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‘Magical thinking’ might make us feel good about ourselves, but it is no basis for public policy

Over the weekend, the Pioneer Press carried an article titled ‘Nine business owners give their thoughts on a $15 minimum wage in St. Paul‘. It showed that all too many people are happy to say things as fact which just aren’t so. 

Take the owner of one restaurant who said “Raising the minimum wage helps address both economic inequalities and racial inequalities in our society”. What literature, theoretical or empirical, is he basing this statement on? As I’ve written before, 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 … [that] a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals … [that] minimum wages do not, on net, reduce poverty … [and that] minimum wages appear to have adverse longer-run effects on wages and earnings.” In 2014, along with economist J.M. Ian Salas, they surveyed the subsequent literature and wrote

“We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”

In a 2017 paper, Neumark and economist Grace Lordan examined whether increasing minimum-wage rates prompt employers to switch to using machines instead of labor. They found that it did. They also found that “Within manufacturing, the share of older workers in automatable employment declines most sharply, and the share of workers in automatable employment also declines sharply for women and blacks”. So, when we look at the evidence, our restaurateur is simply wrong.

What we have here is simply an example of ‘magical thinking‘. This is where we say something is true not because we know it to be true but because we want it to be true. Sadly, however good this might make us feel about ourselves, it is a poor basis for public policy. The evidence is pretty clear, and you can compare the experiences of Minnesota and Wisconsin if thats your thing. “Every time the minimum wage goes up, it’s the exact same argument from the exact same people” says this restaurateur. That is because it is correct.

John Phelan is an economist at the Center of the American Experiment. 

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