The minimum wage's ugly allies

Ron Unz, an American conservative, has launched a new campaign to raise the US federal minimum wage to $12/hour, up from $7.25/hour. Today he makes his case on the New York Times website:

A $12 minimum wage would increase the incomes of America’s lower-wage work force by a total of over $150 billion each year, shifting those huge sums from the pockets of the sort of people who don’t shop at Walmart to those who do. A minimum wage of $12 per hour would be very good for Walmart’s business.

Usually, advocates of minimum wage increases either deny that minimum wages cause unemployment, or say that the unemployment effect would be very minor.

Unz is different. A fierce opponent of Hispanic immigration, he realises that minimum wages cost unskilled workers their jobs and that (Hispanic) immigrants are mostly unskilled. As Bryan Caplan says, “For Unz, the disemployment effect of a high minimum wage is a feature, not a bug.”

This brought to mind Walter Williams’s work on the origins of South Africa’s minimum wage. White labour unions supported the minimum wage’s introduction for similar reasons to Unz: to exclude unskilled black workers from the workforce and stop them from undercutting white workers.

Williams quotes G. V. Doxey’s The Industrial Colour Bar in South Africa as saying that white unionists “argued that in absence of statutory minimum wages, employers found it profitable to supplant highly trained (and usually highly paid) Europeans by less efficient but cheaper non-whites”, and the South African Economic and Wage Commission of 1925:

While definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.

Williams also quotes a South African government minister’s complaint in the 1930s that white workers were losing jobs to Indians due to “unfair competition”, and his recommendation that they be legally prevented from undercutting white workers.

The economics seems to support this view of minimum wages. Neumark and Wascher’s seminal 2006 review of economic studies of the impact of minimum wages found that “the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups”.

Obviously, most supporters of the minimum wage do not share these intentions. But no matter how well-intentioned they are, quite a lot of economic evidence seems to suggest that Unz and the South Africans are correct: the minimum wage can hurt immigrants and other vulnerable groups enormously. People concerned with the living standards of the poor may find that direct income redistribution is a safer and more effective way to help than minimum wage laws.

The Keynesian case against the minimum wage

Bryan Caplan lists a few reasons to be sceptical about the Card & Krueger study that purportedly shows no unemployment effect from minimum wages. His overall point is that, beyond traditional labour economics, there is quite a lot of empirical evidence to show that minimum wages create unemployment. My favourite point:

4. The literature on Keynesian macroeconomics.  If you're even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment.  If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment.  The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

I wrote about the labour economics research into minimum wages in a paper on the Living Wage last year. Even if you think minimum wages are a good thing, the levelof ambiguity around the consequences of raising the minimum wage should give you pause for thought. There are no straightforward solutions to low pay, but if there are ways of increasing the net income of the poor that don't risk putting people on the margin out of work, aren't these the ones that we should focus on?