous. If a business can only afford to hire four workers, then it will only hire four workers even if it needs five. [Granted, h]iring less workers or firing some existing workers isn’t the only option for marginal businesses. They can also reduce the hours of their workers [which results in less pay for each], reduce non-wage benefits [which, for minwage jobs, if there even are any, generally aren’t much to begin with and so can’t be reduced much], substitute new machines for workers [a way of hiring less workers or letting some go], cut back on innovation and expansion, [or] go out of business.

Presenting someone as an expert who is demonstrably not one (Reine, by dint of his own words) suggests shoddy economic journalism. Journalists in general and economic journalists in particular have a responsibility to be well-versed in economics in order to avoid passing ideology and political maneuvering off as science.

***

And here is an op-ed I was invited to write for an unofficial student newspaper called Students for Reform:

Minimum Wage Legislation vs. Economic Law and Compassion
(12-04-06)

With the Democratic takeover in Congress, we are beginning to hear a renewed call for raising the minimum wage. Even the LSU Reveille has come out in favor of raising the minimum wage in two pieces published on November 29th. Since raising the minimum wage would have important ramifications for the economy nationwide, it behooves us to subject this policy proposal to close scrutiny. To state my conclusions clearly at the outset, the minimum wage and especially the notion of raising it have absolutely no moral or economic merit. Here is why:

First, it is said that raising the minimum wage is the compassionate thing to do. But are left-liberals really all that compassionate? A recent study by Arthur C. Brooks suggests that left-liberals are less compassionate than conservatives.[1] They tend to give to others on average less of their money — both in terms of dollar amounts and percentage of income — as well as time and blood. And this despite the fact that left-liberal families average around 6% higher incomes than conservative families. During the 2000 election the fact came to light that Al Gore’s charitable donations as a percentage of his income were less than the national average. The compassionate talk of left-liberals does not translate so well into compassionate deeds. Instead, they tend to prefer to coerce others into bearing the burden through government policies. (To avoid misunderstanding, I am neither a conservative nor a left-liberal; I am a classical liberal or libertarian.)

What then is the status of left-liberal public policies with regards to compassion? Well, aside from the immorality of coercing “charity” out of others by the threat or use of initiatory physical force, that depends on the actual consequences of said policies. Minimum wage legislation flies in the face of fundamental economic laws, particularly the law of demand and supply. Minimum wage legislation increases the price of labor (wages) of the least skilled and unskilled workers, thereby increasing the operating costs of businesses that employ the workers who compete for these wages. Faced with a legal minimum wage and increases in it, such businesses face hard choices. Given the increased cost of hiring and maintaining employees, such businesses might increase the prices of their goods and services to compensate. This, of course, would result in price inflation that would eventually negate any positive effect the minimum wage may have for their employees. But in a competitive market, especially for marginal businesses, raising prices is often not an option. The increased cost of labor will lead such businesses to slow down or hold off on job creation and hiring. It will also lead such businesses to cut the size of their workforce, and therefore also productivity, in order to keep operating costs down. Some will not be able to absorb the increased costs and will be forced to go out of business. So yes, all else equal, minimum wage legislation does destroy jobs and lead to coerced unemployment; for those least skilled and unskilled workers who are less productive than the minimum wage will be out-competed for jobs. Left-liberals ought to know this, and many do: even the left-liberal pro-minimum wage organization ACORN admitted this when it sued the state of California for exemption from its labor laws, arguing, “The more that ACORN must pay each individual outreach worker — either because of minimum wage or overtime requirements — the fewer outreach workers it will be able to hire.”[2]

But wait a minute, you might say, didn’t the LSU Reveille cite “studies [that] have shown that states including Oregon, Washington and Alaska who have raised their state minimum wage have not experienced an unemployment increase”?[3] Well, the writer didn’t actually cite the studies but, that troublesome failure aside, the quoted statement is misleading in any case. What it should say is that these states did not experience a significant increase in their overall unemployment rates. Clever presentation of statistics can be used in support of policy proposals even when the actual evidence does not. While the overall employment statistic might not show worrisome increases from minimum wage legis
lation, it is in the unemployment rates of the least skilled and unskilled workers that economic theory leads us to expect minimum wage legislation to have the most detrimental effect. The facts bear this out. The young and ethnic minorities are hardest hit. “According to the Bureau of Labor Statistics the unemployment rate for everyone over the age of 16 was 5.6% in 2005. The unemployment rate for white teens in the 16-17 age group was 17.3% in 2005. The same figures for Hispanic and black teens were 25% and 40.9% respectively.” These percentages decrease with age but still remain well above the overall rate even into the late twenties and early thirties. Moreover, studies show that raising the minimum wage has been correlated with declining employment rates for these groups. One such study concluded that “for every 10% increase in the minimum wage, employment for teenagers and young adults in general decreased by 2.5%. The decrease for teenagers themselves was 5.7%.” Another study estimated that, “following the increase from $3.35 to $3.80 in April 1990, employment for teenage males and females fell 1.5% and 2.5% respectively. When the minimum wage was again increased to $4.25 in April of 1991, employment for male and female teenagers again declined, this time by 3.1% and 5.2% respectively.”[4]

The Gallup poll cited by the Reveille article is also misleading. It is used to imply that increasing the minimum wage legislation will not have a detrimental economic effect, but all it shows are the feelings of a random sample of small business owners. Three out of four of them may think that a 10% increase in the minimum wage would have no effect on their company. Now, most people, even most poor people, in America make well above the minimum wage so it is not surprising that many small business owners do not think a 10% raise in the minimum wage will affect their business, but the Democrats’ proposed increase is on the order of 40%, from $5.15 to $7.25 per hour. Recall the estimate above that every 10% increase in the minimum wage leads to a 2.5% decrease in teen and young adult employment.

Certainly, a minimum wage income is not much to live on and even more difficult to support a family on. It is interesting, however, that advocates of minimum wage legislation do not give figures on the number of American workers who actually earn minimum wage and are actually supporting families (with children) as the sole breadwinner. “Data from the 1995 Current Population Survey reveals that of all workers who earned the minimum wage immediately preceding President Clinton’s 1996 increase, 37.6% were teenagers living with their parents, 17.1% were single adults living alone, 21.5% were adults who were married to a spouse who also worked. Only 5.5% of all minimum wage workers were single parents, and only 7.8% were married and the sole wage earner for their household, which may or may not have included children.” Moreover: “Nearly two-thirds of all minimum wage employees who continue employment are earning more than the minimum wage within a year. More than 97% of all employees in the United States move beyond the minimum wage by age 30.”[5]

It is evident then that minimum wage legislation is not only an empty gesture — for most Americans are not on minimum wage or do not remain on it for long — it is also downright harmful to those it is allegedly primarily intended to help as well as to its advocates and everyone else who suffers its effects. It purports to be a grand and virtuous and compassionate gesture but is in reality the immoral act of shirking one’s own charitable responsibilities by forcing the burden upon others while perverting the meaning of charity and being counterproductive to boot. Democrats and journalists owe it to themselves and those they want to help to gain a better understanding of economic principles. A good place to start is Henry Hazlitt’s Economics in One Lesson.[6]

Notes and Works Cited

[1] Arthur C. Brooks, Who Really Cares (New York: Basic Books, 2006). See also, Thomas Sowell, “Who Really Cares?” Jewish World Review (November 28, 2006).

[2] Association of Community Organizations for Reform Now vs. State of California, Department of Industrial Relations, Division of Labor Standards Enforcement, Case No. AO 69744, Appellant’s Opening Brief, in the Court of Appeal of California, First Appellate District, Division Five, August, 1995, cited in Employment Policies Institute, Q & A: Minimum Wage Employee Profile, May 1997.

[3] Garesia Randle, “Democrats to push for increased minimum wage,” LSU Reveille Vol. 111, No. 64 (Wednesday, November 29, 2006), p. 16.

[4] D.W. Mackenzie, “Mythology of the Minimum Wage,” Mises Institute Daily Article (5/3/2006). See also the sources cited therein.

[5] Shawn Ritenour, “What You Need to Know About the Minimum Wage,” Mises Institute Daily Article (9/10/2004); particularly notes six and seven for the studies referred to above.

[6] Henry Hazlitt, Economics in One Lesson (San Francisco: Laissez Faire Books, 1996 [1946]).