STAFF NEWS & ANALYSIS
Economist's Wishing and Hoping Won't Make a Minimum Wage Effective
By Staff News & Analysis - February 20, 2013

Minimum human wages … The empirics of the minimum wage debate are complex, but it isn't impossible to draw some conclusions. A recent Free exchange column attempted to do just that: America's academics still do not agree on the employment effects. But both sides have honed their methods and, in some ways, the gap between them has shrunk. Messrs Card and Krueger moved on to other work, but Arindrajit Dube at the University of Massachusetts-Amherst and Michael Reich of the University of California at Berkeley have generalised the case-study approach, comparing restaurant employment across all contiguous counties with different minimum-wage levels between 1990 and 2006. They found no adverse effects on employment from a higher minimum wage. They also argue that if research showed such effects, these mostly reflected other differences between American states and had nothing to do with the minimum wage. – Economist

Dominant Social Theme: There is a case to be made for a minimum "human" wage.

Free-Market Analysis: Price fixing is back with a new title, "human" – as in "minimum human wage." We are indebted to the The Economist magazine for bringing us this latest jargon.

We disagree with the concept, of course … profoundly. As we pointed out just yesterday, The Economist's editors and writers are expert at creating government-oriented arguments where none existed before.

The idea is always to disparage government while providing a reluctant argument for its utility.

It's bad, government is, but even in its badness, there are elements to recommend it. One of them apparently is the idea that government can set a minimum wage without disrupting the economy. This is a variant of the old saw that government – the imposition of force on economic choice – can rectify "market failure."

In this case, what is being floated is the argument that if government sets a wage floor, it will have an inexorable ripple effect, raising wages for others as well. Government, in other words, can effectively combat the forces of the market itself and expand salaries for all, or almost all. The Economist article excerpted above continues (paragraphing ours):

Britain's experience offers … insights. The country's national minimum wage was introduced at 46% of the median wage, slightly higher than America's. A lower floor applied to young people. Both are adjusted annually on the advice of the Low Pay Commission. Before the law took effect, worries about potential damage to employment were widespread. Yet today the consensus is that Britain's minimum wage has done little or no harm.

The most striking impact of Britain's minimum wage has been on the spread of wages. Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality. Wage gaps in the bottom half of Britain's pay scale have shrunk sharply since the late 1990s.

A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage. Wage inequality fell more for women (a higher proportion of whom are on the minimum wage) than for men and the effect was most pronounced in low-wage parts of Britain.

In sum, the employment effects we'd expect if labour-markets were perfectly competitive " don't emerge. That's because there is some monopsony power to labour markets, associated with frictions like the cost of searching for new jobs. Those frictions give employers a bargaining-power advantage that a minimum wage can in some cases counteract.

Further, minimum wage increases may give both workers and employers an incentive to raise their productivity levels in order to preserve jobs: people work harder to justify the higher wage. That helps explain why minimum wage increases can influence pay higher up the income scale. That dynamic—that higher minimum wages often have less of an employment effect because they cause workers to exert more effort—is also something that left-leaning supporters of higher minimum wages should take into account.

To put it bluntly, this sort of argument is, well … useless. Anything the government does via regulation or law is basically a price fix, transferring wealth from those who have generated it to those who have not and won't understand its deployment.

Government, unfortunately, is force and human beings don't react well to force and tend to change their behaviors, as has been amply documented by the Austrians in free-market economic theory. Human action is not a hypothesis but an observation.

The Economist journos involved in this article claim there is a study that shows government can force some employers to pay their employees more – and that this force will have a beneficial effect on other wage earners.

We guarantee that at some point the findings of this study shall be overturned. In months or years – at some point – it will be found that the study didn't take certain variables into account, that the methodology was flawed or the statistical evidence insufficient.

It is not possible on the face of it to force people to pay other people a certain amount and expect anything positive – ultimately – from the process.

What is taking place here is the application of a kind of dominant social theme, that bigness renders results that smallness would not. If the model is big enough, common sense can be suspended.

But it's not true. Just because we are observing an economy of tens or hundreds of millions doesn't mean that human nature itself is reconfigured. Raise wages and some will benefit but many will not. Certain businesses will suffer and the overall labor pool may shrink.

Of course, union-affiliated business may gain power and clout while non-union business will lose. The result will be increased cronyism, corruption and political favoritism.

After Thoughts

There's no such thing as a free lunch no matter how Economist editors may wish for it to be so.

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