Minimum Wage

In Other News, Water is Wet

One of the most beloved fairy tales in this country is that the Government, which seems unable to balance its own books, can by fiat, with no consequences to employment, tell employers that they must pay a minimum wage.  Economist Thomas Sowell, who, like me, began his career earning less than the then mandated minimum wage, explains what an appallingly bad idea this is:

One of the simplest and most fundamental economic principles is  that people tend to buy more when the price is lower and less when the  price is higher. Yet advocates of minimum wage laws seem to think that  the government can raise the price of labor without reducing the amount  of labor that will be hired.

When you turn from economic principles to hard facts, the case  against minimum wage laws is even stronger. Countries with minimum wage  laws almost invariably have higher rates of unemployment than countries  without minimum wage laws.

Most nations today have minimum wage laws, but they have not  always had them. Unemployment rates have been very much lower in places  and times when there were no minimum wage laws.

Switzerland is one of the few modern nations without a minimum  wage law. In 2003, “The Economist” magazine reported: “Switzerland’s  unemployment neared a five-year high of 3.9 percent in February.” In  February of this year, Switzerland’s unemployment rate was 3.1 percent. A recent issue of “The Economist” showed Switzerland’s unemployment rate  as 2.1 percent.

Most Americans today have never seen unemployment rates that  low. However, there was a time when there was no federal minimum wage  law in the United States. The last time was during the Coolidge  administration, when the annual unemployment rate got as low as 1.8  percent. When Hong Kong was a British colony, it had no minimum wage  law. In 1991 its unemployment rate was under 2 percent.

It therefore came as little surprise to me yesterday when the CBO estimated that raising the minimum wage would kill off half a million jobs in 2016:

 

President Obama’s proposal to raise the minimum wage to $10.10 per hour would cost 500,000 jobs in 2016, according to a report released Tuesday by the nonpartisan Congressional Budget Office.

The report also found hiking the wage from $7.25 per hour would raise income for about 16.5 million workers by $31 billion, potentially pulling nearly 1 million people out of poverty.

The White House and economic groups on the left immediately pushed back at the CBO’s conclusions on jobs even as they hailed the findings on poverty, saying its conclusions on jobs ran counter to other research.

“CBO’s estimates of the impact of raising the minimum wage on employment does not reflect the current consensus view of economists,” Council of Economic Advisers Chairman Jason Furman wrote in a blog post. “The bulk of academic studies, have concluded that the effects on employment of minimum wage increases in the range now under consideration are likely to be small to nonexistent.”

Given its findings on poverty alleviation, Furman told reporters the CBO report was an overall positive for the White House.

“Sometimes you have to have a respectful disagreement among economists,” Furman said in a conference call. “I think a lot of economists who have looked at [the] literature would summarize it differently than CBO has done here.”

Democrats are hoping to make the minimum wage a top issue in the 2014 midterms if the GOP blocks passage of a bill, but the CBO report would bolster Republican arguments for stopping a wage hike. →']);" class="more-link">Continue reading

Progressives Are Not Cynical Enough About Business

One thing my study of economics has taught me is that businesses will tend to act in whatever way they think will bring them the most profit. There may be rare exceptions, and of course businessmen often have mixed motives. But the overall tendency in this direction is very strong.

My guess is that if you surveyed people, many more self-described progressives would say that they agreed with the statement than self-described conservatives. Indeed, progressives often criticize conservatives and libertarians for being insufficiently attuned to the rapacious self-interest motivating businessmen.

Yet oddly enough, it seems to me that one of the main problems with progressive thought is that they don’t take the idea that businesses act to maximize profit seriously enough. For a group that claims to have a low opinion of businessmen, progressives have a strange habit of advocating policies that will only work on the supposition that businesses won’t act to maximize profit, and then react with shock when they proceed to do so.

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