Tuesday, April 22, 2014

The Systematic Errors in Thomas Piketty's New Book

From a review of Capital in the Twenty-First Century by Diana Furchtgott-Roth.
Professor Thomas Piketty of the Paris School of Economics has come to America to tell us that many of our problems could be solved with higher taxes on wealth and an increase in the minimum wage. Sunday’s New York Times called him a Rock Star.

Most of the analysis of Piketty’s 671-page tome Capital in the Twenty-First Century has focused on his examination of income inequality and his recommendation to increase taxes on capital and wealth. But how about his prescription to increase the minimum wage?

The political biases of Capital are nowhere more obvious than in Piketty’s errors in his recent history of the U.S. minimum wage. Piketty, in his introduction, portrays his policy recommendations as “lessons based on historical experience,” but he cannot even offer an accurate historic description of the minimum wage...

One might overlook one isolated error as sloppiness to which we are all susceptible. But Professor Piketty’s supposed wage history is not tarnished by a single error, but by a vast array of systematic errors.

His history is pure revisionist fiction, and revisionist fiction with a political purpose: making Democratic presidents look magnanimous and Republican presidents look uncaring. Yet, over the past quarter century, the period Piketty describes as showing a dramatic increase in inequality, Republican presidents signed into law larger percentage increases in the minimum wage than did Democratic presidents.

Piketty’s analysis of the advantages of increasing the minimum wage neglects negative employment effects on low-skill individuals. He states that increasing the minimum wage lowers inequality at the bottom of the income distribution by raising the pay of low-income individuals.That is partly correct. Measured inequality declines because the difference between the lowest wage in the economy and the average wage is reduced, even if some of the low-wage workers lose their jobs because they are no longer employable. But what Piketty fails to admit is that raising the minimum wage prevents people with skills lower than the minimum from getting jobs.

When the minimum wage is increased, the earnings of the unemployed are nonexistent or unreported. Hey presto—more equality. But the low-skilled are not better off by not working, they are worse off, even though the country in which they are no longer able to work has a “better” income distribution. Read the full article here.

2 comments:

  1. -- Piketty’s analysis of the advantages of increasing the minimum wage neglects negative employment effects on low-skill individuals. He states that increasing the minimum wage lowers inequality at the bottom of the income distribution by raising the pay of low-income individuals. --

    Ok, the guy is a charlatan, an economics ignoramus. Why is his book No.1 in Amazon.com? Maybe because religious books are very popular.

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  2. Government cannot "increase the minimum wage" any more than it can "raise taxes." All it can do is ban voluntary employment at less than a fixed minimum rate, in the first case, and raise tax rates in the second case. Whether such actions actually result in higher wages or increased taxes is purely a secondary phenomenon, often with the opposite results than intended. Ask the employee who loses his job as a result of a banning employment at less than a mandated minimum rate whether the government raised his minimum wage. In his particular case, his wage has gone from say $7 per hour to zero. In addition, the whole concept of banning consensual employment agreements affects the entire structure of production, as well as treating all citizens as cattle. Employers are deprived of the ability to get low-benefit, but essential functions covered, like sweeping the floors. Employees at slightly higher than the minimum wage will often see their wages slightly lowered in order to make up for the increases at the minimum level. It's a destructive, distorting, and de-humanizing effect all across the economy.

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