James Kwak Sure Doesn't Understand The Economics Of The Minimum Wage

By Tim Worstall.

"The law professor, James Kwak, has treated us to his thoughts on the minimum wage. The essence of which is that there's just too much economics 101 going on here, people just aren't grasping the complexity of the subject. There being a couple of problems with this assertion. The first is that Kwak has missed that all economists, without fail, agree that the economics 101 explanation is true at some level of a minimum wage. Make a minimum wage "too high" and it will produce significant unemployment effects. The only debate actually happening within economics is what is that definition of too high? The second is that Kwak doesn't actually understand that what he thinks he knows about it is not what is actually known about it.

At which point Mark Perry seems to have the measure of the piece:

    Writing in The Atlantic, law professor James Kwak makes a very ill-advised case for ignoring economic theory, logic, laws and reasoning and supporting higher government-mandated minimum wages for unskilled workers in an essay (“The Curse of Econ 101“) that I would characterize as a 3,000-word logorrheic bouillabaisse of misunderstandings, non sequiturs, half-truths, and false presumptions (to channel Don Boudreaux). It ranks right up there along with articles by John Komlos (“Why a $15 minimum wage shouldn’t scare us“) and “America’s Worst Minimum Wage Pundit” Nick Hanauer (“The claim that if wages go up, jobs will go down is not a theory — it’s a scam“) as one of the most misinformed, flawed and misguided articles ever written about the minimum wage.

Don't pull any punches there professor. The specific part of Kwak's misunderstandings that leap out at me are these bits where he tries running through the arguments in favour of a higher minimum wage:

    In the above examples, a higher minimum wage will raise labor costs. But many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families.

No, this has been studied. The majority of people earning minimum wage are not in poor households. But the majority of people consuming the products of minimum wage labour are themselves in the lower reaches of the income distribution. After all, we're not going around saying that Walmart's target market is the upper middle classes, are we? Changes in wages there, changes in prices there, are going to affect the lower ends of the income distribution therefore. And when we do more detailed empirical studies we find that the majority of a minimum wage rise would not go to the poor but the majority of the costs of higher prices would. The actual effect is the opposite of that assumed by Kwak.

    In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs.

Even Paul Krugman has pointed out the error with this one. You only get that higher productivity by paying more than other employers. A general rise in the wage rate doesn't produce that higher productivity.

    Justin Wolfers and Jan Zilinsky identified several reasons why higher wages boost productivity: They motivate people to work harder, they attract higher-skilled workers, and they reduce employee turnover, lowering hiring and training costs, among other things.

All true but it's from higher than other wages. Krugman:

    They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist's reply is, if paying higher wages is such a good idea, why aren't companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage "compared with other companies" -- and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish.

Kwak again:

    A higher minimum wage motivates more people to enter the labor force, raising both employment and output.

That raises unemployment. Sheesh. So, more of those 96 million not currently working think that wages are now high enough to tempt them to go look for work. That means they've gone from being happily economically inactive to being, presumably, unhappily searching for work. Or, as we use the word, unemployed.

    Finally, higher pay increases workers’ buying power. Because poor people spend a relatively large proportion of their income, a higher minimum wage can boost overall economic activity and stimulate economic growth, creating more jobs.

This effect does indeed exist. But it's also not very large. It's the marginal propensity to spend, or the inverse to save, here. And it will be in the 10 - 15% range of the change in wages, not the total amount of wages itself. And we do also need to note that the economy does not live by consumer demand alone. Investment, financed from savings, also matters. And the very contention is that we're moving stuff from savings by richer people into consumer demand by poorer people. Thus even though the increase in consumer demand is definitely there it's not entirely obvious that the fall in savings and investment on the other side does not cancel out the effect.
And let's be honest about this shall we? If the best defences of a rise in the minimum wage turn out to be things which aren't true then we might then think that perhaps economics 101 has something going for it, might we not?"