Academic Arrogance At Work (Don Boudreaux again on the minimum wage)

Here is the link.

"Below is the abstract of this this 2015 paper by Robert Pollin and Jeannette Wicks-Lim.  (HT Walter Williams)  It is an ideal justification for my insistence that academics who demand that the state raise the minimum wage put their own money where their mouths are before any of the rest of us pay these academics any attention.

ABSTRACT: This paper considers the extent to which U.S. fast-food businesses could adjust to an increase in the federal minimum wage from its current level of $7.25 per hour to $15 an hour without having to resort to reducing their workforces. We consider this issue through a set of simple illustrative exercises, whereby the U.S. raises the federal minimum wage in two steps over four years, first to $10.50 within one year, then to $15 after three more years. We conclude that the fast-food industry could absorb the increase in its overall wage bill without resorting to cuts in their employment levels at any point over this four-year adjustment period. Rather, we find that the fast-food industry could fully absorb these wage bill increases through a combination of turnover reductions; trend increases in sales growth; and modest annual price increases over the four-year period. Working from the relevant existing literature, our results are based on a set of reasonable assumptions on fast-food turnover rates; the price elasticity of demand within the fast-food industry; and the underlying trend for sales growth in the industry. We also show that fast-food firms would not need to lower their average profit rate during this adjustment period. Nor would the fast-food firms need to reallocate funds generated by revenues away from any other area of their overall operations, such as marketing.

The authors are above not doing economics, properly speaking.  Instead, they offer business advice – or, rather, present themselves as possessing knowledge and information that is salable as business advice.  The authors write as if they are management or business-operations consultants rather than economists.  Pollin and Wicks-Lim here implicitly assert that their information on the details the state of the market and their knowledge of the particulars of how to run actual, real-world businesses are so real, full, and trustworthy that we should accept their conclusion that higher minimum wages will not cause businesses to change their operations in ways that result in fewer hours of paid work for low-skilled workers.

Indeed, the trust that we are asked to put in Pollin’s and Wicks-Lim’s alleged business acumen is so high that we are supposed to accept their conclusions as justification to unleash the force of the state to alter the actual, real-world business decisions of actual, real-world people who are actually operating – with their own actual money – in actual, real-world markets.

When I call on certain minimum-wage advocates – specifically, those advocates who justify minimum wages with the assertion that there are unexploited profits to be had, or to be fully protected, in actual, real-world markets – to put their own money where their mouths are by entering markets to give evidence of the soundness of their beliefs, I don’t really expect them to do so.  Minimum-wage advocates such as Daniel Kuehn and other academics, pundits, and politicians who make such assertions about real-world markets are, I’m sure, too unskilled, too uninformed, too incompetent, and too cowardly – as am I and most other academics – actually to compete in real-world markets.  The difference between me (and others like me, such as Walter Williams, Deirdre McCloskey, Matt Zwolinski, Pete Boettke, Steve Horwitz, David Henderson, Mark Perry, Bob Murphy, Liya Palagashvili, Alex Tabarrok, etc.) is that we know that we know too little about the prevailing details of real-world markets and of how to run businesses to presume that we should advise the state to use force to change market arrangements.

Put a bit differently, it’s okay for someone to profess to possess good knowledge about the details of existing, real-world markets.  It’s not okay, however, for that someone to assert, on one hand, that his or her professed knowledge is so reliable that it suffices as the basis for forcing others to act as if that knowledge is accurate but, on the other hand, that his or her knowledge is so unreliable – or so detached from a person who can act competently in real-world business settings – that he or she dare not act on it voluntarily.  And it’s especially galling when these people who demand that we trust their professed knowledge as guides for how to force other people to act get indignant when it is suggested to them that they should act voluntarily upon the unique knowledge that they profess so confidently to possess."

There were also some good comments from Jon Murphy.

"There seem to be some missteps in their abstract:

1) " turnover reductions"

This is one of those "as compared to what" moments. Turnover reductions would only occur if the firm is offering greater pay than everyone else. For example, If McDonalds pays $10/hr but Burger King pays $12, McD will see lots of turnover as people shift toward BK (and BK will see less as the alternative options are lesser). So, it seems to me that this assumption is not particularly likely.

2) " trend increases in sales growth; and modest annual price increases over the four-year period."

These seem to contradict themselves. The Law of Demand would suggest that price increases (even modest ones) would reduce the trend in sales growth (all else held equal, of course). How could there be an increase in sales trend growth and increasing prices? There'd have to be an increase in demand itself, but that is not evident from their abstract. So this has me scratching my head.

3) "We also show that fast-food firms would not need to lower their average profit rate during this adjustment period. Nor would the fast-food firms need to reallocate funds generated by revenues away from any other area of their overall operations, such as marketing."

Hm, this would suggest that the costs are almost entirely borne by the consumer of fast food, something which seems unlikely to me. I may be wrong, but I doubt fast-food is particularly inelastic. It's possible they argue that there are increases in productivity that account for this, but then that would contradict their thesis ("This paper considers the extent to which U.S. fast-food businesses could adjust to an increase in the federal minimum wage from its current level of $7.25 per hour to $15 an hour without having to resort to reducing their workforces."). An increase in productivity and sales trend increases necesarilly means a decrease in the workforce (the "Unseen" aspect).

I've not read their paper, so maybe they address my concerns, but this is just what I'm noticing from their abstract.

Another thought:

If my back-of-the-envelope calculations are correct (and they may not be, so take this comment with a grain of salt), to go from $7.25 to $15 in 4 years would require a 19.93% gain in wages each year. Does anyone really think that nearly 20% price hikes per annum would have no effect on buyers (either the consumers of labor or the buyers of burgers should those costs get passed on)?"