By Kevin D. Williamson
Wednesday, June 28, 2017
Thanks to a new study from economists at the University
of Washington, American progressives have learned that the laws of supply and
demand apply to the labor market. Everybody already knew that, except for
professional economists.
The study, commissioned by the city government of Seattle
and published by the National Bureau of Economic Research, found that Seattle’s
law incrementally raising its minimum wage — to $13 an hour last year, en route
to $15 — resulted in low-wage workers’ earning less money rather than more.
This surprised many in Seattle, who had been assured by all the best
economists, including Paul Krugman, that such a thing would not come to pass.
So, what happened?
The short version is: You can pass a law saying you have
to pay low-wage workers more, but you cannot pass a law that says you have to
hire them in the first place, or that you cannot cut back on hours when the
price of hourly labor goes up. As businesses responded to the new higher labor
costs by reorganizing their processes in less labor-intensive ways (the classic
examples here are the replacement of wait staff with computer screens in
restaurants and the replacement of bank clerks with more sophisticated ATMs),
the law that was supposed to increase low-wage workers’ incomes actually
reduced them — substantially, by an average of $125 a month.
The first lecture in Economics 101 is that supply and
demand interact through prices. (And a wage is a price — the price of labor.)
Producers will produce more of any given product at a higher price, and
consumers will consume less of it at a higher price. At some point, producers’
preferences coincide with those of consumers, and that is the market price that
emerges. That’s a rough model, of course, but it describes the basic reality of
how commercial transactions actually happen.
When Economics 101 tells you something you don’t want to
hear, the thing to do is to commission a study. As Ronald Coase observed: If
you torture the data enough, it will confess to almost anything. For
progressives desiring to raise the minimum wage in spite of the consequences
predicted by basic economics, that study came from two Princeton economists,
David Card and Alan Krueger, who in 1994 compared employment at fast-food
restaurants in New Jersey to that of their counterparts across the river in
Pennsylvania after New Jersey enacted a relatively modest increase in the
minimum wage. The Card-Krueger study found that raising the minimum wage had
not cost jobs in New Jersey. There were many
problems with the study: It used fast-food employment as a proxy for
minimum wage even though most fast-food workers do not make the minimum wage;
it ignored workers in other industries, such as hospitality, that might have
been more strongly affected; it covered a relatively short period of time; it
relied on telephone surveys of restaurant managers rather than on hard
employment data.
The Card-Krueger study included only a few months’ worth
of data from after the time the minimum-wage hike went into effect. Some
economists suspected that while fast-food operators were unlikely to simply
start hacking away at their staffs in the months following an increase in the
minimum wage (which, again, would not affect the wages of most fast-food
workers), they would instead change their medium- and long-term plans, choosing
less labor-intensive modes of production, substituting capital for labor
through automation, reducing hours to make their labor consumption more
efficient, etc. And that is, in fact, what subsequent studies found:
Restaurants didn’t just start firing people after the minimum wage went up, but
the wage hike did significantly reduce future job growth and labor consumption.
As Preston Cooper of e21 put it:
This suggests that in a short-term
response to the minimum wage hike, few businesses fired anyone. Instead, they
raised their prices — something Card and Krueger found — to cover their extra
labor costs, and left employment where it was. It makes sense, as employers
might not want to immediately, significantly alter their business plans in
response to a small increase in the minimum wage.
In the medium to long term, though,
a different picture emerges. Higher minimum wages mean fewer businesses will
open, and struggling ones will close more quickly. Instead of affecting the
number of jobs in an economy, minimum wage hikes affect the rate of job growth.
Diana Furchtgott-Roth, formerly the chief economist at
the Labor Department, offered a different criticism: “The regression statistics
explain little variance, and practically none of the coefficients are
significant. Card and Krueger infer that minimum-wage policy makes no
difference. A more likely interpretation is that the equation excludes
important variables.” In short, Card and Kruger mistook an absence of evidence
of a minimum-wage effect for evidence of the absence of a minimum-wage effect.
It is not entirely surprising that a more dramatic effect
was seen in Seattle: New Jersey hiked its minimum wage by only 80 cents an
hour, or by 19 percent, from $4.25 to $5.05 an hour. Seattle will raise its
minimum wage $9.47 to $15, an increase of nearly 60 percent. The law increases
the statutory minimum in stages — with different schedules for large and small
employers, and for those who do and do not provide medical benefits — but will
be at least $15 for everyone by 2021. Also, the New Jersey minimum-wage hike
happened in the booming 1990s, not in the current conditions of economic
stagnation for relatively low-skill and low-wage workers. A little irony,
there: The economy was booming in the 1990s in part because the young,
high-earning workers of Generation X were inventing a great deal of the
technology that would replace so many of the young, low-wage workers of the
coming generations.
(You’re welcome, Millennials.)
Our progressive friends like to talk about how much they
love science, because there is a great deal of prestige attached to science,
and that prestige is relatively easy to misappropriate for progressive
political ends. For example, the question of what to do about climate change is
not really a scientific question at all — it is to a certain degree an economic
question and to a much greater degree a political question. But deputizing
“science” in support of one’s positions, and lampooning the opposition as
knuckle-dragging flat-earthers, is rhetorically effective. But sometimes
science, and the social sciences, aren’t on progressives’ side, especially when
the dismal science is called into service. Economics tells the Left that its
big ideas have big costs, that there are real limitations on what can be done
by government, and that tradeoffs are not optional. So when a study comes up
that seems to relieve progressives of the burdens of the science they don’t
want to talk about, you can be sure that the study will be heralded as an
“intellectual revolution,” which is what Professor Krugman called the
Card-Krueger study in his influential New
York Times column. Genuine intellectual revolutions are few and far
between.
This is not to say that the Card-Krueger study was
untrue, exactly, or that it was conducted in anything less than good faith.
(And surely there will be shortcomings in the Seattle study.) It may very well
be the case that you could increase the minimum wage by 80 cents an hour in New
Jersey in 1994 without seeing dramatic short-term effects on the headcounts of
fast-food operations in the Garden State. But you cannot conclude from that
that larger wage hikes, or wage hikes undertaken in different kinds of economic
circumstances, will not have an effect. That big jump in the Seattle minimum
wage seems to have had a fairly dramatic one.
A great deal of economic policy is marred by magical
thinking. The Left has its supernatural Keynesian multiplier effect, the Right
has its self-financing tax cuts, and everybody clings to the myth about Henry
Ford bootstrapping his business into greater profitability by paying his
factory workers enough to buy his cars, which is a complete fiction. The truth
is that demand curves slope downward: If you raise the price of something,
including an hour of fry-guy labor, buyers will want less of it.
But magical thinking is much easier, and much more
amenable to the political cast of mind, than undertaking the very hard,
thankless, and uncertain work of doing the things necessary to turn
low-skilled, low-earning workers into more productive and prosperous workers.
Magical thinking is how you get a major political party and its hothouse
intellectuals seriously convinced that the way to make health care more
affordable is to pass a law called the Affordable Care Act. It is how you get
Republican budget proposals that involve jacking up spending on the military,
keeping Social Security and Medicare on their current stratospheric trajectories,
cutting taxes, and . . . balancing the budget in ten years. (“But we’ll cut
foreign aid!”) It’s how you decide to fix the problem of illegal immigration
with a wall on the southern border when most illegal immigrants do not enter by
sneaking over the border. It is how you spend 60 years thinking your prissy
little moral declarations about the necessity of good public education for
every child will result in a good public education for every child, how you
come to believe that shouting “Health
care is a human right!” will somehow summon general practitioners from
the vasty deep and exnihilate hospital beds into existence.
But the next time you are tempted to indulge in that sort
of intellectual laziness, consider that a lot of poor people in Seattle are
going to have trouble paying their rents or feeding their children because
policymakers who did not want to face the economic facts allowed themselves to
be led astray by Professor Krugman, a first-rate economist who devolved into a
second-rate newspaper columnist, who lent the considerable prestige of his
Nobel prize to a policy proposal many of his fellow
progressive economists knew to be defective even as they refused to
criticize it in public. The poor people in Seattle know that there is no
such thing as a free lunch. If only the economists did, too.
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