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Tuesday, April 26, 2016

Here’s a Minimum Wage Experiment Worth Trying

Why Are We Only "Experimenting" with Increasing It?

Here’s a note to the many readers who e-mail me with the counsel that I be more “scientific” about minimum wage legislation. Readers urge me: “Why not regard minimum wages as social experiments? If they succeed, great. If not, they can be undone.”

The more intelligent of these readers understand that real-world minimum wage legislation is instituted for political and not objectively scientific reasons. But these readers hold out hope that the political zebras who alone can inflict minimum wages on workers will lose their stripes and begin to be more “scientific” about enacting minimum wages.

Unlike these readers, I do not believe in miracles. Zebras’ stripes will not be replaced with single-color coats, and politicians’ political motivations will not be replaced with scientific ones. (This reality is one of the many reasons why I oppose minimum wage legislation.) But let’s play along with the miracle-believers for just this post.

Here’s a scientific experiment that I propose: abolish the minimum wage completely and for a long stretch of time, and then see what happens over time.

Because minimum wages have been part of the regulatory scene in the United States for nearly 80 years, this experiment in eliminating the minimum wage will have to last a long time. It’ll have to last at least as long as a decade if the results of this experiment are to accurately reveal the true consequences of minimum wage legislation. Only if people come really to believe that the minimum wage has been eliminated and will not be reinstated anytime soon will employers and employees adjust fully to a no-minimum wage economic environment.

But if such a belief can be instilled by credibly eliminating the minimum wage for a long stretch of time, then we can scientifically compare employment in the new, no-minimum-wage-regime economy to employment in the older, minimum-wage-regime economy that the new regime replaces.

If minimum wage opponents (such as me) are correct, we’ll see over time that elimination of the minimum wage increases the employment of low-skilled workers, as well as eliminating or greatly reducing the differences between the unemployment rates of black and Hispanic low-skilled workers and the unemployment rates of low-skilled white workers. We’ll see a slight reduction in the incomes of middle-class households and increases in the incomes of lower-income households. We’ll see also fewer people in their 20s and 30s who have never gained on-the-job experience and skills.

Of course, if minimum wage opponents (such as me) are incorrect, then we’ll not see these consequences. A much sounder scientific basis than what we have today will thereby be created upon which to found the case for minimum wages.

So why not run the experiment? Science demands it.

It will not do to counter with the accurate observation that we already have a lot of empirical evidence on the effects of raising the minimum wage. First, much of this evidence suggests that the standard economic prediction holds true in reality — namely, that raising the minimum wage destroys jobs for some low-skilled workers. So if this evidence is to carry the day, then let us hear no more assertions that raising the minimum wage does not destroy jobs for some low-skilled workers.

As for the other evidence the evidence that finds no negative employment effects of minimum wage hikes the vast bulk of this evidence comes from studies that take a minimum wage regime as a given. That is, these studies are done of economies in which minimum wage legislation already exists and, typically, has existed for a long time. Further, these economies are ones not only in which there is no expectation that minimum wage legislation will be permanently repealed, but likely contain widespread expectations that existing levels of minimum wages will be raised to higher levels sometime in the foreseeable future.

In short, nearly all of the existing studies that find no negative employment effects of minimum wages are studies of economies in which employers and employees have already adjusted their production arrangements and employment-contract terms (both formal and informal) to the realities of binding minimum wages and to the likelihood that existing minimum wages will be raised, if not today or tomorrow, the day after tomorrow.

These empirical studies, therefore, tell us at best how employers and employees adjust to unexpected increases in existing minimum wages. (See here and here.) And very few of these studies even attempt to distinguish unexpected hikes in the minimum wage from expected hikes. So even if such studies correctly find no negative employment effects of minimum wage hikes, those findings do not tell us that imposing a minimum wage where none existed (and where none had been reasonably anticipated) will not destroy jobs for some low-skilled workers.

But, again, because low-skilled workers and their employers (and potential employers) in America have for nearly eight decades now been burdened by minimum wage legislation, an empirical test of imposing a minimum wage on America is out of the question. So let’s run the experiment backwards: eliminate the minimum wage and promise to keep it eliminated for, say, at least ten years. We’ll then be able to get a much truer and fuller sense of the employment consequences of minimum wage legislation.

So, to all of my “scientific” friends out there who base their support for minimum wages on “the data,” will you join me in calling for this important scientific experiment?

(Note, by the way, that it also will not do to reject my proposed experiment by arguing that innocent people might be harmed by it. The reason is that innocent people might be harmed by current minimum wages.)

Cross-posted from Cafe Hayek.

  • Donald J. Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, and a professor of economics and former economics-department chair at George Mason University.