Category Archives: Minimum Wage

What Do Economists Think about the Minimum Wage?

The playwright George Bernard Shaw once said that if you laid all the world’s economists end to end, they would not reach a conclusion. President Truman allegedly once asked for a one-handed economist, who would be unable to say “on the other hand…” Economists richly deserve such jokes. But there are still issues where economists overwhelmingly agree, regardless of politics, ideology, or methodology. One of those issues is the minimum wage. Economists are far more likely to be against it than the general public.

new poll of professional economists finds 74 percent of respondents opposing a $15 per hour minimum wage—and nearly a mirror opposite of non-economist public opinion. 84 percent believe it would have a negative impact on youth employment levels. 43 percent favor eliminating the minimum wage outright. Only 12 percent of respondents identify as Republicans, which is roughly representative of the profession as a whole, with 35 percent identifying as Democratic and 46 percent as independents.

A subtle point people often overlook is that at a high minimum wage, employers will tend to ignore the least skilled employees. They will require more experience or skills for their minimum-wage jobs at $15 than at lower levels. Economists recognize this, with 83 percent responding that a $15 minimum wage would have exactly this effect.

Finally, if government is going to have a poverty relief program, a minimum wage is a lousy way to do it. There are better options. Rather than messing with the wage system and inviting all sorts of unintended consequences, it is simpler and more efficient to simply redistribute cash. 64 percent of respondents view a $15 minimum wage as “not at all” efficient at addressing low income needs, while 64 percent rated an expanded Earned Income Tax Credit (EITC) as “very” efficient.

None of this comes as a surprise, though it is nice to have some empirical data on professional skepticism of minimum wages.

Relatedly, as a hobby, I’ve collected a fair number of economics textbooks over the years. While this occasionally makes me question my life choices, they do come in handy. Below are quotations on minimum wages from some of those various textbooks, which range across ideologies from the anti-globalist Joseph Stiglitz to the standard Keynesian Paul Samuelson/William Nordhaus text to the ardent classical liberal Ludwig von Mises. They provide still more evidence that people who have studied economics tend to be more skeptical of the minimum wage than people who have not. The only text that is favorable on net is Samuelson-Nordhaus, and even then it acknowledges tradeoffs. There is nothing scientific about my choice of books to quote from; they are merely what I have on hand. That said, take a look for yourself:

Armen A. Alchian and William R. Allen (Ed. Jerry L. Jordan), Universal Economics (2018), p. 645: “The law only specifies the money wage component. The unintended consequence is that to get or retain jobs at the higher imposed wage rates, job applicants will tolerate less pleasant and stricter working conditions, less vacation, less insurance, less employer-supplied work clothing and tools, shorter coffee breaks, more intense labor, less job security, and more occasions of temporary layoffs when demand is transiently low.”

Roger A. Arnold, Macroeconomics, Third Edition (1996), p. 15: “Bob, 16 years old, currently works after school at a grocery store. He earns $5.50 an hour. Suppose the state legislature passes a law specifying that they minimum dollar wage a person can be paid to do a job is $6.00 an hour. The legislators say their intention in passing the law is to help people like Bob earn more income.

“Will the $6.00 an hour legislation have the intended effect? Perhaps not. The manager of the grocery store may not find it worthwhile to continue employing Bob at $6.00 an hour. In other words, Bob may have a job at $5.50 an hour, but not $6.00 an hour.”

Tyler Cowen and Alex Tabarrok, Modern Principles of Economics, Second Edition (2013), p. 148: “In the United States, for example, more than 95% of all workers paid by the hour already earn more than the minimum wage. A minimum wage, however, will decrease employment among low-skilled workers. The more employers have to pay for low-skilled workers, the fewer low-skilled workers they will hire.”

Linda Gorman, “Minimum Wages” in David R. Henderson, ed., The Concise Encyclopedia of Economics, (2008) p. 348. Citing work by David Neumark, Mark Schweitzer, and William Wascher: “This suggests that minimum wage increases generally redistribute income among low-income families rather than moving it from those with high incomes to those with low incomes. The authors found that although some families benefit, minimum wage increases generally increase the proportion of families that are poor and near-poor. Minimum wage increases also decrease the proportion of families with incomes between one and a half and three times the poverty level, suggesting that they make it more difficult to escape poverty.”

Paul Heyne, Peter Boettke, and David Prychitko, The Economic Way of Thinking, Eleventh Edition, (2006), pp. 138-139: “Nearly one-half of those employed at the minimum wage are members of families with incomes above the U.S. average. More crucially, if $200 a week isn’t an adequate income, nothing per week is even less adequate. A large increase in the legal minimum wage would produce more income for some, but it would mean less income for a substantial number who could not obtain employment at any significantly higher wage… Battles over the minimum wage do sometimes seem to be mostly opportunities for people with different political views to call each other insulting names.”

Steven E. Landsburg, Price Theory and Applications, Fifth Edition (2002), p. 407: “Although this law is often presented as protective of the unskilled, it is precisely they whom it excludes from the labor market. At a minimum wage of $5.15 per hour, someone who produces $3.00 of output per hour will not be hired to work. Overwhelming empirical evidence has convinced most economists that the minimum wage is a significant cause of unemployment, particularly among the unskilled.”

Alfred Marshall, Principles of Economics, Eighth Edition (1920 [1890]), Book VI, Chapter XIII, §12 (p. 424 of the reprint edition I own, p. 410 of this PDF). Note that when Marshall wrote, very few jurisdictions had a minimum wage, though proposals were picking up steam. The U.S. first implemented a federal minimum wage in 1938:

“A scheme, that has any claim to be ready for practical adoption, must be based on statistical estimates of the numbers of those who under it would be forced to seek the aid of the State, because their work was not worth the minimum wage; with special reference to the question how many of these might have supported life fairly well if it had been possible to work with nature, and to adjust in many cases the minimum wage to the family, instead of to the individual.”

Deirdre McCloskey, The Applied Theory of Price, Second Edition, (1985), p. 455. Note: My copy of this book was published when Deirdre was still Donald, making it a bit of a collector’s item. Deirdre was also CEI’s 2013 Julian Simon Award winner.

“The usual example of this effect is unemployment among teenagers. Present company excepted, teenagers are on the whole less reliable, prompt, responsible, strong, and skilled than adult workers. They are therefore, by the logic of derived demand, less useful to, say, a manufacturing company. They are not worthless, but worth less. A minimum wage would therefore be expected to cause disproportionate unemployment among teenagers. It does.

“…In the end the argument in favor of the minimum wage must come down to a simple distaste for the result of exchange in the absence of intervention. The feeling is that we simply should not tolerate anyone in a job so undignified that it was worth only $2 an hour. Better that such people be supported by the rest of us, or even starve, than that they be required to work at such a job.”

Campbell R. McConnell, Economics, Seventh Edition, (1978), p. 644: “On balance, however, the evidence seems to suggest that periodic increases in the minimum wage are followed by employment declines in affected industries. Empirical studies suggest that the unemployment effect is particularly pronounced among teenage workers. The other side of the coin, of course, is that those who remain employed receive higher incomes and tend to escape poverty. The overall antipoverty effect of the minimum wage may thus be a mixed, ambivalent one.”

Ludwig von Mises, Human Action: A Treatise on Economics, Fourth Revised Edition (1996 [1949]), p. 776: “What matters is not whether wages are “fair” or “unfair” by some arbitrary standard, but whether they do or do not bring about an excess of supply of labor over demand for labor. It may seem fair to some people to fix wage rates at such a height that a great part of the potential labor force is doomed to lasting unemployment. But nobody can assert that it is expedient and beneficial to society.”

Paul A. Samuelson and William D. Nordhaus, Economics: Eighteenth Edition, (2005 [1948]), pp. 78-79: “Those who are particularly concerned about the welfare of low-income groups may feel that the modest inefficiencies are a small price to pay for higher incomes. Others—who worry more about the cumulative costs of market interferences or about the impact of higher costs upon prices, profits, and international competitiveness—may hold that the inefficiencies are too high a price. Still others might believe that the minimum wage is an inefficient way to transfer buying power to low-income groups; they would prefer using direct income transfers or government wage subsidies rather than gumming up the wage system.”

Joseph E. Stiglitz, Principles of Macroeconomics, Second Edition (1997), p. 388: “Most workers in the United States earn considerably more than the minimum wage, so minimum wage legislation has little effect on unemployment for these workers. However, many economists believe that minimum wage legislation does contribute some to the unemployment rate of unskilled workers, including teenagers just entering the labor force.”

Hal R. Varian, Intermediate Microeconomics: A Modern Approach, Sixth Edition, (2003), p. 467: “Since demand equals supply at the equilibrium wage, the supply of labor will exceed the demand for labor at the higher minimum wage… Things are very different if the labor market is dominated by a monopsonist. In this case, it is possible that imposing a minimum wage may actually increase employment”

Note: Monopsonies are similar to monopolies, but have one buyer instead of one seller. Minimum wage advocates, unlike Varian in this example, typically argue that monopsonies harm workers. A monopsony employer would, by definition, be workers’ only option, leaving no escape from low wages or bad working conditions. Monopsonies are very rare in the real world, especially since the invention of the automobile, so there is little empirical evidence to confirm either Varian’s or minimum wage activists’ position. Varian’s monopsony example is useful for students sharpening their theorizing chops, but not so much for analyzing real-world labor markets.

So there you have it. Polls say economists are more skeptical of the minimum wage than the general public. Their textbooks say so too, and in a variety of ways. Just one thing of many to keep in mind when evaluating current proposals to raise the minimum wage to $15.

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Minimum Wages Have Tradeoffs

Quoted in an article noting that minimum wages are not a free benefit; they come with tradeoffs.

$15 Minimum Wage Bill to Be Introduced Tomorrow

CEI has a press release. My comment:

“Advocates for a $15 minimum wage should look before they leap,” said Ryan Young, a CEI fellow. “A higher minimum wage has real world tradeoffs. It is not a free benefit. A higher wage will force employers to reduce non-wage pay such as insurance, breaks and personal time off, free meals or parking, and more. A hike in the federal minimum wage would also cause an estimated two million jobs to be lost and hit small businesses the hardest.”

The whole statement, also including comment from my colleague Trey Kovacs, is here.

Minimum Wage Proposal Divides D.C. Workers, Voters

Washington, D.C. has a $12.50 per hour minimum wage, increasing to $13.25 on July 1. But for tip-earning workers, such as servers and bartenders, the minimum is $3.33 per hour ($3.89 as of July 1)—tips are supposed to make up the difference. And if they don’t, then employers make up the shortfall. Ballot initiative 77, due for a vote on Tuesday, would raise tipped workers’ minimum wage to match non-tipped workers’ minimum wage in steps through 2026. It would also index D.C.’s minimum wage to the Consumer Price Index so it would automatically annually increase after it reaches $15.00 in 2020. The proposal has divided the restaurant community.

Both sides have good points. Some restaurant owners favor a set wage because it gives them more stability in planning their costs. Some workers prefer that arrangement, too. They know, coming into work, roughly how much they’ll make on a given shift.

But some restaurant owners would rather pay the low wage, even if they sometimes have to randomly supplement it if business is slow or customers are stingy tippers. It lets them print lower prices on their menus, and there can be tax advantages in reporting lower wages. And some servers also prefer lower wages with higher tips because they walk out of work every night with cash in their pocket. They don’t have to wait two weeks for a paycheck. And if they go the extra mile for a good customer, tips can be very lucrative.

So who’s right? They all are. And that’s why ballot initiative 77 is a bad idea. It’s anti-choice.

Restaurateurs and their employees should be allowed to agree on any working arrangement they both see fit. Nothing is stopping restaurants from having a policy of paying its servers a higher wage and discouraging tipping. If that’s what some people prefer, they should be free to choose it, and are. And if some restaurants and workers prefer the low wage/high tip model, they should be free to pursue that, too. The choice should be made by people, not by legislation.

Customers are just as divided. Some prefer walking into a restaurant knowing that what’s printed on the menu is what they’ll pay. Others prefer being able to reward good service with a high tip, or repay bad service with a small tip. Everyone’s different. And they shouldn’t all be shoehorned into one model.

As for the other part of ballot initiative 77, indexing the minimum wage to inflation so it automatically goes up every year—voters should tread carefully. Some workers will benefit, but at a cost to others. Hour cuts, firings, workers never hired at all, non-wage benefit cuts, cuts to on-the-job perks like free parking and meals, and more are all unintended consequences that follow minimum wage hikes. Iain Murray and I have written about those tradeoffs here and here.

The DNC Platform and Inequality

As the Democratic National Committee convention wraps up in Philadelphia, I took some time to look over theparty platform’s planks on inequality. Iain Murray and I counsel a “People, Not Ratios” philosophy on inequality in our recent study; the Democratic platform mostly takes the opposite approach.

Iain and I argue that from an ethical standpoint, the mathematical difference between rich and poor is irrelevant. What matters is making sure that all people, especially at the economic bottom, have enough to live comfortably and securely. The DNC platform instead is about ratios, ratios, ratios: “most new income and wealth goes to the top one percent (p. 3),” “the top one-tenth of one percent of Americans now own almost as much wealth as the bottom 90 percent combined (p. 10),” and so on. Some of the policies it proposes to reduce inequality ratios include:

  • Tax hikes on the wealthy. This would have the unintended effect of leaving less capital for small businesses and startups. The wealthy tend not to hoard their wealth like Scrooge McDuck or Smaug the dragon from The Hobbit. They invest most of their wealth, and as it circulates throughout the economy, and small-scale entrepreneurs, innovators, and other value creators benefit—as do their consumers.
  • Tax breaks for favored corporations. Intentional or not, this would be very good for lobbyists, and hardly anyone else.
  • Tax hikes for disfavored corporations. Ditto, as unpopular industries descend on Washington to try to avoid punishment. If the federal government is going to have a corporate tax, it should be as simple and uniform as possible. Of course, the ideal corporate tax rate is zero—companies pass on their costs to consumers, so it’s really you and me who pay corporate taxes, not GE or Microsoft.
  • A $15 hourly minimum wage. Iain and I discuss this in our other recent paper, “The Rising Tide.” Higher minimum wages would help some workers, but with severe tradeoffs. Some workers will find themselves working fewer hours, or even fired. Other workers, especially younger workers, will never be hired in the first place, denying them the chance to gain skills and experience that can lift them up the economic ladder as they get older. This could potentially increase inequality ratios over the long run. Workers would also see fewer on-the-job perks, such as free parking and meals, flexible vacation policies, and so on. The minimum wage is not a free lunch.
  • Expanded collective bargaining. Again, some workers will get a raise, but at others’ expense. Fewer jobs, higher consumer prices, and more are all among the tradeoffs. And again, increased unionization could increase inequality by giving privileges to union members at non-members’ expense.

Progressives and classical liberals share the same goal when it comes to poverty—ending it. Achieving that goal requires people across the political spectrum to focus more on people, and less on ratios. In that respect, the DNC platform has a long way to go. The most effective policies involve eliminating barriers to entrepreneurship. These include reforming occupational licensing requirements that now affect a third of American workers, as President Obama has suggested. We also recommend clearing vast swathes of the 175,000-page Code of Federal Regulations. Other helpful policies include affordable energy, easy access to capital, and a commitment to an honest price system. For more policy ideas, see Iain’s and my recent papers.

Minimum Wage Increases Inequality, Decreases Labor Force Participation

The minimum wage actually increases inequality. It helps some workers, but only at others’ expense. The reasoning is simple: people can’t make money if you put them out of work. When the minimum wage goes up, some people get a raise, but only because other people get their hours cut, are fired, or never hired in the first place. Some people get more, just as many other people get less. The minimum wage’s results are exactly the opposite of its intentions.

That’s why a recent Council of Economic Advisors report, “The Long-Term Decline in Prime-Age Male Labor Force Participation,” misses the mark. On page 42, the report says: “To fight the long-run trend of increasing inequality, the President has proposed raising the minimum wage, giving greater support to collective bargaining, and helping ensure that workers have a strong voice in the labor market.”

There are two problems with this approach. The big one is the implicit assumption that inequality is automatically a bad thing. This is precisely the approach Iain Murray and I warn against in our recent paper, “People, Not Ratios.” The mathematical difference between rich and poor is ethically irrelevant, as Princeton University philosopher Harry G. Frankfurt also argues.

What is ethically relevant is how people at the economic bottom are doing. Do they have enough to live with comfort, dignity, and security? Are they becoming better off over time? What policies will help the poor become better off over time? These are the questions anti-poverty activists should be asking.

That’s a pretty big problem. The second problem is with a study quoted on the same page by David H. Autor, Alan Manning, and Christopher L. Smith, “The Contribution of the Minimum Wage to US Wage Inequality over Three Decades: A Reassessment.”

Economists are famously divided on many issues, leading to President Harry Truman’s wish for a one-armed economist, who would be unable to say “on one hand… on the other hand…” The minimum wage is not a two-handed issue. A survey of professional economists finds overwhelming support for the statement “A minimum wage increases unemployment among young and unskilled workers.”

So not only did the CEA report have to cherry-pick a study that supported its ideological priors, that study’s support is tepid at best. This may be why the CEA report does not bother to quote it directly, which I do here:

We find that the minimum wage reduces inequality in the lower tail of the wage distribution, though by substantially less than previous estimates… These wage effects extend to percentiles where the minimum is nominally nonbinding, implying spillovers.

For more on how the minimum wage affects inequality, see Iain Murray’s and my recent paper, “The Rising Tide.” A future post will make similar arguments about the CEA report’s arguments on collective bargaining.

Minimum Wage Is No Panacea

I recently spoke to a reporter about the minimum wage’s tradeoffs: it helps some people, but at the cost of hurting other people. Here’s the writeup.