The issue of note in the past few weeks has been the minimum wage, especially as fast food workers are becoming more vocal about how untenable their lives are making just north of seven dollars an hour. Some outlets have pointed out the potential price hikes if a move was made to a $15/hr wage, and there has been a chorus of conservative economists and politicians stating that a higher minimum wage actually increases unemployment, and thus makes certain people worse off as they lose their low wage job for no job at all.
When I took AP Economics my junior year of high school, we used an immensely popular textbook by conservative economist N. Gregory Mankiw. It taught the standard version of introductory economics. It’s rooted in classical economics, and features elegant graphs. It triumphs rational choice theory, or the idea that individuals consistently make the most sensible choice for their overall well-being
Parts of the American left have few good things to say about Mankiw. Beyond that, the issue is that his model doesn’t reflect the real world. Behavioral economists have clearly proven that individuals are not rational, and groups even less so. Looking at in-depth data, it’s clear that the immensely complex world economy does not fit elegant graphs most of the time.
In this debate over a higher minimum wage, there is one flaw of the conservative line. The blog An Economic Sense states simply that there is no empirical research that shows a correlation between a higher minimum wage and higher unemployment. Like many policy changes, it fades into the noise of the economic system. Rory Sutherland, a marketing executive and behavioral economist says that mainstream economics suffers from a case of “physics envy” (video). You can’t isolate individual cogs in the economy and figure out their relations to everything else. Minimum wage policy is not a proton at a particle accelerator- you can’t figure out all of its effects in a controlled environment.
Raising the minimum wage does not create a whole new burden to be shouldered by private industry. The government has to cover these people already through food stamps and Medicaid. Large corporations like McDonalds and Wal-Mart are indirectly subsidized by the government, despite large profits that prove they are not a dollar an hour away from bankruptcy.
John Maynard Keynes had a large set of theories about how the system worked- with data in the decades following his death proving some and disproving others. Famously, he disputed the classical idea that workers only needed to adjust their demands to be employed, and that all unemployment was voluntary.
It’s now clear that some unemployment is involuntary, especially in a near-recession as the United States is now. There are many reasons why people cannot find work, and it is doubtful that the minimum wage is the primary reason. More people could probably provide more labor than their wage if they were hired, but worker value in a large firm is difficult to measure, and the people who run businesses are not always rational. Or rather, they look towards profit rather than output.
The lesson here, which is hammered home every time someone on TV quotes from that economics textbook I had, is that the economy is far more complicated than some would let the public believe. If the minimum wage is an economic problem, it doesn’t show up in current data. It may just be a figment of a theory that just doesn’t make much sense.