Tuesday, April 12, 2016

The Minimum Wage: Science versus Ideology

Wouldn’t it be cool if you could throw a bag full of stuff into the air and it would stay there, suspended in the air. It would be cool and it could probably help a lot of people. But science says “what goes up must come down.” We don’t argue with science and while man-made elevators and forklifts have been invented to lift things for us – one still can’t throw a sock full of rocks into the air and hope it will stay up there.

Even if we had a lobby group and a new political party decrying the mean and arbitrary nature of the Law of Gravity, that wouldn’t change matters. We are stuck with the science. You shake your head and wonder how many JDs I have thrown into the air tonight. But the truth is that we are witnessing these days the tragic retraction of science and reason in our lives. Perhaps because economic well being is tougher to achieve now we want to reject a lot of complicated talk about economic issues. We just want action. We want results. We don’t want "on the one hand this and on the other hand that". 

And so we have political candidates who will tell us anything – anything that makes us feel better. Trump will build a wall. Cruz will bomb the bad guys. Hillary will make women taller. Bernie will give us free education. We will raise the minimum wage and people will live better.

There is nothing wrong with wanting more equality and safety but these politicians focus their energy on ideology and goals without taking the time to explain exactly how and why their actual policies might bring about these results without throwing the baby out with the dirty bath water.. Using ideology and wishful statements, of course, worsens the country directly because it often pits us against each other. The last I heard this was a country with shared values and interests. We depend on each other.  It makes no sense to think that anything will be resolved by making us even more separate and resentful.

The solution to all this is as it always has been -- science. Think about it. Maybe you were not the brightest science student in school. But the evidence that we trust science is everywhere. Biotech drugs are finding new ways to cure cancer. We can hope for a cancer cure, but I like the odds of Lilly's biologists working on this problem. Or take Moore’s Law which explains why you can get more and more power out of smaller and smaller computer chips. Again, hope has little to do with all this power and convenience we obtain.

So if biology, chemistry, physics and the other sciences are so helpful, why are we so willing to reject or ignore the learning from economics? We often rely on economic laws. Many businesses know that the quantity they sell will depend on, among other things, the incomes of consumers and the prices of their goods.  Business firms also understand that a lack of resources makes it harder and more costly to produce goods and services. Economics is a soft science in the sense that the predictions might not always be right on the money, but predictions are based on generally accepted basics and logic.

A good example of all this is the recent legislation in California (and other places) raising the minimum wage to $15 an hour. Asked why this legislation is necessary, the promoters explained that it is unfair for people in California to make less than $15 per hour. The general answer is about fairness and not about science. Science be damned – it sounds very desirable to think that a government can raise a magic wand and make people’s lives better.

Economic science does not care who you are. In physics the focus is on atoms or subatomic particles. In economics we focus on people. But in neither case are we driven by fairness. What we care about is doing what is best for the community or the system. Consider some of these economic facts. First, the wage of a person is determined by the impersonal forces of supply and demand. We have seen it many times. When nurses are scarce, the wages of nurses rise. Is this fair to cab drivers? When people switch from coal to natural gas coal miners are needed less and their wages fall. None of this is about fairness. It is about using economic science to explain why wages and prices vary across people and places and over time. Prices and wages are signals -- precious signals that allocate goods and services from one place to another as needed. We don't need government czars telling every company what to produce. Markets perform these functions day after day. 

Second, raising the minimum wage begs the question – to what amount? If raising it to $15 per hour improves fairness, why not raise it to $20 per hour? The nice thing about the market is that wages move to resolve imbalances. But when your local Mayor is grubbing for votes, she talks about things like a living wage or some such thing. Apparently a person cannot live unless every member of his family is making the government determined living wage. And what does it take to live, anyway? I hope they include JD in that bundle of goods. 

Third, let’s keep in mind the fairness involved with everyone. Suppose there are people making $15 per hour today. When you raise some people to $15 then you have to raise those people to what? $20? And the people who were making $20 must be raised to $25? And so on. So now you have the government determining everyone's wage. Can we really do that? Unless of course you want everyone to make $15 per hour. Is that fair? 

Fourth, a part of economic science is the theory of the firm. If firms have to pay workers more, they have three choices – take lower profits, reduce the number of employees hired, or raise prices. If firms raise prices of their goods and services the minimum wage worker has not in fact been helped. If the prices of the goods you buy go up by a similar amount as your wages, then your wage still buys the same amount. Of course if owners or other workers are harmed, then you have clearly harmed someone in the name of fairness for someone else. What happens when those people react to those harms? Will that be good for the minimum wage workers? 

There is plenty more to say but that should suffice for today. The minimum wage is not about fairness. It is about helping or pleasing some voters at the expense of other voters. The minimum wage distorts science in the same way that using leaches cures modern diseases. The minimum wage is not proved to be fair or to improve the lives of workers. Governments cannot tell a worker what he or she is worth. A worker’s worth reflects education, training, experience, contacts, and an abundance of luck with respect to supply and demand. If you want to help poor people, it would be much less destructive to use other methods that more directly address education, training, contacts, and luck. 


  1. Dear LSD. Yepper, pols don’t tell the whole story about the acktual effects on workers’ take-home pay after an increase in the hourly rate. Folks earning less than the minimum wage still have to pay 7.65% into Social Security . . . . . and likely they get transfer payments via Earned Income Tax Credit, food stamps, and welfare so the bump in hourly take-home is not that big a deal in the workers total income. It won’t amount to a hill of beans but probably a few extra lottery tickets, cans of Colt 45 Malt Liquor, and Tampa Jewels.

    And, oh . . . Jerry Brown’s crowing about the gradual increase to $15.00 until 2021 will weally weally be a financial juggernaut to workers. Wow, I can’t wait for the economic dividend to the U.S. economy from all that newly-found lean green spread around.

    Yer right . . . . it’s not about fairness. Too bad wage increase advocates can’t be more factual . . . . or scientific.

    1. Maybe one way to slice this is to make a difference between fairness and apparent fairness. It seems fair to many nice people that we should guarantee a minimum wage of $15 or more to everyone. That's what I would call apparent fairness. But if what you are after is to help poor people get out of poverty,then this minimum wage approach might not really help -- might not in fact be fair. One extreme example. If one of Trump's kid's has a minimum wage job and we arbitrarily increase the wage to $15. Have we increased fairness?

    2. The difference between fairness and apparent fairness resides in the eye . . . er, mouth . . . . of the sayer; either perception essentially puts the wool over the eye (or in the mouth), making one feel warm and fuzzy and linty, and is tantamount to a headdress of poop in this case. Reality is that increasing the MW to whatever will not put a chicken in anybody’s pot, will not shrink the wealth gap an iota, will not even show up on the GDP Richter scale. A better analogy/example than Trump’s kid is the difference in income taxes paid by the top 1% vs. those that don’t pay any income tax—is that fairness or apparent fairness? How ‘bout this: Is it fairer the top 1% pay way more in taxes or the bottom wage earners get a pittance of increase in hourly wages? It’s apparently abundantly clear many would say both are fair and many would say nay. Reality rules.

  2. My understanding of the minimum wage is that it was initiated to give the unions an ever-increasing starting point for contract negotiations. "Fairness" was just a liberal cover story. IDK.

    1. The history of the minimum wage legislation is interesting and a little more complicated than you say. Part of the history is a fight between northern and southern industry and governments. See https://www.dol.gov/general/aboutdol/history/flsa1938