Though a classic example of sound economic analysis, the doctrine on the effects of a minimum wage has lately been under heavy fire from progressive liberals. The President, naturally, favors an unprecedented increase in the minimum wage to “help the poor.” But aside from political rhetoric, which hardly ever even resembles the facts of reality, there are also open letters from many renowned economists calling for an increase in the minimum wage. Nobel laureate Joseph Stiglitz has recently been one of the more vocal proponents of using political measures to rid society of the “costs of inequality.” The Piketty frenzy is along the same lines. But what is the truth about the minimum wage?

As anyone who has taken an introductory economics course in college should know, mandating a price above the market-clearing price creates a surplus in supply. The reason is obvious: more are willing to supply at this price than the market-clearing price, and fewer are willing (and able) to purchase at this price. Hence, at least in the short term or for as long as the mandate is in place, we will see a surplus. A surplus indicates a wasteful use of resources in the economy and is therefore a “bad.”

The same is naturally true for the minimum wage. Mandating that workers are paid more than their market wage doesn’t mean that we have immediately created a bunch of wealth for workers without consequences throughout the economy. Those who, for whatever reason, are unable or unwilling to produce a value corresponding to at least the minimum wage will not have an easy time finding a job. Or keep the one they already have. This is rather obvious, since hiring them would not be an economic decision by business owners but charity: they are giving away the amount that is the difference between what their comparatively unproductive employee produces and what they (have to) pay.

Raising the minimum wage is therefore not the same thing as raising wages, which appears to be the case if we listen to the deafening ignorance of political rhetoric. A minimum wage law is simply a prohibition of employing anyone under a certain wage level. Stating it this way makes it clear what the minimum wage debate is about.

What is interesting to note here, even though I’m digressing a little, is how progressives have always been advocates of raising the minimum wage – but for different reasons. Today, naturally, they dismiss economics (except when an economist, like Piketty, says exactly what they want to hear, whether or not it is correct) as “ideology” and claim that it is simply wrong that a high minimum wage “causes unemployment.” (Part of this is pure ignorance but part of it is also a play on words, as we shall soon see.) But progressives used to be proponents of a high minimum wage for exactly the reason that it causes unemployment (see this post at the BHL blog, and the links from it). Making the unproductive and thus unwanted people forever unemployed (that is, unemployable due to the minimum wage) would rid society of this unwanted class of people. So the solution was to make it impossible for them to earn a living, and then they would be no more. (The progressive argument included an unhealthy amount of racism and elitism.)

So say what you will about the progressive support for jacking up the minimum wage. Their reasons may have changed rather dramatically, but their advocacy is astoundingly consistent over the past century.

But this does not answer the question of why educated and knowledgeable economists support raising the minimum wage. Surely they know that a mandated minimum wage (above the market wage) prohibits employment rather than creates wealth? This is a much more interesting issue than the make-believe world of political rhetoric. The answer is that they of course understand this, but that they consider the consequences worth it.

If we look closely at their argumentation they do not deny the fact that a mandated minimum wage prohibits and thus destroys jobs. But we need to qualify the statement that the minimum wage “destroys” jobs, because it is a seemingly empirical statement that republicans tend to make (for which they are ridiculed by democrats).

Empirically speaking, it is not necessary that a (very?) high minimum wage means there will be fewer jobs when the minimum wage is raised. The reasons for this are many, but they’re all about measurement rather than economic truth. Raising the minimum wage does not cause all employers to immediately sack people who don’t produce at least equal value. Instead, they may “wait and see,” reorganize production, invest in capital to raise the productivity of labor, etc. Also, employers do not know exactly what the value of a person’s labor input is; this is not easily measurable, so they’re using approximates and guesstimates. They know they are “worth” keeping on as employees at their going wage, but with a higher wage… who knows? There are also personal and social reasons for keeping people longer than is economically viable.

Some argue that the tasks carried out by low-wage labor, such as flipping burgers or mopping floors, still needs to be carried out. So it is not likely that businesses will fire them, because doing so hurts the business since they can no longer produce. So they will instead take from their profits to cover labor costs. There is some truth to that, at least in the short term, but it is a very poor argument. Business owners don’t start businesses only because they like something, e.g. burgers. They also need to make a certain return to cover the costs of capital, and if they knew of a much greater return elsewhere they would most likely take their capital and move it there. This is in fact what will happen, but the process is slow and not frictionless. So the immediate effect of raising the minimum wage may not be much, but the long-term effect will be.

But when we consider the long term, it is also the case that we have plenty of innovation and economic growth that ultimately counteract the inefficiencies of a minimum wage. New jobs emerge, perhaps with higher wages, in other industries, other companies, and so on. New capital is invented that helps raise the productivity of labor and therefore wages. We need to consider these effects (which aren’t easy to measure) in order to establish what is the real effect of the minimum wage.

So saying that we have 100,000 jobs today and we’re likely to still have 100,000 ten years from now despite jacking up the minimum wage, is not the same as saying that the minimum wage didn’t destroy jobs. The proper counterfactual is not present in this “analysis” – what should be considered is the 100,000 jobs ten years from now compared to the number of jobs there would be without raising the minimum wage. We know there would more jobs, but we don’t know how many more.

This is where mathematical and empirical economists do their econometric magic using statistical databases. Pretending they can see into the future or that certain trends or relationships in the past are “constant”, they calculate the effects of the minimum wage and present a number. This is what the Congressional Budget Office did in their now-famous report saying the President’s suggested minimum wage at $10.10 (a 39% increase) would cause 500,000 jobs to be lost. Yes, you heard that right – lost:

Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects … As with any such estimates, however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers.

The “two-thirds chance” is pure guesswork, of course. But what the CBO here says is that the future would see half a million fewer jobs because of the minimum wage. Many (on the left) have argued that it is “only” half a million, and that it is worth it. The tax revenue of the higher wages alone would be enough to pay for the welfare checks sent to those people. But, of course, the half-million number doesn’t say how many jobs that would have been created will not be realized; they’re saying there will be fewer than today. And this is, we should remember, in the short term: through 2016.

This estimate suggests an enormous loss of jobs. All the additional jobs that would be created over the next couple of years plus the 500,000 that will be forced into unemployment. Plus the negative effects in the longer term. We are likely talking about jobs in the millions that are effectively prohibited.

But there are also mitigating effects that we need to consider. For instance, the government (through the Federal Reserve and the banking system) is very consciously expanding the money supply and thereby creating inflation. As inflation means the value of the currency diminishes, the effect of a one-time minimum wage raise will subside over time (though the misallocations of resources likely will not) unless it is continuously raised (which is something many are actually advocating).

The rather crass calculation that economists in favor of raising the minimum wage (even by a mammoth 39%) rely on says simply that the positive effects on those currently struggling at low wages outweigh the negative effects of those being forced into unemployment in the future. How they can get away with making such inter-personal utility comparisons, which we teach undergraduates is both impossible and unsound analysis, is unknown. But perhaps this is a result of staring at data and doing statistical analysis all day long – instead of thinking about these things soundly. One can, after all, prove anything with “data.” Especially in the social sciences.