Saturday, June 23, 2012

Another bad article about how great the minimum wage is

Elizabeth Parisian blogging on the Huffington Post writes that people who want to decrease the minimum wage are "out of touch".

After complaining about the fact that some states are trying to lower their minimum wage, Ms. Parisian lists "some of the biggest falsehoods that are going around, along with facts you can use to discredit them".

As usual from the pro minimum wage crowd, Ms. Parisian's facts are no facts at all, and the sound bites she provides from others defy logic. I will debunk each one of her "truths" in turn.

1. Ms. Parisian provides "Rigorous research" saying that raising the minimum wage has been shown to increase employment. While this assertion is absurd on its face (how can forcing people to pay employees more lead them to hire more employees?) the research she provides a link to shows only correlation, not causation. It is simply a graph (below) that shows employment increasing faster in Illinois, which raised the minimum wage, than in Indiana, which didn't.

Figure 2: Monthly and Annual Percent Change in Private Employment, 2003 to 2005

But in no way does this show causation, as not everything else other than minimum wage was held constant. Some might argue that this is a natural experiment meaning that Indian and Illinois are similar enough in almost every way that the min. wage change is the only explanatory variable, but that is an  opinion at best and is far from a fact. Without any theory as to why raising the min. wage would increase employment data showing correlation is only that, correlation. I am reminded of the great Milton Friedman who said to reject "both theory without evidence and evidence without theory." This is certainly a case of the latter.

2. Ms. Parisian's myth #2 is nearly identical to myth #1 and claims that " a 2006 study found that small businesses experienced higher rates of growth in states where the minimum wage was higher than the federal minimum." The link she provides goes to an assortment of papers, all of which I do not have time to read right now. But I assume she is talking about something like this quote from economist Joseph Stiglitz found on her link:

“We saw no ripple effect at all in the unemployment rate. Unemployment just continued to go down.” The minimum wage increase, he said, “was totally swamped by other factors going on in the economy”


Again, notice that Dr. Stiglitz says that the min. wage increase was "swamped" by other factors. That is, other stuff was going on at the time so we think the effect of raising the min. wage is not that big after all. Maybe. But the reason Dr. Stiglitz mentions the other factors is because it defies logic to say that forcing employers to pay employees more leads to more employment. How can that even work? Does the substitution effect between capital and labor not apply when it comes to the min. wage? Is labor the elusive giffen good i.e. when the relative price rises we want more of it? Ms. Parisian seems to think so.

3. Ms. Parisian's next fact is " Raising the minimum wage would provide the stimulus we need to speed economic recovery. A 2011 study by the Federal Reserve Bank of Chicago found that every dollar increase for a minimum wage worker results in $2,800 in new consumer spending by his or her household over the following year." It is probably true that increasing the min. wage leads to more spending by those receiving the wage, but it is not "new" spending. It is just transferring purchasing power from the owner to the worker, or from the capitalist to the laborer. No "new" wealth is being created. Like other people Ms. Parisian provides the simplistic reason that "low wage workers have a desperate need for any increased income and spend it quickly, often on the local level, which provides a huge boost to the economy". 

 I guess I am just confused about what business owners do with their money, but I assume that they invest it in their business, in other businesses through stocks, bonds, etc., put it in banks where it can be loaned out to those needing capital, etc. For some reason all of these things are never as good as just spending the money right away, and I am not sure why that is. I understand why spending the money is good for the worker who gets the forced raise, but to argue that it is somehow more beneficial to the macro economy than leaving it in the owner's/capitalist's hands is far from clear.

In conclusion, until someone can come up with a sound theory as to how it is possible that forced raises increase employment, I am going to continue to believe the obvious, sound, and indisputable fact that when you raise the relative price of something people purchase less of it. I see no reason why the law of demand fails to apply to labor the same way it applies to all other goods.




1 comment:

  1. I think your points here are clear, concise, and true. The natural experiment of Illinois versus Indiana is silly; Illinois is so much more different than Indiana (being from Chicago, I can tell you that with an informed opinion). As for the other matters, allow me to respond:

    >In conclusion, until someone can come up with a sound theory as to how it is possible that forced raises increase employment, I am going to continue to believe the obvious, sound, and indisputable fact that when you raise the relative price of something people purchase less of it. I see no reason why the law of demand fails to apply to labor the same way it applies to all other goods.

    I agree, the law of demand always trumps; yet, I believe even Card found evidence of a decrease, but a very small decrease.


    >I guess I am just confused about what business owners do with their money, but I assume that they invest it in their business, in other businesses through stocks, bonds, etc., put it in banks where it can be loaned out to those needing capital, etc. For some reason all of these things are never as good as just spending the money right away, and I am not sure why that is. I understand why spending the money is good for the worker who gets the forced raise, but to argue that it is somehow more beneficial to the macro economy than leaving it in the owner's/capitalist's hands is far from clear.


    This is the main thing I want to respond to. There's no real supporting theory about this that I know of; so long as the money is available and being spent or invested, it's beneficial to the economy. Currently, there's little investment. Look at the capital markets, interests rates are terribly low, the economy has been horribly sluggish. This is simply an aggregate demand problem, and consumption just needs to increase, and for that to happen there needs to be huge consumer spending, which is only attainable through consumer's having income. I don't think raising the minimum wage is the best way to go about it, but my reasons for wanting a higher minimum wage are different than your reasons, which is just epistomological. I can respect that part.

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