Minimum wage - the argument continues though the answer is known

One data point does not an argument sustain. But it quite probably is the canary in the coal mine. There is a longstanding argument over minimum wage laws. In economics, it is generally true, absent extremely unusual circumstances, that if you make something more expensive (such as labor), you will reduce the demand for it. Pretty much an iron law of reality.

The problem is that that reality clashes with a genuine desire to simply legislate prosperity. People not earning enough? Raise the minimum wage!

Economists dismiss minimum wages as an idea with too many unintended consequences. You raise the price of labor and businesses who buy that labor will 1) pass along the cost to consumers (reducing their welfare), 2) replace labor with capital (robots or similar), or 3) find other ways to dispense with that labor by redesigning the business processes.

Idealists and progressives embrace minimum wages as an easy answer to a straightforward problem.

You would think that this ought to be an easy question to resolve. Does raising minimum wages decrease employment?

Regrettably, the passion to legislate economic outcomes raises the bar of proof pretty high and the evidence is hard to sort.

One complication is that minimum wages are often passed long after they will have an effect. Example: A city's current minimum wage law is $8 and advocates want to raise it to $10. It has been twenty years since the last time the minimum wage was raised. The average wage for an unskilled worker is now $12. In this scenario, even if the minimum wage increase to $10 is passed, the effects won't be easily noticeable since the average unskilled wage is already $12. Studies might be done and they would arrive at the conclusion that minimum wage laws do not affect the demand for labor because there was no change in labor demand. True, yet irrelevant because the study failed to take into account the context that the average labor rate was already above the new minimum.

Another scenario that occurs with some frequency is when the minimum wage law applies to a very small class. Example: A city passes a law raising the minimum wage from $8 to $10 and that minimum wage applies to all non-management employees. Again with context. The city is 80% a white collar knowledge economy. Most employees are, in FLSA terms, exempt employees. So 80% of employees won't be affected by the minimum wage because they are exempt. Let's also say that for the 20% who are non-exempt, 80% of them are union employees with negotiated contracts above $15. So even though they are nominal beneficiaries of the minimum wage law, it doesn't really affect them. 20% of the labor force is non-exempt and 20% of that group are being paid at levels below the new minimum wage - that's only 4% of the labor force. Whatever the impact of the minimum wage might be, it affects such a small percentage that the effects are swamped by larger forces such as season, weather, economic cycle, etc. It will be hard for an economic study to find an explicit impact from the minimum wage.

The final big barrier to generating good data is time lapse. A minimum wage law passes. Business can't immediately adjust except at the margin. It might take 2-4 years to see the complete impact, the amount of time required to test whether consumers will pay higher prices or determine that the business processes have to be redesigned and those new designs implemented to get rid of labor, or new systems or technology purchased and implemented to displace labor, etc. Over 2-4 years there are all sorts of other events happening. Other laws passed, a crime wave, rare bad weather events, an upturn in the national economic cycle, etc. All these other variables obscure what the actual impact might be of the new minimum wage law.

Well constructed economic experiments to reliably measure the impact of minimum wage laws are big, expensive to conduct, last a long time, and take into account many contextual variables. When these kinds of studies are done, they support the traditional economic view that if you make labor more expensive, less will be demanded. But those aren't usually the kinds of studies that are done. Usually, they are short term studies which don't take into account contextual variables and don't address countervailing forces. These studies are all over the place in their outcomes.

What you are left with is a lot of studies, only a few of which are worthwhile. The worthwhile ones say that minimum wage laws are counterproductive but the people who wish to signal their virtue bona fides by legislating prosperity have plenty of poorly designed studies that will say otherwise. And the argument continues even though the answer is known.

But perhaps there is another way to get at the answer as suggested by Mark J. Perry inFollowing Minimum Wage Increases, Unemployment Spikes among Black Male Teens .

Click to enlarge

What is the class of legal labor that is most vulnerable to employment fluctuations and the price of labor? Young black men (16-19). They are the demographic least likely to have completed high school, have poor educational attainment scores, are more likely to have a criminal record, to face the most competition from illegal immigrants, and to function in the most fragile economic ecosystems (inner cities). They are, effectively, the canaries in the coal mine. If there is any group who are likely to show an impact from new minimum wage laws, it is young black men. The chart seems to indicate that minimum wage laws do indeed have a significant affect on the demand for low skilled labor. Perhaps it is a reporting fluke, perhaps the trend line will stabilize a month or two down the road. Perhaps. But this seems reasonably compelling evidence that the emotional inclination to try and solve economic problems by legislating prosperity should be treated with greater skepticism.