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"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

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For "a human being, the question 'to be or not to be,' is the question 'to think or not to think.'" Ayn Rand

28 October 2014

Debunking the Progressive Elitist Claim that Minimum Wage Laws Increase Employment

Back during the Great Depression, the Progressive Elitist mantra was that if only companies would pay their employees more, all would be well in the economy.  FDR pressed businessmen on this over and over, while many unemployed people would have been eager to work for less.  Record unemployment lasted for a decade due to this wrongheaded Progressive policy, along with a host of other economically illiterate Progressive policies.

Recently, there have been a host of Progressive Elitist claims that raising the minimum wage results in more employment and an improved economy.  I will address that claim, but first it is important to realize that minimum wage laws are an immoral deprivation of very fundamental and essential individual rights.  Everyone owns their own mind and body.  They have the right to associate with others according to their own choice in the very broadest sense.  Specifically, the right to cooperate with others for economic purposes and to earn a living is a very broad right.  The employer has a right to hire and others have a right to provide their labor under a voluntary agreement between the employer and the employee.  It is this panoply of rights and voluntary choices to cooperate between individuals that the Progressive Elitists want to trample.  They are determined to use force to impose their own imperious will upon others.

A great many Americans believe that it is not practical to be a man of principle, so the moral argument holds no sway with them.  They are determined to march out into a complex world as unprincipled as they can be, but for some vague notion that they want to help the underdog or the greatest number of people.  Now this means they are perfectly willing to hurt many other people and they are willing to substitute their judgment for that of others, even though they may not know those whose judgment is over-ridden and do not know the circumstances that might affect their choices.  As though not knowing the people affected by their directives to the government is not enough, they have to understand the many results set in motion by their directives without the aid of principles.  The simplifying and integrating functions of principles having been given up, the Progressive Elitists are without sufficient rational tools to understand reality and the consequences of their tyranny over others.  The chaotic results seldom match their intentions and are generally harmful to those whose individual rights and choices have been trampled.

 The Democrat Party is on a campaign to see the minimum wage raised in as many locales and states as possible.  They would also like to see the federal minimum wage increased.  There are more and more columns and articles about how some community raised the minimum wage and there was no local economic disaster in this or that town.  More recently, two University of Delaware economists, Saul W. Hoffman and Wai-Kit (Ricky) Shum have claimed there were no negative effects due to increases in the minimum wage in 13 states between 1 January 2011 and 1 January 2014.  This recent study, actually not even complete yet, is supposed to make us forget the history of the last staged increase in the federal minimum wage in 2007, 2008, and 2009.  See Democrats Eat the Young: Minimum Wage Case in Point, where I agree with the old Economics 101 viewpoint that higher wages mean fewer jobs, just as higher prices mean fewer sales.  Joe Conason wrote a recent column calling this a myth and citing the work of Hoffman and Shum as his proof.

Apparently, Conason not only does not know economics, but he does not read very well.  He claims that 13 states raised their minimum wage above the federal minimum wage earlier this year.  This is not true.  Hoffman and Shum looked at the 13 states that raised their minimum wage from 1 January 2011 to 1 January 2014 as noted above and Conason apparently did not even take note of that.

I am going to present some data dealing with the factors that affect the minimum wage impact on a state by state basis and the resulting employment of young people between the ages of 16 and 24 in the table that follows.  One very important point is that the minimum wage impact on a local economy is going to be proportionate to the cost of living in that local economy.  For this reason, as I have often argued, the policy of setting a federal minimum wage is very foolish.  The following table will provide an effective comparative minimum wage adjusted for the differing costs of living on a state by state basis.  One of the things you will see is that many of the states that have increased their minimum wage above the federal minimum wage are actually on an adjusted basis below most of the states whose minimum wage is the federal minimum wage.  If their cost of living adjusted minimum wage is below that of other states who use the federal minimum wage, then they actually have an effectively cheaper youth labor force and the employment of such young people should actually benefit from that cost advantage.


State
Cost of Living
Q2 - 2013
Minimum Wage
2012 ($)
Minimum Wage
Adjusted for
Cost of Living ($)
Unemployment
Ages 16-24
2012 (%)
Mercatus
Economic
Freedom Score
For 2011
Alabama
92.4
7.25
7.85
16.3
31.33
Alaska
131.1
7.75
5.91
14.8
7.21
Arizona
100.8
7.65
7.59
17.6
34.35
Arkansas
91.0
7.25
7.97
17.7
-8.56
California
128.6
8.00
6.22
20.2
-71.82
Colorado
99.7
7.64
7.66
16.7
11.56
Connecticut
133.8
8.25
6.17
17.0
-21.17
Delaware
106.9
7.25
6.78
15.2
24.43
Florida
97.8
7.67
7.84
16.4
21.67
Georgia
92.0
7.25
7.88
20.6
31.89
Hawaii
161.7
7.25
4.48
13.5
-56.36
Idaho
89.4
7.25
8.11
17.3
51.82
Illinois
94.9
8.25
8.69
18.5
-13.19
Indiana
90.0
7.25
8.06
14.9
14.62
Iowa
91.3
7.25
7.94
11.0
18.66
Kansas
91.8
7.25
7.90
13.2
9.03
Kentucky
90.1
7.25
8.05
16.9
5.05
Louisiana
94.2
7.25
7.70
16.7
-7.74
Maine
109.0
7.50
6.88
16.6
-35.51
Maryland
122.3
7.25
5.93
13.4
-17.31
Massachusetts
121.2
8.00
 6.60
12.2
-7.03
Michigan
94.4
7.40
7.84
16.9
-5.36
Minnesota
100.9
7.25
7.19
11.0
-7.79
Mississippi
88.7
7.25
8.17
23.0
-19.25
Missouri
92.9
7.35
7.91
16.1
30.64
Montana
98.4
7.65
7.77
11.1
30.53
Nebraska
88.9
7.25
8.16
8.9
17.35
Nevada
94.9
8.25
8.69
17.6
1.68
New Hampshire
120.2
7.25
6.03
13.4
41.17
New Jersey
129.5
7.25
5.60
18.2
-69.19
New Mexico
92.5
7.50
8.11
12.6
3.50
New York
134.5
7.25
5.39
18.0
-133.59
North Carolina
95.6
7.25
7.58
18.8
12.80
North Dakota
99.7
7.25
7.27
7.2
65.72
Ohio
92.3
7.70
8.34
12.6
-2.54
Oklahoma
90.0
7.25
8.06
10.8
50.10
Oregon
106.9
8.80
8.23
17.9
5.62
Pennsylvania
101.1
7.25
7.17
13.4
0.75
Rhode Island
125.8
7.75
6.16
17.2
-35.89
South Carolina
95.0
7.25
7.63
22.9
22.45
South Dakota
99.7
7.25
7.27
9.9
72.76
Tennessee
89.7
7.25
8.08
13.5
62.12
Texas
91.4
7.25
7.93
13.5
30.52
Utah
93.0
7.25
7.80
11.9
37.72
Vermont
118.3
8.46
7.15
13.1
-39.39
Virginia
95.9
7.25
7.56
16.8
45.10
Washington
101.6
9.04
8.90
16.7
2.69
West Virginia
96.6
7.25
7.51
15.7
-35.97
Wisconsin
95.1
7.25
7.62
12.9
-13.33
Wyoming
99.5
7.25
7.29
12.7
-16.35


Because Democrats are more eager than Republicans generally to raise the minimum wage and Democrat-controlled states are usually higher cost of living states, the small increases in the minimum wage in those Democrat states do not usually make them expensive states in which to hire young people.

Now let us compare the results for those states with an adjusted minimum wage under $6.90 with those having an adjusted minimum wage greater than $7.60:

These states have an adjusted minimum wage under $6.90:

State
COL Adj Min Wage ($)
Unemployment
Ages 16-24 in 2012 (%)
Mercatus Economic
Freedom Score
Alaska
5.91
14.8
7.21
California
6.22
20.2
-71.82
Connecticut
6.17
17.0
-21.17
Delaware
6.78
15.2
24.43
Hawaii
4.48
13.5
-56.36
Maine
6.88
16.6
-35.51
Maryland
5.93
13.4
-17.31
Massachusetts
6.60
12.2
-7.03
New Hampshire
6.03
13.4
41.17
New Jersey
5.60
18.2
-69.19
New York
5.39
18.0
-133.59
Rhode Island
6.16
17.2
-35.89
Average
6.01
15.81
-31.26

The states in blue above have a state minimum wage greater than the federal minimum wage.  Six of the twelve states, or exactly 0.50 of these cheap youth labor states have minimum wages higher than the federal minimum wage.


These states have an adjusted minimum wage over $7.60:

State
COL Adj Min Wage ($)
Unemployment
Ages 16-24 in 2012 (%)
Mercatus Economic
Freedom Score
Arkansas
7.97
17.7
-8.56
Colorado
7.66
16.7
11.56
Florida
7.84
16.4
21.67
Georgia
7.88
20.6
31.89
Idaho
8.11
17.3
51.82
Illinois
8.69
18.5
-13.19
Indiana
8.06
14.9
14.62
Iowa
7.94
11.0
18.66
Kansas
7.90
13.2
9.03
Kentucky
8.05
16.9
5.05
Louisiana
7.70
16.7
-7.74
Michigan
7.84
16.9
-5.36
Mississippi
8.17
23.0
-19.25
Missouri
7.91
16.1
30.64
Montana
7.77
11.1
30.53
Nebraska
8.16
8.9
17.35
Nevada
8.69
17.6
1.68
New Mexico
8.11
12.6
3.50
Ohio
8.34
12.6
-2.54
Oklahoma
8.06
10.8
50.10
Oregon
8.23
17.9
5.62
South Carolina
7.63
22.9
22.45
Tennessee
8.08
13.5
62.12
Texas
7.93
13.5
30.52
Utah
7.80
11.9
37.72
Washington
8.90
16.7
2.69
Wisconsin
7.62
12.9
-13.33
Average
8.04
15.51
14.42


In these expensive adjusted minimum wage states, 11 of the 27 states or 0.41 of them have minimum wages set higher than the federal minimum wage.  So, in 2012 a larger fraction of the actually inexpensive states had a minimum higher than the federal minimum wage compared to the expensive adjusted minimum wage states.  Despite having the advantage of a slightly cheaper effective minimum wage, the states with an adjusted minimum below $6.90 had a slightly higher youth unemployment rate of 15.81% compared to the effectively more expensive youth wage states with an unemployment rate of 15.51%.

Why were these inexpensive youth wage states not better at employing youth?  The answer lies in the last column in which I have provided the Mercatus Center state economic freedom rating for 2011 from their Freedom in the 50 States, 2013 Edition.   All of the inexpensive states have costs of living greater than the national average.  This is usually associated with a dense population and/or with Democrat Party control.  The average Mercatus Center economic freedom rating of -31.26 is very low compared to that of the expensive youth wage state freedom rating of 14.42.  Youth employment tends to be better when businesses thrive and businesses definitely thrive better with greater economic freedom.  People at the minimum wage level are the least productive workers in the economy, so their effect on how the economy flourishes is rather small.  The effect of a flourishing economy on them is much greater!

Now let us examine the list of 13 states that increased their minimum wage between 1 January 2011 and 1 January 2014.  These were the states examined by Hoffman and Shum.  The average cost of living index in these states is 110.2 and the adjusted minimum wage is just $7.55.


State
Min. Wage($)
1 Jan 2014
Cost of Living Index 2013
Adjusted Min. ($) Wage for COL
Mercatus Center Economic Freedom
Arizona
7.90
100.8
7.84
34.35
Colorado
8.00
99.7
8.02
11.56
Connecticut
8.70
133.8
6.50
-21.17
Florida
7.93
97.8
8.11
21.67
Missouri
7.50
92.9
8.07
30.64
Montana
7.90
98.4
8.03
30.53
New Jersey
8.25
129.5
6.37
-69.19
New York
8.00
134.5
5.95
-133.59
Ohio
7.95
92.3
8.61
-2.54
Oregon
9.10
106.9
8.51
5.62
Rhode Island
8.00
125.8
6.36
-35.89
Vermont
8.73
118.3
7.38
-39.39
Washington
9.32
101.6
8.46
2.69
Average
8.25
110.2
7.55
-12.67


These 13 states were compared to the remaining 37 states.  Seven of those remaining states had state minimum wages that were higher than the federal minimum wage.  What is more, since the states with changes had an average cost of living index of 110.2, the 37 remaining states had to have an average cost of living index of 96.4.  If we assume that each of these states had a minimum wage at the federal level of $7.25, the cost of living adjusted average would be $7.52.  This is almost equal to the $7.55 adjusted minimum wage to which Hoffman and Shum are comparing these states.  In fact, the seven states with higher than the federal minimum wage who did not raise their rate in the time-frame of the Hoffman and Shum study more than make up the difference.  Taking their rates into account yields an average adjusted minimum wage for the non-raising set of 37 states to $7.64.

So, Hoffman and Shum are trying to claim that a higher minimum wage does not hurt those states which actually have a slightly lower adjusted minimum wage when you compare them to states with a higher effective minimum wage!  Well, surprise, surprise.  How wrongheaded can you be Hoffman and Shum?

On average, the states that have raised their minimum wage rates above the federal level have done so because of the high cost of living in their state.  This is most definitely not an argument for raising the national minimum wage rate, which would only hurt the lower cost of living states to the advantage of the higher cost of living states.  This would also have the moral effect of hurting the freer states to the advantage of the more enslaved states.

Neither does the Hoffman and Shum comparison tell us anything about whether the increases in the minimum wage in the 13 states they compared to the non-raising 37 states gained or lost relative to the economic results they would have had without raising the minimum wage.  The study is useless on that question.

But from the above table we do see that these minimum wage raising states suffer with low economic freedom ratings.  Their attempt to interfere with voluntary employer-employee cooperation is consistent with that low regard for individual freedom.  We know for sure that the states with more economic freedom do out-perform those states with less economic freedom in terms of job growth and goods and services production growth.

The Hoffman and Shum and the Conason arguments for raising the minimum wage are here shown to leak like a sieve.


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1 comment:

DerWilleZurMacht said...

Great post. The key is to remember that most proposed progressive policy is strictly ideological and not based in raitonal reality. Arbitration of "morality" and ubiquitous paternalism is the name of the game. Keep up the good work.

30 October, 2014 09:18

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