Factual Studies
There are serious problems inherent in trying to study the unemployment
effects of minimum wages, as well as other problems that derive from the
way the U. S. Department of Labor chooses to approach the issue.
One problem that plagues minimum wage effects
studies is getting statistical data for the specific workers directly affected
by the minimum. Such workers are often only a small fraction of the total
work force. Even where a substantial proportion of the directly affected
workers lose their jobs as a result of a minimum wage increase, this effect
can be lost statistically in the random fluctuations in employment of the
much larger number of workers whose wages were always above the minimum.
The statistical extraction of the relevant changes is analogous to trying
to receive an electronic signal through a heavy background of static noise.
Different economists use different methods and devices to mute the background
statistical “noise” in order to read the signal. As a result of their different
procedures for grappling with this problem, economists' numerical estimates
of the unemployment effect of the law differ—a variation seized upon by
proponents of minimum wages5—but it is increasingly clear that
the consensus of these studies is that the law does cause substantial unemployment,
and that is more fundamental than the question of exact numbers.
One of the simplest ways of reducing the statistical
“noise” in the data is by selecting some age-group which is known to receive
very low wages, so that a relatively high percentage of the people in the
category chosen are earning low enough wages to be directly affected by
minimum wage changes. Teenagers are an obvious choice, and nonwhite teenagers
even more so. Here the serious unemployment effect of minimum wage rates
has been repeatedly demonstrated by economists operating independently
of one another and using different statistical methods.6
Extremely high unemployment rates among black
teenagers have been so highly publicized in recent years, and so automatically
attributed to employer discrimination, that certain historical facts must
be noted. Large racial differences in teenage unemployment are of relatively
recent vintage. In the late 1940s and early 1950s, there were no such large
differences, and indeed, black youngsters 16 and 17 years old had consistently
lower
unemployment rates than whites in the same age brackets.7 Surely
no one is going to claim that there was less employer discrimination
then than now. We all know better. What was the difference, then? Minimum
wages had not yet begun the rapid rise and spreading coverage which has
been the dominant pattern since then.8
The unemployment effect of minimum wages can
also be seen in international comparisons of countries that do and do not
exempt young people from the adult minimum wage. In countries where such
exemptions are slight or nonexistent—such as the United States and Canada—youth
unemployment is some multiple of adult unemployment. But where there are
exemptions that are large and cover a number of working years—as in England,
Germany and The Netherlands9—there are no significant differences
between youth unemployment rates and adult unemployment rates.10
These findings may reflect the special vulnerability
of teenagers as an inexperienced and relatively unskilled group—or they
may reflect the greater statistical ease of determining the facts for this
group. A recent survey of minimum wage studies notes “the lack of acceptable
continuing data on low-wage adults.”11 The same things
known to be happening to teenagers may also be happening to other very
low-wage people, who happen not to be grouped together statistically. There
are some scattered clues that this is in fact the case. For example, an
older study of domestic servants, before they were covered by the Fair
Labor Standards Act, showed that their ranks tended to be increased in
the wake of minimum wage increases, suggesting the displacement of low-skill
women from other employment that was covered by the act.12
Factual studies by independent (usually academic)
economists must be sharply distinguished from studies by the U. S. Department
of Labor. The Labor Department itself has recently been forced to acknowledge
the gap between its perennially optimistic conclusions and the consensus
of independent studies, the latter “using advanced economic and statistical
analyses.”13 The crudity of the Labor Department studies has
been scathingly criticized by academic economists.14 However,
even so, the actual numbers appearing in Labor Department studies
of minimum wage effects often show employment declines in the wake of minimum
wage increases, even though the stated conclusions of these very
same studies may be that the minimum wage did not cost people their jobs.15
Congressman Dent is correct only in the narrowest sense when he asserts
that “Not once in the history of the minimum wage has there been an adverse
report” from the Labor Department about “the lessening of job opportunities.”16
In this context, such a statement is far from reassuring. It will hardly
be the first clean bill of health given by an agency evaluating itself
or the legislation on which its own appropriations and staff depend. This
is especially unsurprising to me, as one who worked inside the Labor Department
on minimum wage research, and who personally experienced the pressures
to reach conclusions consistent with the department's interests.
Assumptions and Claims
The economic analysis which concludes that minimum wages increase the unemployment of low-wage workers rests essentially on the belief that labor is no exception to the general rule that less is demanded at a higher price than at a lower price. Attempts to overturn this basic economic principle usually reduce to one of four assumptions or assertions: (1) there is a fixed number of workers demanded, more or less without regard to wage rates; (2) low-wage workers are victims of employer monopoly power rather than low productivity, so that raising their wage rates will not price them beyond their value to the employer and therefore will not price them out of a job; (3) higher wage rates will cause employers to use labor more efficiently, so that workers will then become more valuable, and so will not lose their jobs; and (4) the increased “purchasing power” caused by higher minimum wages will lead to a greater demand for goods, and therefore a greater demand for labor, offsetting any tendency toward unemployment. These arguments will be examined in order.
Fixed Demand
The idea that an employer “needs just so many men” is an old one, which
dies hard. Factually, it can hardly stand up in the face of declining employment
after wage increases, or the virtual elimination of such occupations as
Western Union messenger and elevator operator (despite the continued existence
of telegrams and elevators). As a theory, it implies that the substitution
of capital—and of higher priced labor—is impossible. The problem arises
not when the theory is stated directly and explicitly, but when it is implicitly
assumed (and therefore insulated from critical scrutiny), as in the belief
that more jobs for teenagers mean fewer jobs for adults.
Employer Monopoly Power
Under special conditions, where there is only
one employer in a labor market or a group of employers acting in concert,
wages can be kept below what equally productive workers would earn otherwise.
There is a special economic theory for such “exploitation” situations,
and a minimum wage increase under those conditions would not produce unemployment.17
Unfortunately, low-wage workers are very unlikely to be in such situations.
All sorts of firms, industries, and even households employ unskilled workers,
and collusion under these conditions is out of the question. Even such
a staunch advocate of minimum wages as the late Senator Paul H. Douglas
noted that the market for unskilled labor was one of “almost perfect competition.”18
The sad fact is that low-wage workers are not so much underpaid as under-skilled,
and there is no easy way around this problem without pricing them out of
a job.
Efficiency
Theories of offsetting rising wages by increasing
efficiency have long been used to claim that minimum wage increases will
not reduce employment. Unfortunately, those who argue this way have not
distinguished real efficiency—larger output from given combinations of
input—from a mere substitution of one input for another as their relative
prices change. The examples they cite of “better” or “more efficient” methods
of production after a minimum wage increase are methods well-known to employers
before the imposed wage change, and were not used then simply because they
were not the cheapest methods available under the previous input prices.
If higher wage rates lead to the substitution of capital for labor, then
by definition there will be more output per unit of labor; but it is mere
word play to call this more “efficiency” if the product now costs more
to produce and society has to support unemployed workers as well.
Purchasing Power
The doctrine that workers' increased purchasing
power after a minimum wage increase will sustain employment has many problems
connected with it,19 but the most fundamental problem is that
it assumes the very thing that is at issue: that the workers keep their
jobs and work as many hours as before. If not, their hypothetical right
to a higher wage rate will not buy anything. Workers can only spend real
earnings, not hypothetical rights. Once this is realized, it is hardly
necessary to go into the other deficiencies of the theory, such as the
fact that inflationary increases mean that more spending power is
not more purchasing power.
Conclusions
The minimum wage law addresses a serious social problem, but creates
no new options for dealing with it. In fact, it simply reduces the
set of existing options available to the parties—employers and employees—who
must voluntarily agree if there is to be a job. Trying to make people better
off by reducing their options seems questionable even as a theory. In practice,
what has happened is that fewer transactions (less employment) have taken
place when there were fewer options open to the parties. It would be very
surprising if it were otherwise.
The great unsolved problem remains of what
to do about the poor in general, or the low-wage workers in particular.
Low-wage workers are not changed by calling them higher-wage workers, any
more than students are improved by calling them B students instead of C
students. The tragic educational results of the process of upgrading by
fiat is hardly a recommendation for extending this practice into the economic
sphere. In both cases, it is of course much harder, much slower—and more
heartbreaking—to try to create real skills and real achievements. And yet
nothing else will really do the job.
Automatic escalation compounds the problems
of the minimum wage law by making it possible to close our eyes to its
effects hereafter. This seems unconscionable when those affected are poor,
vulnerable, powerless, and inarticulate. If the Congress does not monitor
what happens to them, there is no other powerful institution to do so.
The set of incentives confronting the U. S. Department of Labor makes it
unrealistic to expect it to critically evaluate minimum wage effects, and
nearly forty years of history make it painfully apparent that it has no
intention of doing so. Labor unions have their own imperatives and constraints.
For them, the minimum wage law presents the same kind of opportunity that
a tariff presents to a business firm. It is a way to price competitors
out of the market. That this is accompanied by humanitarian statements
may be a matter of rhetorical, or perhaps political, interest but it changes
no economic fact. In the Union of South Africa, minimum wage laws were
applied to native black Africans for the explicit purpose of stopping their
competition with European workers.20 In the days of the British
Empire, British unions and manufacturers attempted to get minimum wages
applied to India for similar reasons, though with different rhetoric.21
American unions and businesses have been doing something very similar in
Puerto Rico and other affiliated territories where minimum wages are set
by tripartite boards of mainland Americans, often from competing firms.
The point here is not to depict anyone as
particularly evil. The point is that powerful institutional incentives
exist to use the minimum wage laws for purposes very different from those
announced in the Fair Labor Standards Act, and that these institutional
incentives are likely to persist through turnovers of personnel in the
future as in the past.
Special interests, recognized as such, may
be kept within bounds. For the special interests revolving around the minimum wage laws, Congressional oversight seems especially needed, and therefore
automatic escalation seems especially dangerous.
Finally, my hope would be that some way might
be considered to have the statistical analysis of minimum wage effects
performed by some organization other than the agency whose own fate is
intertwined with that of the Fair Labor Standards Act.
1.
|
Marvin Kosters and Finis Welch, “The Effects of Minimum Wages on the Distribution of Changes in Aggregate Employment,” American Economic Review, June 1972; Thomas G. Moore, “The Effect of Minimum Wages on Teenage Unemployment Rates,” Journal of Political Economy, July/August, 1971; Michael C. Lovell, “The Minimum Wage, Teenage Unemployment and the Business Cycle,” Western Economic Journal, December 1972. |
2.
|
Peter B. Doeringer and Michael J. Piore, Internal Labor Markets & Manpower Analysis (D. C. Heath & Go., 1971), p. 182. |
3.
|
Jacob J. Kaufman and Terry G. Foran, “The Minimum Wage and Poverty,” Readings in Labor Market Analysis, ed. J. F. Burton, Jr., et al. (Holt, Rinehart & Winston, Inc., 197 1), p. 508. |
4.
|
Belton M. Fleisher, The Economics of Delinquency (Quadrangle Books, 1966), Chapter 3. |
5.
|
“... the estimated magnitude of these employment impacts and the distribution of these impacts vary among the studies.” Statement of Assistant Secretary of Labor, quoted in Minimum Wage Legislation (American Enterprise Institute, 1977), p. 14. |
6.
|
See note 1 above. |
7.
|
Employment and Training Report of the President (Government Printing Office, 1976), pp. 242, 243. |
8.
|
Minimum Wage Legislation, p. 2. |
9.
|
U.S. Department of Labor, Bureau of Labor Statistics, Youth Unemployment and Minimum Wages, Bulletin 1657 (Government Printing Office, 1970),p.138. |
10.
|
Ibid., P. 149, Table 10.1. It should be noted that The Netherlands did not have a minimum wage before 1966, so the entry in the table for 1960-64 is misleading. |
11.
|
Minimum Wage Legislation, p. 15. |
12.
|
Yale Brozen, “Minimum Wage Rates and Household Workers,” Journal of Law and Economics, October 1962. |
13.
|
Quoted in Minimum Wage Legislation, p. 14. |
14.
|
George Macesich and Charles T. Stewart, Jr., “Recent Department of Labor Studies of Minimum Wage Effects,” Southern Economic Journal, April 1960. See also Thomas Sowell, “The Shorter Work Week Controversy,” Industrial and Labor Relations Review, January 1965. |
15.
|
Numerous specific citations of Labor Department studies are listed in Sowell, op. cit. p. 243. |
16.
|
Representative John Dent quoted in Minimum Wage Legislation, p. 10. |
17.
|
Albert Rees, The Economics of Work and Pay (Harper & Row, 1973), pp. 75-78. |
18.
|
Paul H. Douglas, The Theory of Wages (Augustus M. Kelley, 1964), p. 78. |
19.
|
See Sowell, op. cit., pp. 241-242. |
20.
|
P. T. Bauer, “Regulated Wages in Underdeveloped Countries,” The Public Stake in Union Power, ed. Philip D. Bradley (University of Virginia Press, 1959), p. 346. |
21.
|
Ibid., p. 332. |