Free Marketeers Are Losing the Debate (and Their Minds) Over the Minimum Wage

Milton Friedman

If Milton Friedman were alive today, he’d be…


Writing in The Week, Shikha Dalmia, a senior analyst at the libertarian Reason Foundation (motto: “free minds and free markets”), adds absolutely nothing to the minimum wage debate beyond the same old 1980s-era trickle-down bullshit:

Progressives have gone crazy over the minimum wage.

As opposed to conservative Republicans, who I guess are sanely campaigning on promises to deport 10 million immigrants, build a giant border wall, carpet bomb Syria/Iran/whoever, return us to the gold standard, and punish women who have abortions.

President Obama got the ball rolling when he called for hiking the federal minimum wage from $7.25 to $10.10 per hour. Now, both Democratic presidential candidates are trying to one-up him, with Bernie Sanders demanding a $15 federal wage and Hillary Clinton $12. Meanwhile, California and New York have already passed laws mandating the Bernie rate, and scores of cities across the country are clamoring to follow suit.

Actually, President Obama first got the ball rolling back in 2008, when he campaigned on raising the minimum wage to $9.50 an hour — equivalent to about $10.50 today (about 40 cents below the 1968 inflation-adjusted peak of $10.90). So, yeah, Obama’s been pretty damn consistent on this issue, like, forever.

As for Hillary Clinton’s proposed $12 an hour minimum wage, phased in over five years, by the time it would be fully implemented in 2022, it would stand about 30 cents below the 1968 inflation-adjusted peak. So again, no historical outlier here.

And while Bernie Sanders’ $15 minimum wage would represent an inflation-adjusted high, he too proposes phasing it in over five years, so it’s not quite the jump it first appears: about a 22 percent premium over 1968 (but about half what it would have been had the minimum wage kept pace with productivity gains as it had done over its first 30 years).


So I’m failing to see what’s so “crazy” about all this.

And all the while, minimum wage advocates are making increasingly fanciful claims on behalf of their beloved laws.

The left’s minimum wage obsession dovetails with a shifting academic consensus that until the 1990s considered such hikes a recipe for killing jobs, especially for low-skilled workers.

If by “fanciful claims” Dalmia means  touting the latest “academic consensus,” then yes, guilty as charged.

For a long time, the generally accepted rule of thumb was that, all else remaining equal, every 10 percent increase in the minimum wage would decrease low-skilled employment by 1 to 2 percent, since the more employers had to pay these employees, the fewer jobs they could afford to provide.

This consensus began to fray with a 1992 study by economists David Card and Alan Kreuger, who found that New Jersey’s minimum wage hike — from $4.25 to $5.05 — did not lead to expected job losses in the state’s fast food restaurants.

In other words, the “generally accepted rule of thumb” was refuted by, you know, actual data.

This finding has been hotly contested,

… by free market ideologues like Shikha Dalmia…

… but even if it were true, it doesn’t mean there are no other downsides to minimum wage laws. For example, sometimes employers don’t respond to minimum wage hikes by laying off workers, but instead by raising prices for consumers.

Actually, if she bothered to read the latest academic literature instead of just reflexively dismissing it, Dalmia would learn that rising prices (along with increased worker productivity, reduced turnover costs, and rising consumer demand from higher paid workers) is prominently part of the mechanism that explains why rising wages do not result in net job losses.

(Minimum wage opponents haven’t helped their case by hitching it almost exclusively to job losses while ignoring the other, equally pernicious, adjustment responses by businesses.)

No, they most certainly haven’t helped their case. But that’s mostly because their equilibrium theory is so clearly contradicted by economic reality.

There is only one scenario, according to Naval Postgraduate School economist David Henderson, under which a modest legally mandated minimum wage might do more good than harm: when employers enjoy monopsony power (a monopoly on the buying side) in the labor market, either because there are very few of them or because workers can’t leave for some reason. Employers then have a relatively free hand to hold wages down. A mandated minimum wage under those circumstances merely diverts the firm’s “excess profits” to the worker, something that would have happened automatically in a more competitive market. But it doesn’t diminish a company’s productivity or its incentive for additional hiring — thereby actually boosting job growth. But genuine monopsony isn’t common and would require a very finely calibrated and skillfully crafted minimum wage, which is not how blanket policies work in the real world.

The founder of economics, libertarian heartthrob Adam Smith, would disagree.

America’s federal minimum wage of $7.25 per hour works out to about 42 percent of its $17.40 hourly median wage. Even the most gung-ho academics only advocate raising it to 50 percent of the median — which means a little over $8.70. This in itself is a crude benchmark that lumps together high-wage service occupations with low-wage construction and other non-service ones whose market realities are completely different. Be that as it may, it is inconceivable that a $15 minimum wage — equal to 86 percent of America’s median wage, and the highest in the Western world — wouldn’t kill jobs, especially in small towns and cities where wages tend to be lower. Witness the chronic double-digit unemployment rate that a far less insane minimum wage has generated in France, Spain, Belgium, and other European countries.

Oh, this again. Please. There’s a reason why Dalmia (and every other $15 opponent) neglects to explain the empirical rationale behind the 50 percent minimum-to-median ratio; it’s because there isn’t any. (Also, her “86 percent” number? That’s bullshit. By 2022, when it’s fully phased in, Sanders’ $15 minimum would equal about 69 percent of median, while Clinton’s $12 figure would equal the 55 percent ratio we enjoyed back in 1968).

And yet, minimum wage enthusiasts are abandoning all caution and making increasingly extravagant claims. Here are four of their sillier arguments:

Or rather, four of her sillier arguments.

False: Minimum wage hikes will lead to productivity-boosting automation

The standard rap against minimum wage laws is that by raising the cost of hiring workers, they prompt companies to invest in labor-saving technologies, throwing people out of work. But Matthew Yglesias claims that this would by no means be a “bad thing.” Why? Because productivity is the engine of economic progress. And if machines are more productive than people, then policies that prod employers to replace people with machines would mean more wealth without toil for everyone. This is the reverse of the Luddite fallacy that seeks to boost jobs by eschewing labor-saving technologies. Nobel laureate Milton Friedman once heard a Third World bureaucrat, suffering from this fallacy, defend his decision to have poor workers dig a massive canal with shovels rather than earth movers because that meant more jobs. Friedman asked: Why don’t you replace their shovels with spoons?

Increasing productivity is not simply a matter of increasing output, but doing so in the most cost-effective way. You do not encourage that with policies that force investments in capital equipment when labor is plentiful. Indeed, this raises the overall opportunity cost, rendering an economy less efficient. If Friedman were alive, he may well have asked Yglesias why, by his logic, he doesn’t just advocate a ban on all manual labor.

If Friedman were alive, he’d be scratching at the lid of his coffin. Which if you think is an unserious rebuttal, well, yes, but no more unserious than Dalmia’s lazy “why not ban all manual labor” reductio ad absurdum.

The fact is that the “academic consensus” is that a higher minimum wage does indeed lead to higher worker productivity. Which in the aggregate is a good a thing, regardless of whether it comes from the substitution of labor-saving technology, or, as researchers at the prestigious Cornell University School of Hotel Administration conclude: because “better compensated employees tend to be happier, more productive, and less likely to quit their jobs.

False: Minimum wage hikes helps firms make more money

This claim strains credulity. How would a $15 mandate that almost doubles a company’s labor costs actually boost profits? The argument that former Labor Secretary Robert Reich offers is that higher wages means happier employees and lower turnover, something that saves a company money. If so, the million-dollar question is why aren’t greedy companies doing this already? Are they too stupid or sadistic or both to pass up on a win-win deal for both themselves and their workers?

Yes, many employers are too stupid or sadistic or both.

But rhetorical questions aside, I just re-watched that Robert Reich video Dalmia links to, and nowhere in it does he imply that raising the minimum wage would boost companies’ profits. What he’s saying (and again, what the “academic consensus” says) is that lower turnover “helps employers save money,” thus offsetting part of the cost of higher wages:

In fact, I don’t know anybody on our side who is pushing the “boosts profits” argument. If anything, one of the things that is ailing our economy is the six percent of GDP or so — about a trillion dollars a year — that used to go to wages but now goes to profits. Shifting some of that back into pockets of workers would be a good thing.

False: Minimum wage hikes will stimulate the economy

Michael Reich, an economist at the University of California, Berkeley, claims not only that a $15 minimum wage wouldn’t produce job losses in the short run, but would actually stimulate the economy, resulting in job gains in the long run. “They’d (employees) have more money to spend, the overall level of demand for goods and services would be higher, and so would the level of employment,” he claims.

But shifting wealth around doesn’t generate real economic growth. Boosting productivity does. Indeed, ordering employers to give artificial raises means that they would have less money to spend or invest, cancelling out any extra spending by workers.

Oy. Again, raising the minimum wage increases productivity. That’s the “academic consensus,” not just Michael Reich’s.

As to Dalmia’s larger point about “shifting wealth around” not generating real economic growth, well she’s absolutely right — if we’re shifting wealth into the pockets of the super-wealthy. A 2014 working paper from the OECD found that widening income inequality knocked a cumulative 6 to 9 percent off US GDP growth over the previous two decades due to the drag of stagnant wages on the 70 percent of the economy that is driven by consumer spending.

Wow. Just imagine how many more jobs there would be today if our economy was 9 percent larger!

False: Minimum wage hikes will diminish the strain on welfare programs

Advocates of the minimum wage claim that without a suitably high minimum, low-income workers are forced to rely on food stamps and health care programs to make ends meet. In essence, they argue, welfare programs end up subsidizing McDonald’s low-wage workforce, which is hardly fair to taxpayers. Forcing companies to pay something resembling “living” wages would diminish low-wage workers’ dependence on government programs.

This assumes that boosting the minimum wage would hand more workers a raise than it would throw people out of work, of course — which is hardly a reasonable assumption, as pointed out earlier. Indeed, notes University of California, Irvine’s David Neumark, the probability that a family will escape poverty due to higher wages will be offset by the probability that another will enter poverty because it has been priced out of the labor market.

So, here’s the thing: We’ve been raising the minimum wage for 78 years, and there is simply no evidence of any correlation between minimum wage hikes and net job losses! Nada. Bupkes. Zilch. Dalmia’s got the gall to accuse minimum wage advocates of making “extravagant claims,” and yet Dalmia is unable to support her core argument by, you know, facts.

The core fallacy in this line of reasoning is that employers can set wages based on employee needs rather than market forces. Hence, they can simply be forced to hand over more money to their workers. That, however, is not how things work, especially in a globalized world where forcing employers to cough up wages higher than the market can bear would undermine their competitiveness — not something that helps anyone in the long run.

First of all, most of these minimum wage jobs are in the service sector, and since you can’t offshore the work of a barista or a retail clerk or hotel housekeeper, there isn’t much threat from cheap-labor global competition. But Dalmia’s core fallacy is that the market for labor operates like the market for bananas. It doesn’t.

The problem for Dalmia and her ilk is that this is about much more than just the minimum wage; this is about the entire free market philosophy to which she has dedicated her life. For if we do raise the minimum wage and the job losses don’t come — if we shove the labor market into “disequilibrium,” yet disaster never strikes — then the question must be asked: What else have the neoliberals gotten wrong?

The answer, Dalmia must fear, is everything.


Comments are closed.