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George Mason Economists Disagree With Obama's Theory That "the whole economy does better" When The Minimum Wage Is Increased
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Reconsider That Happy Narrative About Minimum Wages from "Cafe Hayek."
"One
of George Mason University’s star PhD economics students, Ms. Liya
Palagashvili, along with a GMU undergrad student, Ms. Rachel Mace (who
was taught recently in a GMU econ class by Liya), weigh in in
tomorrow’s Wall Street Journal to debunk a happy narrative about the minimum wage.
This narrative made the rounds this summer; even Pres. Obama joined
the chorus. But the narrative was based on a remarkably sloppy
interpretation of employment data. Liya and Rachel set the record
straight. A slice:
Why would firms hire more workers when government raises
the cost of hiring workers? The progressive answer is that hiking the
minimum wage raises the incomes of poor workers, causing them to spend
more. This additional spending, in turn, is so great that firms hire
even more workers. When you raise the minimum wage, as Mr. Obama said in
Denver, “that money gets churned back into the economy. And the whole
economy does better, including the businesses.”
This theory is dubious for many reasons, not least because
minimum-wage workers make up about 2% of the workforce, a percentage
much too small to have such an effect. Yet if this theory were valid—and
if these data reveal useful information—then job growth should be
greater the higher the minimum-wage boost.
Not so. Of the 13 states that raised the minimum wage, Connecticut,
New Jersey and New York were the three that raised it most, with
increases ranging from 5% to 14%. These three states also experienced
the worst job growth between January and May, an average of 0.03%
compared with an average 1.28% for the other 10 states. Indeed, job
growth was worse in each of these three states than it was, on average,
in the 37 states that did not raise their minimum wage at all. Moreover,
in New Jersey, the state that hiked minimum wage the most—to $8.25 an
hour from $7.25—employment actually fell by about 0.56%.
Washington experienced the largest job growth at 2.1%, but the state
only raised its hourly minimum wage by 13 cents. A full-time
minimum-wage employee in Seattle now earns, before taxes, a whopping
$23.80 more a month. That’s barely enough to cover dinner for two at a
chain restaurant. Consider also that between December and May the price
of gasoline rose by more than 20 cents a gallon, according to
Gasbuddy.com.
Minimum-wage workers would need a big chunk of their
higher pay to cover the increased cost of driving. There’s no way there
was enough left over to spark extra job growth.
We conducted a statistical analysis of the Bureau of Labor
Statistics’ data called a two-sample “t” test for comparing two means.
We found, for this time period, no difference in the job-growth trend in
the states that raised their minimum wages from states that did not. In
other words, the correlation cited as debunking the economic case
against the minimum wage is not statistically significant."
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