Note: This is a slightly revised version of a post which appeared on the old Opus Publicum web-log on January 20, 2014. As I have had numerous requests to re-post old pieces, I am trying to do better about fetching them from the archives. Your patience is appreciated.
A few days ago Joe Carter at the Acton Institute Power Blog wrote, “How To Prove That Everyone Knows Raising Minimum Wages Increases Unemployment.” In what is an all-too-common trick among libertarian sorts, Carter offers the thought experiment of a minimum wage hike from $7.25 to $57.25 — a near eight-fold increase — and states that no one would disagree that such a large increase would increase unemployment. Why? Because many businesses would not be able to afford such a radical upward shift in labor inputs and so they would either have to fold (which is likely if they are a small business), decrease their work force (which would obviously contribute to unemployment), or find substitutes for labor (ditto), etc. Ok, that’s fine. What’s not so fine, however, is that Carter assumes, sans evidence, that if a large change will produce large effects in an economy a small change will produce small effects, and that those effects will be registered in the unemployment figures. But that’s not necessarily true, and Carter knows this. He just doesn’t want to admit it.
Take, for instance, the example of a fast food restaurant. Let us say the minimum wage is more realistically increased from $7.25 to $8.00/hour. Let us assume that this restaurant has five full-time employees, all of whom make the minimum wage. The cost of employing all five under the old regime per week is $1,450; under the new regime the cost would be $1,600, or $150 more. According to Carter’s logic, it would seem that the restaurant owner would choose to reduce one employee’s weekly hours by half since $150 is approximately 20 hours of work at $7.25/hour. But that assumes the restaurant could still properly function with one employee working part-time, and that’s far from certain. More likely than not the restaurant will choose to pass the new costs on to the customers in the form of small increases in prices or, absent that, the substitution of other inputs. The profit margin of the restaurant, i.e., what the ownership makes, might be reduced, but is $150 the make-or-break between loss and profitability? Even if one assumes that there will be instances where this is true (which is not as safe an assumption as Carter imagines), it’s not going to be universally true; it’s not even inevitable. Yet Carter, like other libertarians, believes that his audience ought to draw the worst possible conclusion — and he gets them far closer to that conclusion by beginning with the extreme and then quietly slipping in the plausible as an offshoot of the extreme.
Granted, my example above is very simplistic and limited to a single hypothetical firm operating in the fast food industry. What’s important to keep in mind, though, is that a minimum wage hike would be felt throughout the industry. In other words, McDonald’s would not feel the brunt of the hike while its primary competitors, Subway and Burger King, evaded it. Moreover, sophisticated empirical studies have cast doubt on whether or not realistic minimum-wage increases — i.e., the sort which Carter’s hypothetical eschews right out of the gate — actually adversely affects employment rates. John Schmitt of the Center for Economic and Policy Research has a thought-proving paper on this topic, Why Does the Minimum Wage Have No Discernable Effect on Employment? (February 2013). Andrajit Dube et al.’s peer-reviewed piece, “Minimum Wage Effects Across State Borders,” 92 Review of Economics and Statistics 945 (2010), also casts doubt on the “common sense” conclusion that increment increases to the minimum wage produces unemployment.
Admittedly, empirical reality can, at times, be difficult to measure, and economists, like all participants in the murky realm of the social sciences, love to feud with each other over methodological matters until the cows come home. However, let’s be clear here. Libertarians, most of whom subscribe to the heterodox Austrian School of economics, disdain empiricism. They prefer to present “logically airtight” hypotheticals to “prove” their theories; that is where the matter ends. While not every hypothetical and the conclusions they draw from it are implausible (again, an eight-fold increases to the minimum wage is going to have an impact on employment — no one denies this), many of them are questionable, particularly when they draw closer to reality. Before that fact settles in to the mind of their audiences — most of which are comprised of folks who’ve already been converted to that old-time religion of supply-side economics and trickle-down distribution –, the libertarians have duped them with Chicken Little tactics. It’s an unedifying spectacle, especially when it emanates from a think tank which is ostensibly Catholic.