I think most people believe the minimum wage is virtuous. The main reason being that they believe somehow the poorest amongst us gain benefit from the most well off.  In other words, wealthy business owners just pay poor workers more.  However, many, if not most, economists see through this fallacy using a basic economic principal: Price floors cause surpluses.  What does that mean?  A floor on the price of employment leads to less employment. That’s why I believe supporting the minimum wage is great politics, but poor policy.

I’ve recently been watching (and rewatching) some debates on minimum wage. Proponents seem to argue that they have the preponderance of studies that show minimum wage helps poor people starting with the grandfather of pro minimum wage studies, Card/Krueger. Those against telling low skill workers they are not legally allowed to be employed, however, usually counter the claim stating they have the numbers.  I tend to believe those against the price floor, but that’s probably my bias.  And even if my position does have many more empirical studies, it doesn’t actually matter.  Why? Because the 2 sides use completely different methodologies to come to their conclusions.  One side could stop doing studies for 20 years.  If the other side said every study in that time span shows they’re correct, it wouldn’t mean a thing.  What’s really at issue is the methodology those studies use.  But before I talk about that, I’d like to discuss another important point I’ve been using for years and that I heard brought up in at least one debate.

Before any studies are even considered, what does economics 101 say about a price floor?  They cause surpluses.  For comparison, price ceilings cause shortages (even well-intended, but ultimately harmful decrees against price “gouging”).  The moment the price of labor goes up, the employer has 2 things he can do, raise prices or take less profit (or a mix, of course). The latter will be done by all employers that are still happy with their profit.  Of course, some employers will not be happy and instead raise prices. This will necessarily mean people demand less of their product, i.e. produce a surplus. This will drive down the supply meaning less workers will be needed to make the product.  Eventually, the market will have its way. This is the hurdle that proponents of the minimum wage must overcome with their studies.  They have to be so convincing that a basic law of economics is suspended.  And they are anything, but convincing.

First off, let’s say what most of these studies that support a minimum wage don’t say.  They don’t say the minimum wage is a good policy or that it helps the poor. Basically they say that in a very short time frame a small change in the wage has negligible effects on employment.  But of course, that’s not how politicians or “progressive” economists present them. In the debates I watched, a couple times their measuring was compared to displacement of water.  One in particular compared it to putting bricks into a pool of water.  If each brick was measured against the last brick, there wouldn’t be much change.  However, if the bricks were measured in totality, they’d definitely have an effect.  Further, the timeframe measured was also considered small. Debaters against the minimum wage admitted in the short run, employers would most likely not fire people, but in a longer timeframe would definitely be less likely to hire people. Russ Roberts used the example of American Somoa to show how seemingly small hikes can affect certain locations disastrously in the short run too.

I also like to remember that the main supporters of the minimum wage, progressives, have always supported it as a policy. However their early support was for very different reasons. They agreed with those currently against the central planning of wages that the floor on price would actually keep people from working.  I believe it was first for children, then for women, and finally for minorities.  But then, as they became less misogynistic and racist, they wanted to keep the policy, but just claimed that it no longer had these negative employment effects and instead helped the poor and underprivileged.  It just took them a while to “prove” it using studies.  In fact, I’m not even sure there was any significant study that supported their position prior to Card/Krueger.