Sunday, January 15, 2017

A 3,000-Word Logorrheic Bouillabaisse of Misunderstandings, Non Sequiturs, Half-Truths, and False Presumptions

James Kwak has written a bizarre pro-minimum wage piece in The Atlantic, The Curse of Econ 101.

His attack on Econ 101 begins by outlining the theory that correctly explains the theoretical problems with minimum wage laws:
The argument against increasing the minimum wage often relies on what I call “economism”—the misleading application of basic lessons from Economics 101 to real-world problems, creating the illusion of consensus and reducing a complex topic to a simple, open-and-shut case. According to economism, a pair of supply and demand curves proves that a minimum wage increases unemployment and hurts exactly the low-wage workers it is supposed to help. The argument goes like this: Low-skilled labor is bought and sold in a market, just like any good or service, and its price should be set by supply and demand. A minimum wage, however, upsets this happy equilibrium because it sets a price floor in the market for labor. If it is below the natural wage rate, then nothing changes. But if the minimum (say, $7.25 an hour) is above the natural wage (say, $6 per hour), it distorts the market. More people want jobs at $7.25 than at $6, but companies want to hire fewer employees. The result: more unemployment. The people who are still employed are better off, because they are being paid more for the same work; their gain is exactly balanced by their employers’ loss. But society as a whole is worse off, as transactions that would have benefited both buyers and suppliers of labor will not occur because of the minimum wage. These are jobs that someone would have been willing to do for less than $6 per hour and for which some company would have been willing to pay more than $6 per hour. Now those jobs are gone, as well as the goods and services that they would have produced.

The minimum wage has been a hobgoblin of economism since its origins. Henry Hazlitt wrote in Economics in One Lesson, “For a low wage you substitute unemployment. You do harm all around, with no comparable compensation.” In Capitalism and Freedom, Milton Friedman patronizingly described the minimum wage as “about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it.” Because employers will not pay people more money than their work is worth, he continued, “insofar as minimum-wage laws have any effect at all, their effect is clearly to increase poverty.” Jude Wanniski similarly concluded in The Way the World Works, “Every increase in the minimum wage induces a decline in real output and a decline in employment.”
But he then goes on to deny the logic of the theory:
 Looking at historical experience, there is no obvious relationship between the minimum wage and unemployment...
Mark Perry correctly comments on Kwak's quackiness:
Writing in The Atlantic, law professor James Kwak makes a very ill-advised case for ignoring economic theory, logic, laws and reasoning and supporting higher government-mandated minimum wages for unskilled workers in an essay (“The Curse of Econ 101“) that I would characterize as a 3,000-word logorrheic bouillabaisse of  misunderstandings, non sequiturs, half-truths, and false presumptions (to channel Don Boudreaux). It ranks right up there along with articles by John Komlos (“Why a $15 minimum wage shouldn’t scare us“) and “America’s Worst Minimum Wage Pundit” Nick Hanauer (“The claim that if wages go up, jobs will go down is not a theory — it’s a scam“) as one of the most misinformed, flawed and misguided articles ever written about the minimum wage.

I took on the deniers of minimum wage theory directly in an October 2013 talk before a lefty anarchist group in Oakland, California :



  1. Do these quacks ever talk to business owners that lay off employees, reduce their hours to part time, or move/close up shop all together precisely because of the increased cost of labor when minimum wage is increased too much. It seems to me, that business owners who say they did such things precisely because of this is probably the clearest type of evidence you can find. If their cherry-picked data doesn't show this, perhaps they should realize there is a problem with their data, just like the statisticians who predicted a 90% probability of Hillary presidency should do the same.

  2. --- "Looking at historical experience, there is no obvious relationship between the minimum wage and unemployment..." ---

    Isn't this the same as "reducing a complex topic to a simple, open-and-shut case"? "Look, I can't find a relationship looking at data some friend of mine provided, so it doesn't exist!"

  3. Should have mentioned Vernon Smith's long ago lab experiments that validated supply and demand back when he was skeptical about markets.