The minimum wage, economics and dishonest studies

Gerard Jackson

Nottrampis made comments about my post on wages and the fallacy behind union bargaining. My thesis, as he called it, is an economic law. To wit: if you price the services of any good above its market clearing price you will get a surplus. And that also goes for labour. The Great Depression testifies to that fact.

Arindrajit Dube is one of the 5 so-called economists that Nottrampis referred to. Now if Dube’s ‘analysis’ were right then there would be no youth unemployment in America. Yet when he published his study in 2010 youth unemployment had averaged about 18 per cent for the year. It is now 2014 and he is still peddling his snake-oil even though youth unemployment is still being reported at crisis levels.

Last March the Centre for American Progress (Soros-funded leftwing ‘think tank’ that loathes free markets) sponsored and published The Effects of Minimum Wages on SNAP Enrollments and Expenditures by Rachel West and Michael Reich. According to this pair of alleged economists, raising the minimum wage would cut federal “spending by $4.6 billion” per annum. So not only would raising the minimum wage reduce poverty and promote economic growth it would also eliminate the deficit and perhaps even reduce federal spending. I have not read anything this stupid on economics since Nancy Pelosi claimed that raising dole payments would generate economic growth.

These economists rest their argument on two stools, the first one being that the wage rate must be indeterminate, meaning that an increase in the rate would not have any effect on the demand for this kind of labour. The second stool is based on the fallacy that consumption drives the economy. For obvious reasons I shall focus entirely on the first stool. If the wage rate were really indeterminate then there would be no youth unemployment problem in the US. All able bodied youngsters who were willing to work would find it. Yet when they published their so-called study youth unemployment rate registered 15.8 per cent, a fact that they studiously ignored.

Now for a little history: In 1948 the U.S. minimum wage was 40 cents an hour and applied to only a small portion of the workforce. The unemployment rate for black and white teens age 16 to 17 averaged about 10 per cent. In 1950 a Congressional decree raised minimum wage to 75 cents an hour and then in 1955 to $1 an hour. Further increases in the minimum wage not only saw youth unemployment rise but not evenly. A yawning chasm appeared between black and white unemployment rates so that by 1978 white youth unemployment stood at about 15 to 20 per cent and an appalling 40 to 45 per cent for black teenagers. By 1995 it was 15.6 percent for whites and 37 per cent for blacks.

The callous indifference of these ‘economists’ to facts that contradict their ideology brings us to the use and abuse of economic studies. The late professor Orme W. Phelps was a firm believer in the benefits of the minimum wage. He cited studies proving to his satisfaction that increasing the minimum wage had no detrimental effects on the demand for labour*. (What is really meant is the demand for a certain type of labour). In fact, he implied the opposite. He approvingly cited The Monthly Labor Review, September 1950, which based its favourable findings on Southern sawmills where in 1949 69 per cent of workers earned less than 75 cents per hour but after the minimum wage increase in 1950 the figure fell to 8.2 per cent. This fall was followed by a general increase in investment and wage rates.

Hardly able to contain himself Phelps described the report’s conclusions as “serene. And no wonder. The report stated that

the minimum wage increase had not, by December 1956, resulted in any substantial changes in the economic situation of the nation as a whole, as measured in terms of employment, [or] unemployment . . . .

What Phelps omitted is that no sooner had Congress raised the minimum than the Korean War exploded. To finance the war the US government resorted to a rapid monetary expansion which in turn sparked off an inflationary boom that saw prices rise and unemployment dive from 5.9 per cent in 1949 to 2.9 per cent in 1953. It was the boom and not the increase in the minimum wage that stimulated the Southern sawmills.

Reading West and Reich immediately brought to mind Phelps’ book. At least Phelps recognised the existence of marginal productivity theory whereas West and Reich felt free to write about the minimum wage without once referring to any economic theory of wage rate determination. In fact, they made no mention of economics at all. Not only that, there was absolutely not a single mention of the youth unemployment rate.

These leftwing ‘economists’ and their allies in the phony media like to stress that their statistical findings supports their destructive proposal but the fact remains that the empirical evidence refutes them: It is called the unemployment rate.

Nottrampis says that Australian unions now have to take in to account a company’s financial position. Whenever here stuff like that I think of Detroit. It is the value of the workers’ output that is the crucial factor, not the financial situation of any firm. If wage rates are pushed to the point where they exceed the value of the workers’ product then unemployment will emerge.

Any study that promotes a minimum wage without attempting to explain the youth unemployment crisis is not only worthless it is downright dishonest.

Note: Nottrampis has posted two further comment in which he says that “if wages are rising at 2% and inflation is 3% you do not need to be Einstein to know what is going on and what it means for a firm!… it means your company’s labour costs are declining!!” An Einstein would be making a serious error in following this line of reasoning because producer prices have been rising at about 4 per cent per annum.

1. Consumer prices are not input prices.
2. Price movements are never uniform because money is not neutral.
3. During a boom input prices rise faster than consumer prices.

Aggregates can be horribly misleading, particularly when it comes to prices. I shall shortly do a post on what I call the tyranny of aggregates.

*Introduction to Labor Economics, Robert E. Kreiger Publishing Company 4th edition, 1978. In 1978 white youth unemployment stood at over 15 per cent and an appalling 40 per cent plus for black teens. As a committed statist Phelps saw no reason why these shocking figures should cause him to revise his views. It is now 2014 and we are still getting the same destructive nonsense from leftists.

11 thoughts on “The minimum wage, economics and dishonest studies”

  1. What we leaned here is that the left-wing economists are not interested in facts unless they support their opinions.

  2. Right on, Sarah. This guy Phelps writes a book defending the minimum wage and then ignores the youth unemployment rate. theyve got no respect for the truth.

  3. No Jerry,
    the 5 economists were all Aussies.

    nothing to do with Dube.

    They advocated using family tax credits to allow family incomes to remain as they are but allow minimum wages over time to fall.

    On real labour costs almost every empirical study I have read have shown a positive correlation between real labour costs ( which uses the country’s CPI) and unemployment.

    I hope people realise Gerry and i are on the same page with regard to high minimum wages and the level of unemployment.
    I have never supported high minimum wages.

  4. Just to enlarge on this. Two of the economists were Michael Keating and Chris Richardson. Minimum wages would be held constant for a considerable time thus falling over time but Family incomes would rise because of the Family tax credits.

    on real labour costs Jerry is only correct if you only think of Manufacturing. Services employs the vast majority of employees and is relatively unaffected by that series hence why the CPI is used in almost every study.

    in the Great Depression in OZ unemployment was around 20% but rose when real wages rose despite wages being cut because of Deflation. unemployment fell sharply once a massive devaluation ( as described by one Ben Bernanke) caused Actual inflation in Australia and thus real labour costs fell quite a bit.

  5. I shall respond in to the points you raised, Homer, in another post. As for monopsony, I stand more of a chance of finding a unicorn than I do of finding a monopsonist, I shall explain in the near future why the monopsony model is a misuse of marginal productivity theory.

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