Don Boudreaux’s ongoing, excellent coverage of the minimum wage issue

From Mark Perry.

"No one has more steadfastly, consistently and vigorously brought economy sanity, logic and reason to the issue of the minimum wage law government-mandated wage floor that guarantees reduced employment opportunities for America’s teenagers and low-skilled workers (especially minorities) than George Mason University economics professor Don Boudreaux. On his Café Hayek blog, Don has for many years regularly covered the minimum wage issue with his wisdom, wit, and keen economic thinking, and I applaud his ongoing efforts to educate his readers, students and (hopefully, some day maybe) policymakers about an important economic issue.

In several recent posts, Don has emphasized a very important, but usually overlooked or neglected reason that some empirical studies fail to find negative employment effects following increases in the minimum wage government-mandated wage floor that guarantees reduced employment opportunities for America’s teenagers and low-skilled workers (especially minorities). That reason has to do with the fact that the minimum wage has been in effect for almost 80 years since the Fair Unfair to Unskilled Labor Standards Act was passed in 1938, and it’s been increased 27 times since then. Therefore, the government’s mandated market-suppressing, artificial wage for low- and un-skilled workers has been around for such a long time, and it’s been raised so many times, that the distortionary effects of the minimum wage have long ago been “internalized” by employers who hire unskilled workers. Don explains that phenomenon in a recent blog post where he schools Washington Post columnist Steven Pearlstein about his “simply poor economic journalism,” and provides this additional commentary:

Empirical studies today of the effects of changes today in the minimum wage are biased against finding negative employment results because many of the negative results of minimum-wage legislation have long ago been ‘internalized’ into the economy due to the fact that the minimum wage has been in existence in the U.S. for almost 80 years.

It would be like empirically studying today the effects of a recent rise in the minimum-allowed price of strawberries if strawberries had long ago been made unnecessarily pricey by minimum-strawberry-price legislation.

Consumers would long ago have switched their diets away from strawberries; chefs would long ago have begun concocting fewer desserts and recipes with strawberries and more with other fruits and berries. Other ingredients would have become staple substitutes for strawberries in consumers’ diets and in chefs’ dishes and recipes. Farmers, in turn, would have – despite the formal, legislated higher list price for strawberries – either totally abandoned or significantly abandoned strawberry production. Many producers who would otherwise, in the absence of the minimum-strawberry-price legislation, grown and sold strawberries, wind up more and more as the years pass producing other berries that are not burdened with price controls. So when an empirical study is done of the effect on strawberry sales of, say, a 10 percent or even of a 100 percent hike today in the minimum price of strawberries, the detected empirical effects will underrepresent the full depressing impact that a legislated minimum price of strawberries has on the market for strawberries.

In other words, we would expect a huge difference in the possible, detectable negative employment effects between: a) the highly likely, inevitable 28^th increase in the federal minimum wage from $7.25 to $10.10 per hour (or something close to that) in the next few years, the effects of which have already been internalized and incorporated into business and staffing decisions over the last 80 years, and b) the imposition for the first time of a government-mandated minimum wage of $10.10 per hour, which didn’t follow 27 previous increases over almost 80 years.

It’s also important to note that increases in the federal minimum wage follow years of highly publicized debate and are therefore fully anticipated by employers well in advance of the actual implementation of a minimum wage hike. For example, the current proposal to raise the minimum wage to $10.10 per hour came from President Obama in his January 2014 State of the Union address. Assuming that a $10.10 per hour minimum wage will likely eventually become a reality, it might be another year or more before it will take effect, giving employers several years of advance notice that a higher minimum wage is inevitable, and giving them incentives to prepare today for the inevitable 39% increase in their labor costs for unskilled workers. Those preparations might include investing today in labor-saving technologies like robots and self-ordering kiosks that McDonald’s and other restaurants are introducing to replace cashiers and servers.

Therefore, Don highlights an important point that the distortionary effects of government-mandated price controls on unskilled labor markets have been internalized by employers for so long, along with the fact that future labor market distortions are so widely anticipated well in advance, that empirical studies will be generally biased against finding negative employment effects of new minimum wage increases.

Don made his case that employers have had almost 80 years to adjust to the distortionary effects of government price controls on unskilled labor in a letter to the Washington Examiner on December 9, 2014:

Jason Russell nicely summarizes the much-discussed new study that finds that raising the minimum wage destroys jobs for many low-skilled workers (“New evidence that the minimum wage kills jobs,” Dec. 9). Yet even this careful study underestimates the damage that minimum-wage legislation inflicts on the job prospects of the unskilled.

Employers in the U.S. have now had 76 years to adjust to the existence of this regulation that makes unprofitable the hiring of the lowest-skilled workers. One result is that business and labor practices that would have employed legions of low-skilled workers in the absence of a minimum wage were either long ago snuffed out or never created.

Empirical studies today, therefore, can at best detect only changes in employment at existing firms that use existing business practices – firms and practices that, having evolved in an economic environment with a minimum wage, were never suited to employ as many low-skilled workers as would be employed by businesses that evolved in an environment without a minimum wage.

Raising the existing minimum wage does indeed destroy some jobs. But even the most accurate measurements of today’s job destruction offer no clue to the full magnitude of the vast amount of economic opportunities that the minimum wage denies to the poor and unskilled.

Another important point: Why do some retailers actually support raising the minimum wage? Is it out of compassion and concern for unskilled and low-skilled workers? Or could it be in their self-interest to raise labor costs disproportionately on some of their competitors because those apparently “compassionate” retailers are already paying their workers wages that are above the federal minimum?

In a letter to the WSJ on January 7, 2015 (“Suspect Retail Motive On Minimum Wage”) Don explains why “there’s something suspicious about some retailers pleading with government to force all employers to raise wages”:

Labor Department official David Weil justifies his support for raising the minimum wage in part by recounting that the majority of retailers he met at a National Retail Federation conference pleaded with him to raise the minimum wage (“Wage-Law Enforcer Favors Proactive Approach,” Dec. 31).

Such pleading by some retailers for a higher minimum wage is not as clear a sign as Mr. Weil would have us believe of the wisdom of raising that wage. For starters, every retailer is free to raise its wages on its own. And because raising its wages when other employers don’t allows the wage-raising firm to attract a larger and better pool of employees than it attracts when all firms raise wages, there’s something suspicious about some retailers pleading with government to force all employers to raise wages

I have a good idea what that something is. The retailers who begged Mr. Weil for a higher minimum wage likely have wage scales well above the industry norm; they rely less intensely than do their competitors on minimum-wage workers. Raising the minimum wage, therefore, would impose heavier burdens on their competitors than on themselves. Mr. Weil’s retailer friends thus see a hike in the minimum wage as a way for government to artificially improve their profitability by bankrupting, or at least throttling, many of their rivals.

(Related: See my CD posts here and here on this topic of businesses supporting a higher minimum wage.)

Bottom Line: Kudos to Don Boudreaux for his ongoing and tireless efforts to regularly expose the numerous flaws of the minimum wage law government-mandated wage floor that guarantees reduced employment opportunities for America’s teenagers and low-skilled workers (especially minorities, see chart below).

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