FT_14.09.08_MinimumWage

Robert Reich Is Wrong About Minimum Wage….Again!

by / 0 Comments / 1528 View / May 19, 2015

Sometimes, it astounds me how smart men can act so stupidly. Robert Reich is one of those men. Here is a man who was a Rhodes scholar, earned his J.D. from Yale, taught at Harvard, and served in three presidential administrations. The man clearly has good credentials, yet I have to wonder when he pontificates on something like minimum wage. This isn’t the first time he’s gotten it so wrong. He made a video last year about why we need the minimum wage, and I called him out on it. The video he released a couple weeks ago shows that he’s at it again. What did Reich say that was so off-base that I have to call it cringeworthy?

 

Let’s go through his video claim-by-claim:

1. We see a growth in the working poor, some working 60 or more hours a week. “Some.” What a vague qualifier. Let’s get a more precise figure by looking at Bureau of Labor Statistics (BLS) data from 2014. 13 thousand minimum wage workers work 60 hours or more, which means that only 0.4 percent of minimum wage workers are working this grueling amount.

2. If the minimum wage from 1968 kept up with inflation, it would be worth $10 today. This might seem like a fair argument. However, let’s take a look at the minimum wage over a longer period of time. The Pew Research Center actually published a 2014 study that looks at the inflation-adjusted minimum wage going back to its inception during the Fair Labor Standard Act of 1938.

Notice anything interesting? In terms of inflation-adjusted dollars, 1968 was the year during which minimum wage was at its peak. Historically speaking, the minimum wage was seldom as high as Reich would like for us to believe.

3. If it kept up with the added productivity of the American worker, it would be $21.72. This figure comes from a study conducted by the Left-leaning Center for Economic and Policy Research. However, this study suffers from the same aforementioned selection bias of making 1968 the base year to determine minimum wage policies. Even if we use the 1968 starting point, there is an issue with the way inflation is measured. As Manhattan Institute scholar Scott Winship points out, using the CPI-U to measure inflation overstates prices. Not only is there a substitution effect of goods, but the quality of goods changes over time, which increases purchasing power. As an example, a 1982 Apple computer versus one now is not only slower, but took more work-hours to earn enough money to pay the computer off. The two goods are qualitatively different. As such, a chained CPI or the personal consumption expenditure (PCE) method is preferred by the CBO and other governmental entities. And let’s not forget that workers’ wages are determined by marginal productivity, not average productivity.

4. When we put money in the pockets of the majority of minimum wage workers who are adult breadwinners, they turn around and spend it, which creates demand and jobs for all of us. It’s a virtuous cycle. If the minimum wage is purely a “virtuous cycle,” then it’s reasonable to ask why we shouldn’t raise the minimum wage to $50 or $100 per hour since it will be circulated back into the economy right away. What Reich seems to forget is that by raising the minimum wage, employers will respond accordingly since increased wages mean a smaller profit margin. Employers can adjust either by cutting hours and/or benefits, passing the cost on to the customer, or automating services.

5. Minimum wage workers aren’t teenagers earning pocket money. About half are 35 or older. Most are women, and many are key breadwinners for their families. Let’s take another look at that BLS data from 2014 to see if Reich is correct. While it’s true that most minimum wage workers are not 19 and younger (only about a fifth are), it’s equally untrue that about half are 35 or older (Table 7). If you do the math with the figures, about 29 percent of minimum wage workers are 35 or older (ibid). Minimum wage workers tends to be under 25, have a high school degree or less, have never been married, and work part-time. Also, 2.5 percent of workers age 25 and older earn the minimum wage, so it’s not like we have a society full of minimum wage workers, which is the picture that minimum wage proponents like to paint.

6. And don’t believe scaremongers who tell you that a $15 minimum wage will cause employers to cut employment. Reich is either forgetting or ignoring that there is an elasticity for the demand of labor, which is the responsiveness of employers in wage changes, most notably in terms of the amount of workers the employers keep employed as a result of said wage increase. Since labor has a cost, it’s inconceivable that labor, especially low-skilled, is so inelastic. If you don’t want to believe me or the “scaremongers” (his word, not mine), then believe the Congressional Budget Office (CBO) 2014 study that shows that an increase from $7.25 to $10.10 would cause an estimated 500,000 unemployed individuals as a result (CBO, 2014, p. 1).

7. When the minimum is raised, more are brought into the potential pool of employees. This cuts back on turnover, which saves more money. Reich very well might have confused correlation with causation. As for turnover, the lower turnover rate might have something to do with the fact that employers are disincentivized to hire more workers precisely because of the minimum wage hike (Neumark and Wascher, 2008Meer and West, 2013).

8. Employers who don’t pay enough to lift their employees out of poverty are indirectly subsidized by the rest of us……through food stamps, Medicaid, etc. Arindrajit Dube, an economist who is a proponent of the minimum wage, disagrees with Reich by saying that such assistance does not have that effect, but actually increases a worker’s reservation wage and contracts the labor supply. So as appealing as it might sound to say that means-tested assistance (e.g., food stamps) are subsidies to the poor since they supposedly cannot earn a decent wage, that is not the case.

Reich says that the decent thing to is raise the minimum wage to $15 an hour. A decent thing to do is have a discussion that takes both the costs and benefits of minimum wage into consideration. The real decent thing to do, though, is to not cause higher unemployment for those who you claim that you’re helping.

“One of the great mistakes is to judge policies and programs by their intentions rather than their results.” -Milton Friedman

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