The view of economists concerning the minimum wage is virtually unanimous: The laws of supply and demand hold for the labor market just as for other markets.
If government artificially raises the minimum wage (the price of labor), employers will demand fewer low-skilled employees. At the same time, the supply of labor (job seekers) increases in response to a higher minimum wage. The net result is more workers seeking fewer jobs. Unemployment rises. This conventional result is depicted graphically in Figure 1.
Economists also agree that a higher minimum wage most adversely affects the very workers it is designed to help -- low-income workers with the fewest skills. Raising the minimum wage destroys jobs among the young and the poor in particular.
Secretary of Labor Robert Reich has presented some rather unorthodox economic ideas to support an increase in the minimum wage. His initial, unqualified, remarks were that "raising the minimum wage increases job growth." In other words, minimum wage increases create more jobs; as the minimum wage rises, unemployment falls. This eccentric theory is depicted in Figure 2. Even the most untutored in the laws of economics must realize the absurdity of this theory.
Recently, Secretary Reich has downgraded his specious claim from the status of a general law of economics to that of a special case which holds some of the time in certain special circumstances. Reich's reformulated special law of demand -- the Nouveau Reich Law of Demand (NRLD) -- can be stated as follows: "small increases in prices raise demand for a commodity while large increases in prices lower demand." Applied to the case of the minimum wage, the NRLD would predict that small increases in the minimum wage lower unemployment while large increases in the minimum wage raise unemployment. See Figure 3.
As a corollary to his new law, Mr. Reich contends that somewhere between "small" and "large" increases there exist a range of so-called "moderate" minimum wage increases that will have noeffect on the demand for low-wage labor. He characterizes a 90 cent increase as "moderate" and thereby asserts that the President's proposal to increase the minimum wage to $5.25 would have no effect on employment.
There are three fundamental problems with the NRLD and its corollary: 1.) They have no foundation in microeconomic theory; 2.) they are contradicted by the overwhelming weight of the empirical evidence; and 3.) they do not comport with common sense.
The Labor Secretary has been unable to articulate with any rigor the distinctive real-world conditions under which these new, special laws supposedly are valid. For example, it is difficult even to conceive how at the level of the firm an employer would decide to employee more workers because they have suddenly become more expensive. Moreover, Secretary Reich has not presented credible empirical evidence that the 21 percent increase in the minimum wage proposed by the President, a so-called "moderate" increase, would have no disemployment effects.
When the Labor Secretary's logic is dissected, his fallacious reasoning is revealed. First, he concedes that if the minimum wage were raised to ten dollars an hour, the conventional law of demand would apply, and employment would suffer. Second, however, he asserts that a one-cent increase would have no discernable effects on employment. The "proof" of this assertion rests on the trivial fact that if small enough changes are made in an economic variable, its consequences may go undetected by available measuring techniques.
In other words, Secretary Reich would have us believe that if the disemployment effects due to "small" changes in the minimum wage cannot be measured, they do not exist for so-called "moderate" increases, which in this case he defines to be 90-times-small. Unfortunately for policy makers, Secretary Reich has not found a painless way to raise standards of living for American workers. He mistakes measurement error for theoretical truth. His conclusion follows from the imprecision of the measuring device rather than the veracity of his theory.
His theory is based on nothing more than the prosaic observation that for small enough changes in prices, economists' measuring instruments cannot readily detect changes in demand. It does not follow, however, that such changes in demand do not actually occur.
Economics is not a natural science, and the statistical techniques employed by economists are far from precision instruments. The Economist cannot perform "natural" experiments like the chemist. He observes behavior through a fog. Though it is impossible to observe behavioral changes due to infinitesimally small changes in causal factors, this measurement problem does not imply that the law is invalid. Rather it implies that our measurement tools are inadequate. The weight of the evidence is clear. The law of demand applies to labor markets just as it does to all other markets.
Clearly, economists will be able to observe the impact of a 21 percent increase in the current minimum wage. It will create unemployment for low-skilled workers; the poor and the young. In 1981, the Congressionally-mandated Minimum Wage Study Commission (MWSC) concluded that a ten percent increase in the minimum wage reduces teenage employment by one to three percent. The President proposes raising the minimum wage by a little more than twenty-one percent. Based upon the findings of the Commission, the Clinton minimum wage increase can be expected to destroy between 130,000 and 400,000 jobs.
Furthermore, the findings of the MWSC demonstrate that Dr. Reich's apparently convincing example of a one-cent increase in the minimum wage is itself empirically unfounded. Even a one-cent increase could be expected to produce some minimal job loss. Based on the MWSC methodology, at least 2,600 jobs would be destroyed by such an increase, even though such a relatively small effect may well go undetected by economists' conventional measuring techniques.
The old fashioned truth is that compassionate politicians and well-meaning government programs like the minimum wage cannot repeal the laws of supply and demand any more than they can repeal the law of gravity. In fact, House Majority Leader and Chief Economist Dick Armey says without hesitation that it is the Minimum Wage Law that ought to be repealed!
Click here to see Figure 1.
Click here to see Figure 2.
Click here to see Figure 3.
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