



Populist Nonsense



In his state of the union speech, president Obama asserted that government should intervene further in the market economy in a myriad ways. It was chock-full of the usual canards – such as for instance the allegedly dire need for the government to engage in “infrastructure spending”, save the planet by throwing money at the global warming boogeyman (which means wasting even more scarce resources on uneconomic “green energy” projects and hampering industry with even more regulations and taxes), expand the State's involvement in education further (presumably because it has been such a great success hitherto), increase “affirmative action” in various non-specified ways, and so forth. The entire gamut of the social engineering dreams of modern-day interventionism was on display. However, the proposal that really took the cake was the idea to increase the minimum wage.

This is an issue that populist politicians generally regard as safe ground. After all, who can be against guaranteeing the average working man a “living wage”? Anyone raising objections to such a proposal must be prepared to be denounced as a heartless lackey of evil capitalists.

The reality is however that there is scarcely any regulation that contributes more assuredly and strongly to institutionalized unemployment as the minimum wage. The labor market is subject to the laws of economics just like any other market, no matter how much government interferes with it in misguided attempts to improve it. The laws governing supply and demand are not magically rendered obsolete on the government's say-so.

The immediate effect of minimum wage legislation is therefore to price the lowest skilled workers out of the labor market and render them into perpetual beggars or dependents of the welfare state. One might even think that this is the real objective of such legislation: namely, to create more welfare state dependents. After all, they can be counted upon in the future to vote for the politicians promising the biggest handouts.

As Ludwig von Mises points out in Human Action (ch. XXX):





“The very essence of the interventionist politicians' wisdom is to raise the price of labor either by government decree or by violent action on the part of labor unions. To raise wage rates above the height at which the unhampered market would determine them is considered a postulate of the eternal laws of morality as well as indispensable from the economic point of view. Whoever dares to challenge this ethical and economic dogma is scorned both as depraved and ignorant.” […] “The market wage rate tends toward a height at which all those eager to earn wages get jobs and all those eager to employ workers can hire as many as they want. It tends toward the establishment of what is nowadays called full employment. Where there is neither government nor union interference with the labor market, there is only voluntary or catallactic unemployment. But as soon as external pressure and compulsion, be it on the part of the government or on the part of the unions, tries to fix wage rates at a higher point, institutional unemployment emerges. While there prevails on the unhampered labor market a tendency for catallactic unemployment to disappear, institutional unemployment cannot disappear as long as the government or the unions arc successful in the enforcement of their fiat.”

(emphasis added)

This in short is what economic theory has to say on the issue of the minimum wage rate. Since these economic laws are established by rational logical deduction, they cannot be “disproved” by empirical studies. The only thing that allows all wage rates to rise over the time is the accumulation of capital, this is to say the increase of capital invested per worker. Government interference with the market slows down or sometimes even reverses the process of capital accumulation. Therefore, not one of the interventionist proposals made by the president is likely to sustainably lower unemployment or increase wealth (it may be admitted that in a command economy, unemployment can be temporarily made to disappear, at least until the economy breaks down due to the socialist calculation problem).

'Empirical Studies' Can Be Made to Yield Any Result One Likes



An example for the careless nonchalance with which the existence of economic laws is shoved aside on the basis of spurious empiricism was promptly provided by the New York Times, which is well-known for its support of socialistic policies. It actually seemed unhappy that the proposed increase in the minimum wage rate wasn't even higher. Intoned the NYT:





“President Obama was right about the need to increase the federal minimum wage, but it was too bad that he pulled his punches in calling on Congress to lift the wage only to $9 an hour by the end of 2015, from $7.25 an hour, where it has been since 2009. His proposal would boost the annual pay of an employee working full time at the minimum wage from $14,500 now to $18,000, which is still very low. Several economic measures — including purchasing power, average wages and productivity gains — indicate that the minimum wage should be at least $10 an hour today, not $9 an hour three years from now. In 2008, Mr. Obama campaigned on raising the minimum wage to $9.50 an hour. Opponents of an increase in the minimum wage argue that it will harm small businesses, but that fear is exaggerated. Research shows that the extra cost is offset by lower labor turnover, small price increases or other adjustments. In addition, many low-wage workers at small businesses are tipped workers whose employers have been shielded for decades from minimum wage increases, and thus have room for an increase. Over all, the argument that a higher wage will kill jobs has been debunked by a range of studies showing that a higher minimum wage boosts pay without measurably reducing employment, while improving productivity. One study from the Federal Reserve Bank of Chicago found that a $1 increase in the minimum wage results, on average, in $2,800 in new spending by affected households in the following year, in large part because the increase helps workers accumulate down payments to buy cars. Owning a car, in turn, helps workers to keep their jobs.”

(emphasis added)

This is the typical Keynesian “let's put the cart before the horse” type thinking. Increases in minimum wages do not increase productivity – it is the other way around. Increases in productivity are what has enabled a steady rise in incomes and concomitant decline in working hours ever since capitalist modes of production have been adopted. As an aside to this: labor is a scare resource. In an unhampered market economy, employers must compete for labor just as they must compete for other factors of production. There is no danger of workers not getting a “fair share” of the economic pie. For instance, Henry Ford realized that his plants would benefit if he offered his workers higher wages once mass manufacturing processes had been established – this was however only possible because the invested capital had made it feasible to raise wages.

Whenever you read assertions prefaced with the words “studies show” followed by the denial that economic laws actually exist in the real world, you will find out – if you care to look around a little bit – that studies that show the exact opposite are out there as well. Not surprisingly, this is the case in this instance as well.

As the WSJ informs us on this point:





“In his State of the Union address, Mr. Obama proposed an increase to $9 an hour by 2015 from $7.25, and then indexing the minimum to inflation. "Employers may get a more stable workforce due to reduced turnover and increased productivity," the White House says. No doubt employers are slamming their foreheads wondering why they didn't think of that. And don't worry about lost jobs. "A range of economic studies," a White House memo assures, "show that modestly raising the minimum wage increases earnings and reduces poverty without measurably reducing employment." Note the shifty adverbs, "modestly" and "measurably," which can paper over a lot of economic damage. In the real world, setting a floor under the price of labor creates winners and losers. Some workers will get a $1.75 raise. Great. But others—typically the least educated and skilled—will be priced out of the job market and their pay won't rise to $9. It will be zero. University of California at Irvine economist David Neumark has looked at more than 100 major academic studies on the minimum wage, and he says the White House claim of de minimis job losses "grossly misstates the weight of the evidence." About 85% of the studies "find a negative employment effect on low-skilled workers."

(emphasis added)

In other words, even the so-called “empirical evidence” is predominantly in agreement with what economic theory suggests: the lowest skilled workers will be priced out of the labor market and become unemployed. They won't earn $9 per hour; instead they will forthwith earn nada.

The whishy-washy assertions about what studies allegedly show are evidently disproved as soon as one refrainsfrom selectively picking a small handful of studies that seemingly support one's viewpoint (as the New York Times has done), but looks at a much bigger array of academic studies.

Naturally academic studies on economic topics are often not entirely free of political prejudice or preconceived notions either. These are for instance often embedded in the mathematical models economists nowadays like to employ (in many cases the conclusions are decided beforehand, and the models then tweaked until they seemingly “prove” the conclusions – see the infamous Blinder-Zandi study as an example for this). This is the reason why only 85% instead of 100% of the academic studies examined by David Neumark are coming to the correct conclusions.

However, such empirical studies are anyway not required to “prove” or “disprove” a point of economic theory. One can employ sound economic theory to examine and show why some of the studies are coming to the correct conclusions and others are not, but one cannot use the studies to make up any economic laws one likes. If anyone wants to disprove that the laws of economics apply to the labor market just as they apply to other markets, he will have to do so by coming up with a superior economic theory.

Conclusion

If the president's proposal is accepted, it will undoubtedly increase institutional unemployment further – at least insofar as the new minimum wage represents an increase in real terms and is not already achievable due to increases in economic productivity. However, an increase in wages due to rising productivity does not require laws in order to be established – it will be established on the market anyway.

The major flaw in the thinking of so-called “progressives” is that it is actually not progressive at all. As a closer look at their ideological antecedents and their economic policies reveals, they are generally of the view that the economy is completely static. They don't really believe in progress – they hold that there is a fixed economic pie that must be forcibly redistributed (according to their ideas about who deserves what). They conceive of the economy as a zero-sum game, in which one person's gain can only come at the price of another person's loss. It has been that way since Marx, and evidently nothing has changed. Luckily the market economy has delivered long term progress and wealth accumulation despite their best efforts.

Youth unemployment and the minimum wage, via the WSJ

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