Monday, January 6, 2014

The Truth about Those Studies that Say Increasing Minimum Wages Reduce Poverty

By Per Bylund
In a long and seemingly technical blog post on the Washington Post “wonkblog,” Roosevelt Institute fellow Mike Konczal suggests that raising the minimum wage will reduce poverty. He primarily relies on one meta study (Dube 2013, unpublished) to show that economists “do agree” “that raising the minimum wage would reduce poverty.”
Quickly reading through the article, it is obvious that this is the kind of perception Konczal wants the reader to get. Well, not so fast. The blog post exclusively refers to aggregates of different kinds, which obscures the analysis. And, if one reads more closely, Konczal includes several limitations and constraints to his thesis, and in fact agrees with the age-old truth that raising the minimum wage would kill off jobs. Minimum wage mandates above the present market wage of course has only one direct effect: jobs below that level are outlawed. Hence, any person on the job market with a productivity level (whatever the reason) below the minimum wage mandate will not be able to find a job.
Konczal’s text is a balancing act relying on arbitrary limits and vague language. For example, he relies on extrapolating on the elasticity of minimum wage found in several studies to be around -0.24 (which means, statistically, that raising the minimum wage by 1 % would reduce the number of poor people by 0.24 %), but says that one “shouldn’t take the effects of small changes to see what would happen if we, say, increased the minimum wage 500 percent, or to levels that don’t actually exist right now.” Right. This is true, but not because the elasticity of minimum wage at the level studied “is” -0.24, but because it was – using the specific data and methods in the particular study.
There are no constant relationships in the social world, which is the reason Konczal shows reluctance to extrapolate too far from the mean; but the same fact should also make him weary to assume the found elasticity is applicable on different time periods. (But the latter obviously doesn’t bother him.)
Throughout, Konczal uses the term “poverty.” But poverty statistics take into account only income, not what tasks are carried out within employment. If raising the minimum wage prohibits certain jobs (on which Konczal agrees), is it then not likely that the remaining jobs will change? Some of the tasks carried out by low-productivity labor cannot profitably be carried out by employees with higher wages, which means – to the extent they must be carried out – business owners and entrepreneurs will need to find other ways to get them done. Perhaps through excessive automation and capital investments, which would slightly increase the demand for labor in higher-earning professions (while raising the barriers to entry for other entrepreneurs). (This is, by the way, one of the rather crazy progressive arguments for outlawing manual labor – that it forces entrepreneurs to “innovate,” which increases productivity and thus wages for those remaining employable.)
Is it not likely that a higher minimum wage, which prohibits certain low-producing jobs, will force those in such jobs by choice (that is, those choosing low-productivity employment though they would be able to earn higher wages elsewhere) will instead seek employment with higher productivity? Is it not also likely that those who cannot muster higher productivity levels would accept unpaid overtime or other types of unpaid work just to remain salaried? Both of these effects may reduce the aggregate poverty statistic while forcing those unwilling or unable to get such “perks” from employers into unemployment. (It is furthermore probable that this in turn leads to an increase in black market employment opportunities, as well as outright abuse in the work place, as unscrupulous employers seeks ways to “deal” outside the system’s restrictions.)
But Konczal seems oblivious to these effects, perhaps because they cannot easily be studied using aggregates: the type of studies he refers to tend to perform statistical magic on selected data that reveal “levels” of employment, wages, poverty, etc. Exactly what the results tell us is far from clear, but this is typical for mainstream research. Changes within employment aren’t generally observable in the aggregate data, so why not assume it is unimportant?
Of course, Konczal cannot get around the fact that raising the minimum wage above the market wage will cause unemployment. And, which is unfortunate for statistics-enamored progressives, unemployment shows up in the aggregate employment statistics too. So he concludes that, based on the studies he cites, it is the case that “there are significant benefits, whatever the costs.”
Yes, some aggregate statistics will indeed look “better.” Whatever the costs.

(The above originally appeared at


  1. Aggregate statistics that show a reduced "poverty" level from a minimum wage increase ignore the disutility and injustice done at the individual level. Reducing "poverty" in the aggregate just means that the small gains to the fortunate individuals who keep their jobs will offset the devastating loss of the entire income of all those whose jobs are worth more less than the minimum wage. This is just the State treating people as fungible cattle, culling the herd by eliminating the less useful in order to improve the overall stock. Disgusting.

    The same applies to statistics that justify "injecting" or "sopping up" liquidity into the monetary "system." No regard is given to the individuals whose life savings are diluted by such tinkering. All that matters is the "system" in the aggregate - the cattle herd.

    Regarding the minimum wage, each firm, because its influence on the entire market is small and must compete for workers against all other firms, must take the prevailing wage rate as a given and then adjust it's mode of production such that the given wage rate will be no higher than its marginal revenue value added by paying that wage. If government intervenes in the wage market by setting a minimum wage rate, then the production structure across all industries must adjust by changing the product mix to one that is less useful to consumers than the one they previously expressed through the operation of the free market. But the consumers will move on. If the minimum wage makes fast food production unprofitable, consumers may end up buying less fast food than they otherwise would have desired, in favor of something else they desire less. The marginal workers are left to fend for themselves by finding jobs in other industries that may be more dirty or dangerous, and thus can justify the higher mandated wage. Or they must go into the gray or black markets, or become self-employed - such as selling oranges or flowers at freeway off ramps. Sad situation.

    1. I have been reading EPJ for a long time but this is my first post - Alan, your comment is poignant and absolutely spot on.