How Minimum Wage Has Nothing To Do With Economics

Noah Smith thinks that a $15 per hour minimum wage is a bad idea economically. Admittedly, he makes a compelling argument that regions could suffer, and that any minimum wage should be made on a more local level. However, the trap that Noah fell into, along with a lot of Economists is that Minimum Wage has very little to do with actual economics. Minimum wage has always been a sociopolitical policy.

The proposed $15 per hour minimum wage represents a 106% increase in wages. Noah, along with others think this is uncharted territory, but it really isn’t. In 1950, there was an 86% increase in minimum wage, and nothing bad happened. There were other significant increases without anything bad happening. Progressive states have raised their minimum wage well above the federal level, and guess what happened? Nothing bad (and some good). This kind of shows that minimum wage really does become separated from economics.

fredgraph

Yes, there are interstate trade issues, and the more people earn, the more they consume, which is good for the economy (à-la-Keynes), but first let’s look at the history of minimum wage: the Fair Labor Standards Act which originally created minimum wage (along with other work standards) was never passed because of economic issues. It was passed because there were people dying in the streets, along with a myriad of social problems in labor, including people getting killed for working (and sometimes for not working). The “Invisible Hand” it turned out, was really an “Invisible Fist.” It was also passed because states refused to do anything about it, with most states continuing that trend in 2015.

Another issue in Noah’s piece, which I’ve heard other economists talk about is “regionalizing” minimum wage. So a person working in McDonalds or Walmart in Alabama has a labor value that’s less than a McDonalds or Walmart worker in Chicago, doing the exact same job, simply because of where they live. Somehow the value of labor is equated to the cost of living in a region. Good economics, but assures that people will get trapped into wage slavery. People generally do not get to chose where they are born, and if they’re born in the wrong place at the wrong time (say, Alabama in 2015), then their socioeconomic chances are slim for their lifetimes. This makes minimum wage NOT an economic issue, but a SOCIAL one.

In this “regionalism” scheme of labor, economists forget that there is a war on labor within many states. States are not likely to set, or increase minimum wage anytime soon. The whole purpose of the Federal Minimum wage in the 1930s was the fact that states refused to do it. With a few exceptions, not much has changed on the state level. This makes minimum wage NOT an economic issue but a political one.

The real philosophical question is this: what’s the value of labor as an aggregate? This is the same question that has been around since David Ricardo circa 1800, yet most economists ignore today (I’m assuming because they think Ricardo & Marx were whacko). The Fair Labor Standards Act, and Congress says that the value of labor is at a minimum, worth $7.25 per hour. Many economists say that wage rigidity hampers the mostly-free market. There has been wage rigidity since 1938, yet CEO-to-median pay spreads are the highest in history.

What about that wage-price spiral that most economists use as a reason against a minimum wage? Also known as “wage inflation,” as the chart shows, there’s simply no empirical evidence of it historically. Not one economist has ever produced a single piece of solid empirical evidence of a wage-price spiral. People who make more wages have never actually caused economic problems on any level.

And with notably rare exception, I call Bullpucky on any economist in the public sphere that says that they are concerned about labor. Labor economics has always been marginalized in the world of economics as a discipline. Here are some examples of marginalized labor:

  • One of the mandates of the Fed is to obtain full employment. Yet in their quest for “stable prices,” (the other mandate), employment has always taken a back seat. There is no empirical evidence that employment has any effect on price stability (inflation).
  • The 7.8% private sector union rate of the United States: the lowest of the G7 nations.
  • The lack of any acknowledgement of the effects of Quantitative Easing’s impact on labor, which (in one of my papers) shows a devastating impact to the full time labor force and labor force participation rates.
  • If productivity calculations are down, then many economists still see it as labor choosing not to work, instead of lack of capital investment demand
  • In calculating GDP, consumption demand is everything. Yet in the national income, labor to produce consumption demand is not calculated.
  • On the micro level, labor is always seen as a “variable” cost that can (and needs to be) controlled by the business owner(s) because fixed costs cannot be controlled. No one has ever (nor do they dare) to suggest that labor become a “fixed cost.”

The examples go on ad nauseum.

Besides, we all know that Walmart is not alone. There are many businesses that have used the “hours” mechanism to avoid minimum wage laws, and saddled the needed labor onto the backs of (misclassified) “salaried” employees. It’s basic math that most economists won’t touch.

What Noah and others forget is that while economically, federal minimum wage makes little sense, the social and political facts are that federal minimum wage has never had anything to do with economics. Minimum wages is about preventing proletariat uprisings with pitchforks and torches by attaching some arbitrary number to the value of labor in America. Scrapping the minimum wage may (or may not) make for better economics; but it will NOT make for a better society.

So the two questions I leave in the debate are these: what is the value of labor (Welcome Back, Ricardo!)? And what is the purpose of economics as a discipline – to make the math work, or to make society better, even if it means disequilibrium?

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This entry was posted in Economic Theory, Economics, Labor, Macroeconomics, Political Economy, Public Policy, Socioeconomics, Sociological Theory, Sociology, Wages. Bookmark the permalink.

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