DRI-265 for week of 2-23-14: False Confession Under Torture: The So-Called Re-Evaluation of the Minimum Wage

An Access Advertising EconBrief:

False Confession Under Torture: The So-Called Re-Evaluation of the Minimum Wage

For many years, the public pictured an economist as a vacillator. That image dated back to President Harry Truman’s quoted wish for a “one-armed economist,” unable to hedge every utterance with “on the one hand…on the other hand.”

Surveys of economists belied this perception. The profession has remained predominantly left-wing in political orientation, but its support for the fundamental logic of markets has been strong. Economists have backed free international trade overwhelmingly. They have opposed rent control – which socialist economist Assar Lindbeck deemed the second-best way to destroy a city, ranking behind only bombing. And economists have denounced the minimum wage with only slightly less force.

Now, for the first time, this united front has begun to break up. Recently a gaggle of some 600 economists, including seven Nobel Laureates, has spoken up in favor of a 40% increase in the minimum wage. The minimum wage has always retained public support. But what could possibly account for this seeming about-face by the economics profession?

The CBO Study

This week, the Congressional Budget Office (CBO) released a study that was hailed by both proponents and opponents of the minimum wage. The CBO study tried to estimate the effects of raising the current minimum of $7.25 per hour to $9 and $10.10, respectively. It provided an interval estimate of the job loss resulting from President Obama’s State of the Union suggestion of a $10.10 minimum wage. The interval stretched from roughly zero to one million. It took the midpoint of this interval – 500,000 jobs – as “the” estimate of job loss because… because…well, because 500,000 is halfway between zero and 1,000,000, that’s why. Averages seem to have a mystical attraction to statisticians as well as to the general public.

Economists looking for signs of orthodox economic logic in the CBO study could find them. “Some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.” The minimum wage is a poorly-targeted means of increasing the incomes of the poor because “many low-income workers are not members of low-income families.” And when an employer chooses which low-wage workers to retain and which to cut loose after a minimum-wage hike, he will likely retain the upper-class employee with good education and social skills and lay off the first-time entrant into the labor force who is poor in income, wealth and human capital. These are traditional sentiments.

On the other hand, the Obama administration’s hired gun at the Council of Economic Advisers (CEA), Chairman Jason Furman, looked inside the glass surrounding the minimum wage and found it half-full. He characterized the CBO’s job-loss conclusion as a “0.3% decrease in employment” that “could be essentially zero.” Furman cited the CBO estimate that 16.5 million workers would receive an increase in income as a result of the minimum-wage increase. Net benefits to those whose incomes currently fall below the so-called poverty line are estimated at $5 billion. The overall effect on real income – what economists would call the general equilibrium result of the change – is estimated to be a $2 billion increase in real income.

The petitioning economists, the CBO and the CEA clearly are all not viewing the minimum wage through the traditional textbook prism. What caused this new outlook?

The “New Learning” and the Old-Time Religion on the Minimum Wage

The impetus to this eye-opening change has ostensibly been new research. Bloomberg Businessweek devoted a lead article to the supposed re-evaluation of the minimum wage. Author Peter Coy declares that “the argument that a wage floor kills jobs has been weakened by careful research over the past 20 years.” Not surprisingly, Coy locates the watershed event as the Card-Krueger comparative study of fast-food restaurants in New Jersey and Pennsylvania in 1994. This study not only made names for its authors, it began the campaign to make the minimum wage respectable in academic economic circles.

“The Card-Krueger study touched off an econometric arms race as labor economists on opposite sides of the argument topped one another with increasingly sophisticated analyses,” Coy relates. “The net result has been to soften the economics profession’s traditional skepticism about minimum wages.” If true, this would be sign of softening brains, not skepticism. The arguments advanced by the re-evaluation of the minimum wage have been around for decades. Peter Coy is saying that, somehow, new studies done in the last 20 years have produced different results than those done for the previous fifty years, and those different results justify a turnabout by the economics profession.

That stance is, quite simply, hooey. Traditional economic opposition to the minimum wage was never based on empirical research. It was based on the economic logic of choice in markets, which argues unequivocally against the minimum wage. Setting a wage above the market-determined wage will create a surplus of low-skilled labor; e.g., unemployment. Thus, any gains accruing to the workers who retain their jobs will come at the expense of workers who lose their jobs. The public supports the minimum wage on the misapprehension that the gains come at the expense of employers. This is true only transitorily, during the period in which some firms go out of business, prices rise and workers are laid off. During this short-run transition period, the gains of still-employed workers come at the expense of business owners and laid-off workers. But once the adjustments occur, the business owners who survive the transition are once again earning a “normal” (competitive) rate of profit, as they were before the minimum wage went up. Now, and indefinitely going forward, the gains of still-employed workers come at the expense of laid-off workers and consumers who pay higher prices for the smaller supply of goods and services produced by low-skilled workers.

The still-employed workers are by no means all “poor,” despite the face that they earn the minimum wage. Some are teenagers in middle- or upper-class households, whose good educations and social skills preserved their jobs after the minimum-wage hike. Some are older workers whose superior discipline and work skills made them irreplaceable. The workers who rate to lose their jobs are the poorest and least able to cope – namely, first-time job holders and those with the fewest cognitive and social skills. The minimum wage transfers income from the poor to the non-poor. What a victory for social justice! That is why even the left-wing economists like Alan Blinder formerly pooh-poohed the minimum wage as a means of helping the poor. (While he was Chairman of the CEA under President Clinton, Blinder was embarrassed when the arguments against the minimum wage in his economics textbook were juxtaposed alongside the administration’s support of a minimum-wage increase.)

This does not complete the roster of the minimum wage’s defects. Government price-setting has mirror-image effects on both above-market prices and below-market prices. By creating a surplus of low-skilled labor, the minimum wage makes it costless for employers to discriminate against a class of workers they find objectionable – black, female, politically or theologically incorrect, etc. Black-market employment of illegal workers – immigrants or off-the-books employees – can now gain a foothold. Business owners are encouraged to substitute machines for workers and have done so throughout the history of the minimum wage. In cases such as elevator operators, this has caused whole categories of workers to vanish. This expanded range of drawbacks somehow never finds its way into popular discussions of the minimum wage, which are invariably confined to the effects on employment and income distribution.

“If there are negative effects on total employment, the most recent studies show, they appear to be small,” according to Bloomberg Businessweek.  The trouble is that the focus of the minimum wage is not properly on total employment. The minimum wage itself applies only to the market for low-skilled labor, comprising roughly 20 million Americans. There are certainly effects on other labor and product markets. But it is difficult enough to estimate the quantitative effect of the minimum wage on the one market directly affected, let alone to gauge the secondary impact on the other markets comprising the remaining 300 million people. The Obama administration, the vocal economists, the Bloomberg Businessweek and the political Left are ostensibly concerned with the poor. Why, then, do they insist on couching employment effects only in total terms?

It is clear that the same reasons why economists have traditionally chosen not to confuse the issue by dragging in total employment are also the reasons why economists now choose precisely to do so. They want to confuse the issue, to disguise the full magnitude of the adverse effects on low-skilled workers by hiding them inside the much smaller percentage effect on total employment. That is what allows CEA Chairman Jason Furman to brag that the “CBO’s central estimate…leads to a 0.3% decrease in employment… [that] could be essentially zero.” 500,000 is not 0.3% of 20 million (that would be 60,000) but rather 0.3% of the larger total work force of around 170 million. 0.3% sounds like such a small number. That’s almost zero, isn’t it? Surely that isn’t such a high price to pay for paying people what they’re worth – or what a bunch of economists think they’re worth, anyway.

But we digress. Just what is it that causes those “apparently small” effects on total employment, anyway? “Higher wages reduce turnover by reducing job satisfaction, so at any given moment there are fewer unfilled openings. Within reasonable ranges of a minimum wage, the churn-reducing effect seems to offset whatever staff reductions occur because of higher labor costs. Also, some businesses manage to pass along the costs to customers without harming sales.”

This is mostly warmed-over sociology, imported by economists for cosmetic purposes. American industry is pockmarked with industries plagued by high turnover, such as trucking. If higher wages were a panacea for this problem, it would have been solved long since. Today, we have a minimum wage. We also have a gigantic mismatch of unfilled jobs and discouraged workers. The shibboleth of businesses “passing along” costs to consumers with impunity was a cherished figment imagined in books by John Kenneth Galbraith in the 1950s and 60s, but neither Galbraith nor today’s economists can explain what hypnotic power businesses exert over consumers to accomplish this feat.

The magic word never mentioned by Peter Coy or the 600 economists or Jason Furman is productivity. Competitive markets enforce a strict link between market wages and productivity – specifically, between the wage and the discounted marginal value product of the marginal worker’s labor. Once that link is severed, the tether to economic logic has been cut and the discussion drifts along in never-never land. The political Left maunders on about the “dignity of human labor” and “a living wage” and “the worth of a human being” – nebulous concepts that have no objective meaning but allow the user to attach their own without fear of being proven wrong.

Bloomberg Businessweek‘s cover features a young baggage handler holding a sign identifying his job and duties, with a caption reading “How Much Is He Worth?” Inside the magazine, a page is taken up with workers posing for pictures showing their jobs and their own estimation of their “worth.” These emotive exercises may or may not sell magazines, but they prove and solve nothing. Asking a low-skilled worker to evaluate their own worth is like asking a cancer victim what caused their disease. Broadcast journalists do it all the time, but if that were really valuable, we would have cured cancer long ago. If a low-skilled worker were an expert on valuing labor, he or she would qualify as an entrepreneur – and would be set up to make some real money.

A Fine-Tuned Minimum Wage

Into the valley of brain death rode the 600 economists who supported a minimum wage of $10.10 per hour. Their ammunition consisted of fine-tuning based on econometrics. Let us hear from Paul Osterman, labor economist of MIT. “To jump from $7.25 to $15 would be a long haul. That would in my view be a shock to the system.” Mr. Osterman, exercising his finely-honed powers of insight denied to the rabble, is able to peer into the econometric mists and discern that $10.10 would be …somehow… just right – barely felt by 320 million people generating $16 trillion in goods and services, but $15 – no, that would shock the system. In other words, that first 40% increase would be hardly a tickle, but the subsequent 38% would be a bridge too far.

In any other context, it would be quite a surprise to the economics profession to discover that the study of econometrics had advanced this far. (The phrase “science of econometrics” was avoided advisedly.) For decades, graduate students in economics were taught a form of logical positivism originally outlined by John Neville Keynes (father of John Maynard Keynes) and developed by Milton Friedman. Economic theory was advanced by developing hypotheses couched in the form of conditional predictions. These were then tested in order to evaluate their worth. The tests ranged from simple observation to more complex tests of statistical inference. Hypotheses meeting the tests were retained; those failing to do so were discarded.

Simple and attractive though that may sound, this philosophy has failed utterly in practice. The tests have failed to convince anybody; it is axiomatic that no economic theory was ever accepted or rejected on the basis of econometric evidence. And the econometric tools themselves have been the subject of increasing skepticism by economists themselves as well as the outside world. One of the ablest and most respected practitioners, Edward Leamer, titled a famous 1983 article, “Let’s Take the Con Out of Econometrics.”

The time period pictured by Peter Coy as an “econometric arms race” employing “increasingly sophisticated” tools and models overlapped with a steadily growing scandal enveloping the practice of econometrics – or, more precisely, statistical practice across both the natural and social sciences. Within economics alone, it concerned the continuing failure of the leading economists and economic journals to correctly enforce the proper interpretation of the term “statistical significance.” This failure has placed the quantitative value of most of the econometric work done in the last 30 years in question.

The general public’s exposure to the term has encouraged it to regard a “statistically significant” variable or event as one that is quantitatively large or important. In fact, that might or might not be true; there is no necessary connection between statistical significance and quantitative importance. The statistician needs to take measures apart from ascertaining statistical significance in order to gauge quantitative importance, such as calculating a loss function. In practice, this has been honored more in the breach than the observance. Two leading economic historians, Deirdre McCloskey and Steven Ziliak, have conducted a two-decade crusade to reform the statistical practice of their fellow scientists. Their story is not unlike that of the legendary Dr. Simmelweis, who sacrificed his career in order to wipe out childbed fever among women by establishing doctors’ failure to wash their hands as the transmitter of the disease.

This scandal could not be more relevant to the current rehabilitation of the minimum wage. The entire basis for that rehabilitation is supposedly the new, improved econometric work done beginning in 1994 – the very time when the misuse and overemphasis of statistical significance was in full swing. The culprits included many of the leading economists in the profession – including Drs. Card and Krueger and their famous 1994 study, which was one of dozens of offending econometric studies identified by McCloskey and Ziliak. And the claim made by today’s minimum-wage proponents is that their superior command of econometrics allows them to gauge the quantitative effects of different minimum-wages so well that they can fine-tune the choice of a minimum wage, picking a minimum wage that will benefit the poor without causing much loss of jobs and real income. But judging the quantitative effect of dependent variables is exactly what econometrics has done badly from the 1980s to the present, owing to its preoccupation with statistical significance. The last thing in the world that the lay public should do is take the quantitative pretensions of these economists on faith.

This doesn’t sound like a profession possessing the tools and professional integrity necessary to fine-tune a minimum wage to maximize social justice – whatever that might mean. In fact, there is no reason to take recent pronouncements by economists on the minimum wage at face value. This is not professional judgment talking. It is political partisanship masquerading as analytical economics.

The Wall Street Journal pointed out that the $2 billion net gain in real income projected by the CBO if the minimum wage were to rise to $10.10 is a minute percentage gain compared to the size of a $16 trillion GDP. (It is slightly over 0.001%.) The notion of risking a job loss of one million for a gain of that size is quixotic. Even more to the point, the belief that economists can predict gains or losses of that tiny magnitude in a general equilibrium context using econometrics is absurd. The CEA and the CBO are allowing themselves to be used for political purposes and, in the process, allowing the discipline of economics to be prostituted.

The increasing politicization of economics is beginning to produce the same effects that subservience to political orthodoxy produced on Russian science under Stalin. The Russian scientist Lysenko became immortal not because of his scientific achievements but because of his willingness to distort science to comport with Communist doctrine. The late, great economist Ronald Coase once characterized the economics profession’s obsession with econometrics as a determination to “torture the data until it confesses.” Those confessions are now taking on the hue of Soviet-style confessions from the 1930s, exacted under torture from political dissidents who wouldn’t previously knuckle under to the regime. Today, politically partisan economists torture recalcitrant data on the minimum wage in order to extract results favorable to their cause.

The CBO and the CEA should have new stationery printed. Its logo should be an image of Lubyanka Prison in old Soviet Russia.

DRI-259 for week of 2-10-13: Coverage of President Obama’s SOTU Minimum-Wage Proposal

An Access Advertising EconBrief:

Coverage of President Obama’s SOTU Minimum-Wage Proposal

As advertised, President Barack Obama’s 2013 State of the Union (SOTU) address outlined the economic agenda for his second term in office. Among its planks was a proposal to raise the minimum wage to $9.00 an hour from its current $7.25. The reputation of economics as “the dismal science” is vindicated by the coverage of this proposal in the news media, which is indeed nothing short of dismal.

The Wall Street Journal‘s Coverage of Obama’s Minimum-Wage Proposal

The Wall Street Journal is the leading financial publication in America – indeed, in the world. On page four of its morning-after coverage of Obama’s SOTU message, the Journal provided a five-column box headlined “Bid on Minimum Wage Revives Issue That Has Divided Economists,” written by reporters Damian Palette and Jon Hilsenrath. The pair predicts that “President Obama’s proposal… is likely to rekindle debates over whether the measure helps or hurts low-income workers.” And the debates will be between “White House officials” who “say the move …is aimed at addressing poverty and helping low-income Americans” and “Republicans and business groups, which have traditionally said raising the minimum wage discourages companies from hiring low-skilled workers.”

The article rehearses the specifics of the President’s proposal, which raise the minimum wage in stages to $9.00 per hour by 2015, after which it would be indexed to the rate of inflation. It reminds readers that Mr. Obama originally proposed to raise the minimum to $9.50 by 2011. It reports confident projections by “Administration officials” that at least 15 million Americans would directly benefit from the increase by 2015, not counting those now earning above the minimum whose wages would be driven higher by the measure.

Three paragraphs in the middle of the piece gloss over the views of “economists and politicians [who] are divided over the issue.” These consist of two economists, one proponent and one opponent, and one central banker. David Neumark of the University of California Irvine unequivocally maintains that “the effects of the minimum wage are declines in employment for the very least skilled workers,” while “a lot of the benefits …leak out to families way above the poverty line.” Alan Krueger from PrincetonUniversity, currently Chairman of the President’s Council of Economic Advisors, “found positive effects” from the minimum wage on fast-food workers in New Jersey. The authors do not remark the apparent coincidence that Neumark and Krueger studied precisely the same group of workers in reaching their conclusions. Janet Yellen, Vice-Chairman of the Federal Reserve, was quoted as refusing to endorse the minimum-wage increase on grounds of its irrelevance to current conditions, while admitting its adverse effects would probably be small.

The authors close out by summarizing the political strategies of the White House and Republicans in proposing and opposing the measure. The authors toss in a few numbers of general economic significance – surging stock market, recent increase in hiring, persistently slow economic growth, nagging high unemployment, decline in median real income since 2000. They cite the most recent minimum-wage increase in 2009 and note that 19 states already have statewide minima in excess of the current federal minimum.

The reader will notice that the Journal‘s headline refers to a revival of a debate between economists. Yet the article only cites two economists and the debate consists of approximately five lines out of five columns of prose – just over 4% of the article’s 120 lines. A reader who isn’t already thoroughly familiar with the issue will learn virtually nothing at all about why the minimum wage is bad or – for that matter – why its proponents think it is good. The closest thing to analysis are cryptic references to “discourages companies from hiring,” “declines in employment” and – most mysterious of all – “benefits” that “leak out to families way above the poverty line.”

Between 90% and 95% of the article is devoted to politics. And that is utterly superficial. The world’s leading financial publication has devoted substantial space to a Presidential proposal of economic significance, yet its readers would never suspect that the subject is one of the most highly research, well-considered and settled in all of economics. The minimum wage has been a staple application in microeconomics textbooks for over a half-century. Along with policy measures like free international trade and rent control, the minimum wage has generated the most lopsided responses in opinion surveys taken of economists. In percentages ranging from 75% to 90%, economists have resoundingly affirmed their belief that minimum wages promote higher unemployment among low-skilled workers – among their many undesirable effects.

Yet today Wall Street Journal reporters imply that it’s a 50-50 proposition. Or rather, they imply that economists are evenly divided on the merits of the measure. The article mentions a revival of a debate without explaining the terms of the debate or its previous resolution. Indeed, even the arguments of the proponent economist – the Chairman of the CEA, no less! – go unmentioned.

Something more than mere journalistic incompetence is on display here. The WSJ reporters are showing contempt for the discipline of economics. The only significant thing about economists, they imply, is that they are “divided.” The economics itself is hardly worth our attention.

Economists have only themselves to blame for their low repute. But readers deserve a truthful and complete understanding of the minimum wage.

The Minimum Wage As Seen by Economics – and Economists

The minimum wage is a species of the economic genus known as the “minimum price.” Other species include agricultural price supports, imposed for the ostensible purpose of increasing the incomes of family farmers. The idea behind all minimum prices is to make the price of something higher than it would otherwise be. The alternative embodies in “otherwise” is to allow the price of human labor to find its own level in a free labor market. That level is the point at which the amount of labor workers wish to supply is equal to the amount that businesses want to hire. Economists call the wage that equalizes the quantity of labor supplied with the quantity demanded the equilibrium wage.

In practice, the minimum wage is always legislatively pegged at a higher level than the current equilibrium wage. Otherwise there would be no point to it. And in practice, the minimum wage applies only to low-skilled labor. This is because wages reflect the value of labor’s productivity and low-skilled labor is the least productive kind. What is the effect of a higher-than-equilibrium wage for low-skilled labor?

Holding the price of anything above its equilibrium level produces a surplus of that thing. A surplus of human labor is called “unemployment” in layman’s terms. Thus, a minimum wage produces unemployment where there would otherwise be no (persistent) unemployment.

If this sounds pretty categorical, cut-and-dried and matter-of-fact, that’s because it is. Supply and demand are economics. More precisely, they are what we today label “microeconomics.” Since there is no macroeconomic theory left standing that is worthy of the name, that leaves us with supply and demand and very little else.

The federal minimum wage was first introduced in the Fair Labor Standards Act of 1938. It first began attracting attention from academic economists after World War II when George Stigler wrote a celebrated article outlining its basic effects in 1946. The first edition of Stigler’s legendary textbook on microeconomic price theory appeared in 1949. This may have been the debut of the minimum wage as a textbook application – a way of illustrating what happens when the principles of supply and demand are flouted by government.

Stigler may have been the first future Nobel Laureate to oppose the minimum wage, but he headed up what became a long procession with few absentees. Since then, it has been rare to find an intermediate (junior-senior level) micro textbook that didn’t feature an analysis of the minimum wage and the effects of the labor surplus it causes. This practice has crossed political lines. Liberal economists write textbooks, too, but they were pitiless in their view of the minimum wage – at least until recently, anyway. Alan Blinder, former CEA member under President Bill Clinton, was embarrassed by the revelation that his political support for a minimum wage conflicted with his textbook’s unsparing criticism of it.

The Effects of a Minimum Wage

The effects of a minimum wage are those of a minimum price generally, translated into the specific context of the market for low-skilled labor. The overarching effect, whose implications far exceed the obvious, is the surplus of labor created. The resulting unemployment, in and of itself, confounds the expectations of minimum-wage proponents. Their stated purpose is to increase the monetary incomes, hence real incomes, hence well-being of low-income workers. But you can only benefit from a higher wage if you have a job from which to earn that wage. The low-skilled workers whose jobs are lost because of the minimum wage are harmed by it, not helped. Moreover, they have nowhere to go except the unemployment line. Ordinarily, people who lose their job look for another job. But low-skilled workers are already scraping the bottom of the barrel – when that residue is suddenly denied them, they’re out of luck.

But what about the people who don’t lose their job? They benefit, don’t they? True enough, at least as a first approximation. The minimum wage should be viewed as transferring income from some low-skilled workers to other low-skilled workers. It is tempting to say it transfers income from some poor workers to other poor workers, but this is not always true. Sometimes it transfer income from poor people to rich people or, more precisely, to the offspring of rich people. That outcome will be explained below.

Wait a minute – what about employers? To hear the left wing talk, the problems of the poor are mostly the fault of greedy bosses who refuse to pay the poor what they’re worth. (The ever-popular formulation is that employers owe their workers a “living wage.”) At least the minimum wage sticks it to those greedy bastards, doesn’t it?

The answer is: Yes and no, but mostly no. In the short run, owners of businesses share the cost of the minimum wage with workers who are driven out of work. Business owners share that cost because higher wages mean higher costs, and higher costs will reduce revenues and profits and drive marginal businesses out of business. The reduced supply of goods will drive prices to consumers higher.

In the long run, though, the higher price gradually attained by the market in response to the higher costs will restore the business rate of return (i.e., profit) to its “normal” level. So, the remaining businesses in the market do not suffer long-run harm from the minimum wage. In the long run, the burden of the minimum wage is borne by consumers of the products produced using low-skilled labor and by low-skilled workers who remain out of work or whose prospects for work and productivity are permanently reduced by their sojourn into unemployment.

In other words, the minimum wage does not exact class revenge against evil, greedy businessmen. It harms poor, low-skilled workers and consumers – who are mostly ordinary people. Is it any wonder, then, that even liberal economists have traditionally refused to endorse the minimum wage as a means of transferring income to the poor?

Wait – There’s More. A LOT More

If John Paul Jones were an economist, he might interject at this point that we have not yet begun our analytical fight against popular misconceptions about the minimum wage. The artificial surplus created by the minimum wage has even more insidious implications.

In a competitive market, the tendency toward equality between quantity supplied and quantity demanded of the good or service being provided exerts a restraining influence on the actions of buyers and sellers. If you show up to rent an apartment or house and the landlord doesn’t like the color of your skin, he might decide to not to rent to you. But when there are exactly as many buyers as there are apartments and houses on the market, this will cost him money. The economic history of the world – and the history of discrimination in the American South and South Africa, among other places – very strongly confirms that competition and economic incentives are the best means of overcoming racial discrimination.

But when the market is in surplus, the picture changes dramatically. Now the landlord can afford to discriminate among would-be buyers by turning down one he doesn’t particularly like, because he knows that others are out there waiting for his unit.

The logic applies to buyers as well. Under competitive conditions, employers cannot afford to discriminate against workers for any reasons not related to productivity. They know only too well how hard it is to find good help when the market is tight. But when unemployment is high, an employer with a “taste for discrimination” can afford to indulge it. (It is idle to talk about whether that behavior is against the law or not. In practice, the case for discrimination cannot be proved; legal cases are won by imposing heavy costs on defendants until they give up and settle by admitting guilt whether true or not. And the cases are prosecuted in the first place for political or economic reasons, not to achieve justice for defendants.)

One of life’s supreme ironies is that the very people who cry the loudest for an end to racial discrimination and lament the injustice of our racist society are the same people who lobby in favor of the minimum wage. By creating a surplus of low-skilled labor and reducing the effective cost of discrimination to zero, the minimum wage surely makes it easy for employers to exercise whatever racist urges they might feel.

…And More

The minimum wage is anti-black in its effects not only because it promotes discrimination, but also because it places blacks at an objective disadvantage. One thing employers look for is experience. On average, blacks are younger than other ethnic groups and have less experience. Thus, they are less able to cope with the labor surplus created by the minimum wage.

Both minimum and maximum prices bring the issue of product quality to bear on the decisions of businesses. When businesses can’t raise prices due to maximum prices, or price controls, they try to reduce product quality instead. Similarly, when businesses suddenly face an increase in the minimum wage, they look to offset its effects by retaining only their highest-quality low-skilled workers. That is, they retain the best-dressed, most punctual, technologically adept workers rather than the shabbier, less reliable, socially and technically awkward workers. All too often, the workers let go are the ones who need the job the most – namely, low-income blacks picking up the necessary skills to succeed in the working world. Their places are taken by the sons and daughters of the well-to-do, whose cultural and economic advantages gave them an occupational leg up when they entered the labor market. This is what David Neumark meant by benefits leaking out to the well-to-do.

Black (illicit) markets are an inevitable by-product of minimum and maximum prices. In this case, the existence of a labor surplus means that there are people willing to work at a lower wage than the prevailing wage. By offering sub-standard working conditions and employment “off the books,” some employers can induce workers into work that they wouldn’t accept in a competitive labor market. This is still another ill effect of the minimum wage and another way in which low-skilled workers bear its brunt.

The late Milton Friedman was outraged by popular efforts to depict the minimum wage as the salvation of the poor and underprivileged. He called it the most anti-black law on the books.

The Card-Krueger Study

In 1993, two economists made a bid to overturn the decades-old economic consensus against the minimum wage. David Card and Alan Krueger conducted a phone survey of fast-food establishments in New Jersey and Pennsylvania. They chose these two adjoining states because New Jersey had raised its minimum wage prior to the study period, during which Pennsylvania’s law remained unchanged. Their study found that New Jersey’s employment of low-skilled labor increased by 13% relative to Pennsylvania’s. They ascribed this to the fact that the higher wage had certain desirable effects on the labor force.

Both the general public and the economics profession went gaga over this single result. Despite decades of studies and negative results by dozens of distinguished economists, this one study was said to have revolutionized thinking on the minimum wage. In reality, its effects were more political than economic.

An attempt to replicate the study by the National Bureau of Economic Research used payroll records from the businesses surveyed by Card and Krueger rather than relying on the phone surveys. Apparent anomalies had been found in both the New Jersey and Pennsylvania date using the phone surveys, so the payroll records were substituted as a check on the results. Sure enough, recalculation of the results using the payroll records reversed the results of the study – New Jersey employment was now found to have declined by about 4% relative to Pennsylvania’s.

Alan Krueger parlayed the popularity of his study into the Chairmanship of the President’s Council of Economic Advisors. David Card has recently written a book about the subject of the minimum wage. But there is little reason to accept the results of their original study at its face value.

The Political Purpose of the Minimum Wage

Economists have long known that the true purposes of the minimum wage are political rather than economic. Low-skilled labor is a substitute for unionized labor and higher-skilled labor. By making low-skilled labor less attractive to employers, the minimum wage makes union labor more attractive. That is why unions have supported a minimum wage since long before it was actually adopted, both in the U.S. and in places like South Africa.

Unions are one of the strongest and most numerous constituent groups of the Obama administration. That is why the President has now opted to advance this proposal to increase the minimum wage. Yet The Wall Street Journal‘s piece – which purported to describe the economics and politics of the measure – did not breathe a word of this.

Note: The first draft of this post erred by saying that the minimum wage was introduced in the Wagner Act of 1935, rather than the Fair Labor Standards Act of 1938.