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home | Tea Party Economist | Test Case for Economic Ignorance: Mi . . .
 

Test Case for Economic Ignorance: Minimum Wage Laws

Gary North - January 18, 2014
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The central law of economic theory is this one: "As the price increases, the quantity demanded falls." This is known as the law of demand.

If this is not true, then all economic theory is wrong. It is not just the Austrian school that is wrong. The Chicago school is wrong. Public choice theory is wrong. Every economics textbook is wrong. If, in the face of rising prices and costs, with other things remaining equal, there is not a decrease in the quantity demanded, then economic theory is wrong.

Walter Williams wrote this in early 2013.

Are people responsive to changes in price? For example, if the price of cars rose by 25 percent, would people purchase as many cars? Supposing housing prices rose by 25 percent, what would happen to sales? Those are big-ticket items, but what about smaller-priced items? If a supermarket raised its prices by 25 percent, would people purchase as much? It's not rocket science to conclude that when prices rise, people adjust their behavior by purchasing less.

It's almost childish to do so, but I'm going to ask questions about 25 percent price changes in the other way. What responses would people have if the price of cars or housing fell by 25 percent? What would happen to supermarket sales if prices fell by 25 percent? Again, it doesn't require deep thinking to guess that people would purchase more.

This behavior in economics is known as the first fundamental law of demand. It holds that the higher the price of something the less people will take and that the lower the price the more people will take. There are no known exceptions to the law of demand.

There is widespread consensus among economists on the issue of minimum wage laws and unemployment, Williams wrote.

University of California, Irvine economist David Neumark has examined more than 100 major academic studies on the minimum wage. He states that the White House claim "grossly misstates the weight of the evidence." About 85 percent of the studies "find a negative employment effect on low-skilled workers." A 1976 American Economic Association survey found that 90 percent of its members agreed that increasing the minimum wage raises unemployment among young and unskilled workers. A 1990 survey found that 80 percent of economists agreed with the statement that increases in the minimum wage cause unemployment among the youth and low-skilled. If you're looking for a consensus in most fields of study, examine the introductory and intermediate college textbooks in the field. Economics textbooks that mention the minimum wage say that it increases unemployment for the least skilled worker.

Harry Truman said he wanted to hire a one-armed economist, someone who did not say, "on the one hand. . . on the other." When it comes to minimum wage laws, the vast majority of economists are one-armed economists.

There are two well-known cases that an economist uses to test whether somebody understands economics. These two cases are tariffs and minimum-wage legislation. If the individual believes that there will be an increase in trade in association with rising tariffs, then he does not understand economic theory. If he believes that with a rising minimum wage, there will be greater employment, then he does not understand economic theory.

The case against tariffs and import quotas goes back to Adam Smith. He was opposed to mercantilism, because he believed that mercantilism, meaning state interference in the economy in order to grant monopoly favors to specialized producers, reduces the wealth of nations. He called for a decrease in intervention, but especially in the field of tariffs -- sales taxes on imported goods -- in order to increase the wealth of nations.

The idea that minimum wage legislation might possibly increase employment is so completely off the charts in terms of economic theory, that there is virtually no one who is not on the payroll of alabor union who teaches it.

In the division of intellectual labor, there is specialization. Right-wing economic illiterates promote tariffs. Left-wing economic illiterates promote minimum wage laws. Both errors are a product of the same error: a failure to understand the law of demand.

AN UNEMPLOYMENT LAW

Walter block recently wrote a good article on minimum-wage legislation. It was published on LewRockwell.com. He began with a clear statement: the minimum wage is an unemployment law.

The minimum wage on its face is an unemployment law, not an employment law. It does not compel anyone to hire anyone else. It only stipulates who CANNOT legally be employed: no one may be hired for less than the amount stipulated by law. If the minimum wage law is set at $10 per hour, the law does not require any employer to hire any employee at that wage level. It only FORBIDS employment contracts set at $9.99 or below. This is not a matter of empirical evidence, not that there can be any such thing in proper, e.g., Austrian economics; this conclusion is a matter of pure logic. We repeat: the minimum wage on its face is an unemployment law, not an employment law.

Begin with the basics of the law. Two people are discussing the possibility of making an agreement. One of them will pay money to hire the other's labor services. A man with a badge approaches them. He pulls out a badge. He points to his gun. "You see this badge? You see this gun? Well, you two will not make any employment arrangement at a price less than what the law says."

Politically, of course, the guy with the badge goes only to the employer. He does not need to go to the worker. There is asymmetry in the economic relationship. It is cheaper to police employers than it is to police workers. There are fewer employers than workers. The man with the badge and the gun understands the law of demand. He will get greater aggregate compliance to his demands by coercing the employer rather than the workers. The cost of enforcement is lower per intervention when you threaten the employer. The employer hire lots of workers. It is cheaper to terrorize him than to terrorize workers: "more bang for your buck."

Given the logic of economics -- the law of demand -- a minimum wage law in fact targets workers who will work for less, but it is always passed in the name of preventing exploitation of workers in general. The word "exploitation" is applied to "a voluntary transaction between an employee and an employer."

Block wrote about his first-year students.

Why do we have this law on the books if it is so evil, so pernicious? One reason, already discussed, is that there are beneficiaries: organized labor, and our friends on the left who support them. Another is of course monumental economic illiteracy. Obdurate economic illiteracy. I teach freshman economics at Loyola University, and I usually take a survey of my students on opening day. Typically, a large majority favors the minimum wage law, and they do so not out of malevolence. Rather, they really think that this law will raise wages and help the poor. My students think this law is like a floor rising, and thus raising everyone with it. They do not realize that a better metaphor is a hurdle, or high jump bar: the higher the level stipulated by the minimum wage law, the harder is it to "jump" into employment. This law eliminates the lowest rungs of the employment ladder, where especially young people can gain valuable on-the-job training, which will help raise their productivity. If this legislation were of such great help to the poor, I ask my students, why are we so niggardly about it? Why limit the raise to $10, or $12 or even $15, as some radicals favor? Why not really help the poor, and raise the minimum wage level to $100 per hour, or $1000 per hour, or maybe $10,000 per hour. At this point they can see that virtually the entire population would be unemployed, because it is a rare person who has such high productivity. But, then, hopefully, then can begin to see that a minimum wage of a mere $7 per hour is an insuperable barrier to employment for someone whose productivity is $4 per hour.

UNEMPLOYED BLACKS

For half a century, economists have known that every increase in the minimum wage in the United States had led to an increase of unemployment among black male teenagers. This statistical evidence has never been refuted. So, the labor unions never cite it, because they don't care. From the very beginning, the hope of the labor union movement in the United States was to keep blacks out of jobs. They always understood, from the late 19th century until today, that blacks will work for less money, because they have lower demand for their labor services. The way they get jobs is to offer to work for less money than whites.

The black radical, W. E. B. DuBois, called attention to this in his 1918 essay, "The Black Man and the Unions."

I have tried, therefore, to see a vision of vast union between the laboring forces, particularly in the South, and hoped for no distant day when the black laborer and the white laborer, instead of being used against each other as helpless pawns, should unite to bring real democracy in the South.

On the other hand, the whole scheme of settling the Negro problem, inaugurated by the philanthropists and carried out during the last twenty years, has been based upon the idea of paying off black workers against white. That it is essentially a mischievous and dangerous program no sane thinker can deny, but is peculiarly disheartening to realize that it is the Labor Unions themselves that have given this movement its greatest impulse and that today, at last, in East St. Louis have brought the most unwilling of us to acknowledge that in the present Union movement, as represented by the American Federation of Labor, there is absolutely no hope of justice for an American of Negro descent.

Personally, I have come to this decision reluctantly and in the past have written and spoken little of the closed door of opportunity, shut impudently in the faces of black men by organized white workingmen. I realize that by heredity and century-long lack of opportunity one cannot expect in the laborer that larger sense of justice and duty which we ought to demand of the privileged classes. I have, therefore, inveighed against color discrimination by employers and by the rich and well-to-do, knowing at the same time in silence that it is practically impossible for any colored man or woman to become a boiler maker or book binder, an electrical worker or glass maker, a worker in jewelry or leather, a machinist or metal polisher, a paper maker or piano builder, a plumber or a potter, a printer or a pressman, a telegrapher or a railway trackman, an electrotyper or stove mounter, a textile worker or tile layer, a trunk maker, upholster, carpenter, locomotive engineer, switchman, stone cutter, baker, blacksmith, booth and shoemaker, tailor, or any of a dozen other important well-paid employments, without encountering the open determination and unscrupulous opposition of the whole united labor movement of America. That further than this, if he should want to become a painter, mason, carpenter, plasterer, brickmaster or fireman he would be subject to humiliating discriminations by his fellow Union workers and be deprived of their own Union laws. If, braving this outrageous attitude of the Unions, he succeeds in some small establishment or at some exceptional time at gaining employment, he must be labeled as a "scab" throughout the length and breadth of the land and written down as one who, for his selfish advantage, seeks to overthrow the labor uplift of a century.

Minimum wage legislation in the United States began in the 1890's at a state level. A few states passed these laws. They applied to firms selling goods to the government: public works projects. This became national in 1931: the Davis-Bacon Act. Wikipedia reports:

Finally, in the midst of the Great Depression, with local workers complaining about cheap labor taking their jobs and Congressmen frustrated that their efforts to bring "pork barrel" projects home to their districts did not result in jobs (and therefore political support) from their constituents, the Hoover Administration requested that Congress reconsider the Act once more as a means of preventing falling wages. Sponsored in the Senate by former Labor Secretary Davis, it passed by voice vote and was signed into law on 3 March 1931.

The result was greater unemployment. Why? The law of demand. At a higher price, less is demanded.

In an article on minimum wage laws in the United States, Wikipedia reports:

The first attempt at establishing a national minimum wage came in 1933, when a $0.25 per hour standard was set as part of the National Industrial Recovery Act. However, in the 1935 court case Schechter Poultry Corp. v. United States (295 U.S. 495), the United States Supreme Court declared the act unconstitutional, and the minimum wage was abolished.

The minimum wage was re-established in the United States in 1938 (pursuant to the Fair Labor Standards Act), once again at $0.25 per hour ($4.10 in 2012 dollars). In United States v. Darby Lumber Co. (1941), the Supreme Court upheld the Fair Labor Standards Act, holding that Congress had the power under the Commerce Clause to regulate employment conditions.

The minimum wage had its highest purchasing value ever in 1968, when it was $1.60 per hour ($10.64 in 2012 dollars).

In the 1950's, increases in the minimum wage became the unions' strategy to keep low-cost workers out of the labor markets. Too many jobs were migrating to the South, where wages were lower. Union leaders concluded (accurately) that there had to be a national law to reduce this migration. But there are so few union members today that they find it difficult to threaten politicians with reprisals if they fail to raise the minimum wage. But, in the words of DuBois, "the philanthropists" in Congress keep trying. They come in the name of the poor. Their economic ignorance is total -- rather like Block's first-year students on the first day of his course. In the name of helping the poor, they keep poor people from being able to bid for work in legal markets.

Walter Williams has spent his career arguing that minimum wage laws hurt the poor, especially teenage black males. I did a Google search for "Walter Williams" and "minimum wage." I got lots of articles.

CONCLUSION

So, you can use minimum wage laws as your test case. If anyone, at any time, says that minimum wage laws do not reduce the demand for labor services, you can be sure that this person (1) does not understand economics, or (2) is being paid by a labor union or a government agency to make the case in favor of minimum wage laws.


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