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With wage hike, Minneapolis ignores economic laws

This op-ed appeared in the Post Bulletin on July 3, 2017.

In 2010, as the disastrous economics of the European single currency threatened to blow it apart, German Chancellor Angela Merkel said, “We must re-establish the primacy of politics over the markets.”

The Minneapolis City Council is attempting just that, with its vote to raise the minimum wage to $15 per hour. Standard economic theory is pretty clear on this: If you raise the price of something, the quantity demanded of that something decreases. Labor demand curves slope downward.

Last week saw the release of a report on the effects of Seattle’s minimum wage increases. There, it was raised from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. The authors made use of a new, comprehensive data set from Washington’s Employment Security Department. These economists found that “the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”

That’s $1,500 per annum. 

In other words, the price of labor increased and the quantity demanded decreased. Again, labor demand curve slope downwards.

This prediction isn’t always borne out in the empirical literature. As proxies for low-paid workers, many previous studies looked at the effects of the wage increase on workers in a certain sector, such as restaurants or retail, or a particular age group, such as teenagers. This, the Washington economists argue, is unsatisfactory, as it includes some workers earning above the minimum wage in the “treatment” group. The Washington economists, by contrast, look directly at the effects on low-wage workers.

Even with these methodological debates, the weight of empirical literature supports the Washington economists. In 2008, economists David Neumark and William L. Wascher surveyed two decades of research into the effects of minimum wage laws. They found that “minimum wages reduce employment opportunities for less-skilled workers”, and “a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals.”

“Minimum wages do not, on net, reduce poverty,” they found, and “minimum wages appear to have adverse longer-run effects on wages and earnings.”

Does the Minneapolis council not care about this? You have to think they do. You have to assume, instead, that they just don’t believe the theory and evidence — that somehow, you can raise the cost of labor by decree and employers will just carry on buying as much of it as they did before.

Supporters of these schemes like to say, “Another world is possible.” So it is. But it will always be one where the apple falls downward from the tree, where the Vikings never win the Super Bowl, and where labor demand curves slope downwards.

Whatever Merkel or the Minneapolis City Council may think, the laws of economics have a habit of being enforced with the implacable doggedness of Inspector Javert and the merciless brutality of Dirty Harry.

John Phelan is an economist at Center of the American Experiment and wrote this for the Post Bulletin.

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