Don Boudreaux's Open Letter to Nick Hanauer (on mimum wage laws)

From Cafe Hayek.

"Mr. Nick Hanauer

Dear Mr. Hanauer:

Criticizing as “goofiness” the economic case against the minimum wage, you exhibit an arrogance possessed only by people who opine on matters about which they know absolutely nothing (“Is trickle-down economics science or scam?” June 1).  Here are two examples of your many flawed assertions.

First, contrary to your claim, the fact that Seattle’s overall unemployment rate is on par with that of the rest of the country isn’t evidence that that city’s unusually high minimum-wage rate is not wreaking damage of the sort predicted by economic theory.  Economic theory predicts that the minimum wage prices out of jobs only workers whose hourly output has a lower value than the minimum wage.  The prediction is that only some low-skilled workers will lose jobs; it is not that the overall unemployment rate will rise.  Both because the percentage of workers affected by the minimum wage is low (in a dynamic economy with countless changes happening every day) and because a rise in the minimum wage artificially raises the relative attractiveness to employers of hiring some kinds of unemployed workers (say, white teens from good school districts) while firing (or not hiring) other workers (say, blacks from poor school districts), the overall unemployment rate need not rise, and might even fall, when the minimum wage rises.
Second, the fact that the number of CEOs has increased along with CEO pay is also not – contrary to another of your assertions – evidence against economists’ theory that higher wages prompt employers to economize on labor more than they would if wages were lower.  Like all scientists, we economists carefully distinguish cause from effect – here, we distinguish factors that cause wages to rise on the market from the effects of higher wages mandated by government.  A rise in the market demand for CEOs caused CEO pay to rise which, in turn, drew more talent in to the CEO market.  Yet had government mandated a rise in CEO pay absent an increase in the market demand for CEOs, the effect would have been higher CEO unemployment.

The rise in CEO pay is no more a cause of increased market demand for CEO talent than is, say, the purchase of a yacht by a billionaire a cause of the billionaire’s riches.  And just as a policy to turn poor people into billionaires by forcing them to buy yachts would fail, a policy to raise low-skilled workers’ pay by forcing them not to work at hourly wages below some dictated minimum will fail.  Both policies are built on an unscientific confusion of cause with effect – or, as you might say, on a scam.

Sincerely,

Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

I thank my old friend Jim Lark for alerting me to Hanauer’s painful-to-read piece.
….
Every principles-of-economics student learns early on to distinguish between the effects of price changes in the market for good X (which are changes in quantity demanded and in quantity supplied of good X) and the causes of changes in the price of good X (which are changes in the demand and in the supply of good X).  Admittedly, to non-economists this language isn’t the most revealing, but the distinction to which it points is as fundamental and as important as any in science.  Yet Hanauer – despite launching into a public diatribe against economic theory (or, rather, against what he imagines economic theory to be) – is obviously unaware of this most fundamental of distinctions.  It would be as if he launched into a public diatribe against modern astronomy unaware that the earth revolves around the sun and himself convinced that astronomers believe that the earth sits atop the shell of a turtle."