Understanding Minimum Wage Mandates: Empirical Studies Aren't Enough
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President Joe Biden has promised to raise the minimum wage from $7.25 to $15 per hour.
Some economists are of the view that the increase in the minimum wage could cause an increase in unemployment. Other economists think that the increase is unlikely to harm the labor market. Hence, they are of the view that raising the minimum wage could lift the workers' living standards.
For example, in a study conducted in the 1990s, economists David Card and Alan Krueger examined a minimum wage rise in New Jersey by comparing fast-food restaurants there and in an adjacent part of Pennsylvania.1 They found no impact on employment.
Based on this study, many mainstream economists have pressed for an increase in the minimum wage, which they hold is going to raise workers' living standards.
In a recent study, the National Bureau of Economic Research (NBER) surveyed a body of economic research on minimum wage increases and rebutted the notion that empirical data show no impact from minimum wage hikes. The authors find that in all the available research on the subject they reviewed, there is a “clear preponderance” of findings that show a job-killing impact.
The documentation of job losses is even more pronounced for teenagers, young adults, and the less educated. “The body of evidence and its conclusions point strongly toward negative effects of minimum wages on employment of less-skilled workers, especially for the types of studies that would be expected to reveal these negative employment effects most clearly,” economists David Neumark and Peter Shirley wrote.2
Given the contradictory results, is there an alternative approach to decide whether the increase in the minimum wage will result in an increase or reduction in employment?
Can Historical Data Tell Us How the Economy Works?
Note that the so-called data that analysts are looking at is a display of historical information.
According to Ludwig von Mises in Human Action (pp. 41-49),
History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies.
Also, in the The Ultimate Foundation of Economic Science (p. 74), Mises argued that,
What we can "observe" is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: Over a definite period of the past the miner John in the coal mines of the X company in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from the assemblage of such and similar data to any theory concerning the factors determining the height of wage rates.
The historian does not simply let the events speak for themselves. He arranges them from the aspect of the ideas underlying the formation of the general notions he uses in their presentation. He does not report facts as they happened, but only relevant facts.
Contrary to the natural sciences, facts in economics cannot be isolated and broken into their simple elements. The realities of economics are complex historical facts that have emerged on account of many causal factors.
In the natural sciences, while a scientist can isolate various facts, he does not know the laws that govern these facts. All that he can do is hypothesize regarding the “true law” that governs the behavior of the various particles identified. He can never be certain, however, regarding the “true” laws of nature. On this Murray Rothbard wrote,
The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.3
In economics however, we do not need to hypothesize, for we can ascertain the essence and the meaning of people’s conduct. For instance, one can observe that people are engaged in a variety of activities. They may be performing manual work, driving cars, walking on the street, or dining in restaurants. The essence of these activities is that they are all purposeful.
Furthermore, we can establish the meaning of these activities. Thus, manual work may be a means for some people to earn money, which in turn enables them to achieve various goals like buying food or clothing.
Dining in a restaurant can be a means for establishing business relationships. Driving a car may be a means for reaching a particular destination.
People operate within a framework of means and ends; they use various means to secure ends. We can also establish from the above that people’s actions are conscious and purposeful.
The knowledge that human action is conscious and purposeful is certain and not tentative. Anyone who tries to object to this in fact contradicts himself, for he is engaged in a purposeful and conscious action to argue that human actions are not conscious and purposeful.
Various conclusions derived from this knowledge of conscious and purposeful action are valid as well. The theory, that human action is conscious and purposeful stands on its own regardless of what the so-called data is showing. Needless to say, the established theory does not require any statistical verification.
Contrary to natural sciences, in economics we do not hypothesize, we know the essence of things, i.e., that human action is conscious and purposeful. Hence, in economics we do not have to set a hypothesis and then test it.
For instance, we know that all other things being equal, an increase in the demand for bread will result in an increase in its price. We do not require a statistical verification that this is so.
Minimum Wages and Unemployment
Given that each individual’s ultimate goal is their life maintenance and well-being, a businessperson is unlikely to pay a worker more than the value of the product that the worker generates. If a worker generates per hour a value of $10 toward the business, then the businessperson is not going to pay more than this amount.
If the minimum wage is set at $15 per hour while the worker can only generate a value of $10 per hour, it will then be illegal for the business to pay the worker less than the minimum wage of $15 per hour.
Consequently, in such a scenario, the business would be forced into laying off the worker, since employing the worker for $15 per hour is going to undermine the profitability of the business.
It is only through the increase in capital goods, i.e., through the enhancement and the expansion of the infrastructure, that labor can become more productive and earn a higher hourly wage.
- 1. David Card and Alan Krueger, “Minimum Wages and Employment," American Economic Review 84 (1994): 772–93.
- 2. David Neumark and Peter Shirley, "Myth or Measurement: What Does the New Minimum Wage Research Say about Minimum Wages and Job Loss in the United States?" (NBER Working Paper 28388, January 2021).
- 3. Murray N. Rothbard, “Towards a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise: The Economics of Free Enterprise, ed. May Sennholz (Princeton, N.J.: D. Van Nostrand, 1956), p. 3.