The Minimum Wage, Part Two:
Challenging Right-Wing Think Tanks' Economics-Lite
by Ellen Dannin
When arguments turn to economics, most of us (a) flee, (b) fall asleep,
or (c) give up and figure it's just too hard to understand.
But you can stand your ground, even if you have never taken an economics course. What it takes is being curious and willing to ask questions and challenge claims. It also helps to know that most of the pundits of Right-Wing Think Tanks (RWTTs) who fall back on economic claims base them on economics-lite. They use a few facile
and sterile ideas and stretch them to fit all situations. These ideas
are mere theories (in the pejorative sense of the word), and, unlike scientific theories, they have no evidence to support them. Indeed, when put to the test, these ideas tend
to be falsified. That is, the evidence does not support them (more on
that below). When your common sense tells you that they seem to be
over-simplifying, you are probably right, er, correct.
All this should give you confidence that you can take on proponents of
right-wing ideas, even when they resort to using economics-lite.
It helps to have some information in a battle against RWTTs' economics-lite, but it is not hard to get the
basics. Here is a brief survey of basic arguments and information on the
Most neoclassical (i.e. conservative) economists claim that increasing
the minimum wage causes unemployment. They claim this conclusion is
supported by many studies. You may think this means actual experiments
where data are gathered. That is not the case. When they refer to tests
or studies, most often they mean
The first and still most rigorous testing of the relationship between the
minimum wage and unemployment was performed ten years ago by David Card
and Alan Krueger, economists at Princeton University. Their book Myth and Measurement: The Economics of the Minimum Wage (1995)
compiles the results of a number of empirical studies they performed. Their data are available here, so that others can
assess and challenge them. Their work is open to public view and criticism.
In the most well known study in Myth and Measurement, Card
and Krueger compared unemployment rates in the
contiguous metropolitan area of two neighboring states, New Jersey and
Pennsylvania. New Jersey had raised its minimum wage above the federal
minimum. Pennsylvania had not.
Neoclassical economics predicts that New Jersey's unemployment rate
would rise or at least its employment growth would slow as New Jersey
employers laid off workers to contain their labor costs. But the opposite
was true. Employment growth was slightly higher in New Jersey than in Pennsylvania. Their data have been re-analyzed and confirmed.
Other studies in
the US and elsewhere have come to various
conclusions, both confirming Card and Krueger and supporting the
neo-classical theory. The mixed results themselves, however, falsify the claim that raising the minimum wage always
results in increased unemployment. (If it
were true, increases in the minimum wage should always lead to
more unemployment. Since this is not the case, there must be some other factor[s] to explain these mixed outcomes.) So if you hear
that there are studies that support the neo-classical theory, you are hearing
only part of the story.
The Card and Krueger studies have been fiercely attacked by
conservatives and corporations. A study that the cons and corps allege refutes
their findings, however, was funded by a fast food lobbying group, and those who
conducted the study, unlike Card and Krueger, have refused to make their data public.
In any case, the weight of the evidence is now sufficiently compelling
that over 552 economists, including Nobel Laureates and past presidents
of the American Economic Association -- not exactly radical groups -- have signed
on to an ad publically calling for an increase in the minimum wage.
If you want to know more, here are some discussions of the Card and
John Schmitt, "The
Minimum Wage and Job Loss: Opponents of Wage Hike Find No Effect"
Kevin Sohr and Walter Block, "The Minimum Wage"
Here is a compilation
of a large number of studies and discussions from many sources on
the minimum wage. (You may also want to observe and participate in a lively
discussion about the minimum wage and Card and Krueger's findings.)
There's More to Life than Economics
The argument against the minimum wage is really an argument against decent wages for workers -- just like the Fed's theory of inflation and unemployment.
We have had a natural study of the
relationship between rising wages and unemployment in the 1990s. For
years, the Fed raised interest rates in order to keep inflation under
control. The connection between increased interest rates and rates of inflation
is wages and unemployment: when the unemployment rate goes down, workers get in a stronger position to demand higher wages, which lead to higher inflation, and that's bad for bondholders. (In fact, during that period, the business
pages headlines would show that investors worried every time
unemployment fell, because it meant the Fed was likely to raise interest
rates.) The Fed's theory is referred to as NAIRU, the
nonaccelerating inflation rate of unemployment. The belief was that
whenever unemployment fell below some number, believed to be roughly
6.2%, inflation would take off.
But in the early 1990s, under some pressure from the Clinton
administration and with no evidence of inflation, the Fed began to
restrain itself from raising interest rates. During this period,
unemployment fell and there was little or no evidence of
inflation. This left the Fed in a quandary: Federal Reserve Bank of San
Francisco, Economic Letter 97-35, "NAIRU: Is It
Useful for Monetary Policy?" (November 21, 1997).
We are now in the midst of another natural experiment in which the
minimum wage is at historically low levels. Throughout this period
unemployment has remained high, despite the jobs left open as soldiers
have been stationed abroad or called up for active duty in the US.
The battle over the minium wage is on, though not on center stage. Most
state minimum wages are at the federal minimum of $5.15 an hour. That's a total of $10,712 a year
for full-time work.
The 2005 federal
guidelines define poverty as incomes at or below the following
levels for a family of 1 to 3 members.
Based on your own experience, can a person, let alone a family, thrive -- or even just survive
-- on the minimum wage? Can it allow people to live in dignity? If you are uncertain, try the Minimum Wage Challenge.
Or read a collection of stories (case studies) on what it means to be
poor in America: David K. Shipler, The Working Poor: Invisible
in America (here are two reviews of the book and an interview with the author, which includes a link to the interview in streaming video).
Or read Raise
the Floor: Wages And Policies That Work For All Of Us, a very
readable collection of data and other information about the minimum wage (click here for
more information that supplements the book).
The best weapon against RWTTs' economics-lite, after all, is to always remember that there is more to life than economics.
Ellen Dannin is Professor of Law at Wayne State University Law School. She is the author of Working Free: The Origins and Impact of New Zealand's Employment Contracts Act (Auckland University Press, 1997) and many other publications. Her forthcoming book Taking Back the Workers' Law: A Strategy for Values-based Labor Law Reforms will be published by Cornell University Press.