This isn't, of course, what Mother Jones thinks it is saying when it tries to defend a higher minimum wage in the US. But, much to my amusement, it is in fact what it does say. That the minimum wage reduces the number of jobs where a minimum wage is imposed. This is of course obvious from the basic economics of the matter: raise the price of something and people will buy less of it.It is possible to construct theoretical models where this is not so, some involving Giffen Goods but we're pretty sure there aren't any of those in the US economy. Other theoretical models call into play monoposony, which is where we've got the buyer of the good having significant market power. This idea fails too given that the minimum wage really bites in the food industry for the US (it being about 50% of those who get that minimum) and an industry with tens of thousands of independent employers simply isn't going to have monopsony power over the price of labour. It is in fact much more like that model of perfect competition that Econ 101 teaches us and Econ 102 teaches us so rarely exists in real life.
Here's Don Boudreaux having a go at Mother Jones:
No serious opponent of minimum wages has ever said that they are “harbingers of economic doom” and sparks of “economic collapse.” Not Milton Friedman. Not F.A. Hayek. Not Thomas Sowell. Not my colleague Walter Williams. No credible scholar or pundit has ever made such a prediction about minimum wages at the relatively low levels that these wages are set in the United States. The reason is that only a small percentage of the workforce earns wages at, or just above, the prevailing legislated minimum. Therefore, minimum-wage hikes of the sort that are typical in the U.S. cannot possibly propel the economy to the brink of “collapse” or unleash economic “doom.”
And here's me making much the same point a couple of weeks ago:
And finally, let me once again draw attention to what the prediction is:
Please do note though what is the prediction. Not that there’s going to be a wiping out of employment opportunities, nor that the economy of Seattle is going to become a howling wasteland. Rather, that less human labor will be employed at $15 an hour than would have been employed if the minimum wage had not risen to that amount.
Please note, even Jared Bernstein agrees with this point. It is not controversial in the slightest.
It is this rather delicate point that the Mother Jones article manages to prove, entirely in contradiction to what they think they're saying. But then it does have to be said that our Social Justice Warrior writing the article seems to have a slight difficulty with some economic facts. For example, we are told this:
Obviously, there's a limit to how high you can raise the minimum wage without harming the economy, but evidence suggests we're nowhere close to that tipping point. The ratio between the United States' minimum wage and its median wage has been slipping for years—it's now far lower than in the rest of the developed world. Even after San Francisco increases its minimum wage to $15 next year, it will still amount to just 46 percent of the median wage, putting the city well within the normal historical range.
That final sentence would put the median wage in San Francisco up at $32, $33 an hour. Which, when the median wage for the US is around $17 an hour and the mean wage is a shade under $25 would be a really remarkable number. Anyone with a basic numeracy about economic numbers in general would not believe that at all. And of course it's not true at all. As we can see here the mean hourly wage in SF is up at that sort of level. And OK, perhaps not everyone needs to know the difference between a mean and a median, nor the manner in which, in a distribution open ended at one end and closed at the other (there's no negative wages and no obvious cap on hourly wages at the top end), the mean is generally going to be higher than the median. But we might hope that someone who wants to write an article on mean and median wages would know it.
And the truth is that this relationship between the minimum and median wages is very important. A minimum wage which is 10% of the median wage does nothing for anyone. It doesn't have any unemployment effects because it doesn't raise anyones' wages. For the obvious reason that no one is paid 10% of the median wage. Labour markets simply don't work that way (outside of those insitutionalised in prisons and the like, giving you a good idea of the sort of social and economic control that would be necessary to generate such wage rates). A minimum wage which is 100% of the median wage would cause significant unemployment effects. Because, by definition, 50% of the population are getting less than the median wage and so we would have just raised the wages of 50% of the population (perhaps minus a few percentage points of those who were being paid exactly the former median). As best we know, and these things are estimates, an art more than a science, significant unemployment effects start arriving when the minimum wage rises to 45 to 50% of so of the median wage. Simply because very few people get paid less than that in any case so the move changes very little for anyone.
But, do really note: it's of the median, not the mean, wage which is what makes that idea that SF's $15 is under 50% of the median wage for that city so odd.
But I promised you proof that a rise in the minimum wage means less labour employed. And that's what Mother Jones provides us with even as they don't realise that they do. For, as above, they're rather missing on the understanding the nuances of economics thing.
Economists with the Institute for Research on Labor and Employment at the University of California-Berkeley have found similar results in studies of the six other cities that have raised their minimum wages in the past decade, and in the 21 states with higher base pay than the federal minimum. Businesses, they found, absorbed the costs through lower job turnover, small price increases, and higher productivity.
Those last two words. Higher productivity sounds so great doesn't it? However, it's a synonym, a direct one, for "employ less labour".
We can have the productivity of anything. For example, we could talk about the productivity of tantalum in making capacitors for smartphones. As we moved from making solid Ta capacitors to making surface mount ones we went from using 1 or 2 grammes of Ta in a capacitor to using 30-40 milligrammes in one. We raised the productivity of our use of Ta therefore. Note what has happened here: we're reduced the amount of tantalum that we're using to achieve any given engineering end state. It would be odd to talk about the productivity of Ta, for sure, but it's possible. More normally we talk about the productivity of more general things, like capital, or labour.
So let us consider the productivity of labour. What we measure is the value of the output from one hour of labour. Just to make up some numbers, if that value of output rises from $30 to $40 for one hour then we say that the productivity of labour has risen by 33%. Excellent, that's great, we think that rising productivity is very important. As Paul Krugman has said, productivity (of labour) isn't the only thing but in the long run it's pretty much everything. It's what determines our general standard of living. But also note: just as with the tantalum, by raising that productivity we're also reducing our consumption and purchase of labour to reach any given level of output. In that specific example we now need 33% less labour to have the same output.
Thus, ineluctably, raising the productivity of labour reduces the employment of labour for any static level of output. And what is Mother Jones telling us about how businesses react to a rise in the minimum wage? They raise the productivity of labour. That is, they employ less of it for whatever level of output they have as compared to when the minimum wage is not raised.
The end result of this is that we get the absolute joy of seeing a refutation of the idea that raising the minimum wage reduces employment actually containing the proof that it does. At which point there's not really much left to do except offer Mother Jones a hearty "Well done there chaps" is there?
Except, perhaps, to point out that if you actually, as a matter of public policy, wish to raise wages then the way to do it is to engineer a full employment economy. Ask the Fed to hold off on raising interest rates for a few more months perhaps, rip down some of the barricades of regulation that stop people creating jobs, possibly even cut the tax burden so that people have more to spend on the products of that labour. Not quite as enjoyable as marching around shouting "Fight For Fifteen" to be sure but a great deal more effective in reaching the end goal of higher wages for the working poor.
