Ellen Dannin, "The Minimum Wage, Part Two: Challenging Right-Wing Think Tanks' Economics-Lite"

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 minimum wage.

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 econometric modeling.

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 Krueger studies:

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.

1....................................................... $9,570
2....................................................... 12,830
3....................................................... 16,090

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.