In his State of the Union address last week, President Obama called for a $1.75 per hour minimum wage hike, from $7.25 to $9.00.
New York Times columnist Paul Krugman opined that, “surprisingly,” increasing the minimum wage may be good policy: “Why ‘surprisingly’? Well, Economics 101 tells us to be very cautious about attempts to legislate market outcomes.” No, I didn’t make up that disclaimer; that’s just Krugman trying to sucker you with a little false modesty. Don’t worry — he still comes out all in favor of the wage increase.
And what an increase it would be: Raising the minimum wage $1.75 an hour would be by far the biggest single hike since the federal minimum wage was established in 1938. The next biggest increase — of $0.70 an hour — occurred three times, once each in 2007, 2008 and 2009, when newly sworn-in Democrats spiked the rate three years in a row.
Proponents claim that raising the minimum wage helps workers at the bottom of the economic ladder earn more and also helps the economy, because those workers will spend more and stimulate the economy. Opponents argue that raising the minimum wage restricts employers’ ability to hire low-wage workers, and thus reduces their employment levels, and also hurts the economy, because it forces employers to direct financial resources in less efficient ways.
So what happens after minimum wage increases take effect? To answer this question, one can look at federal minimum wage increases since World War II to see what happened to unemployment and gross domestic product after these hikes.
First, look at the unemployment rate following each minimum wage increase. Average unemployment during the first month after each wage increase, for all increases from 1950 to 2009, was 6.00 percent. From three months out, average unemployment progressed as follows: 6.01 percent, 6.09 percent, 6.10 percent, 6.11 percent, 6.13 percent, 6.23 percent, 6.25 percent and 6.33 percent. So over the 10 months following minimum wage increases, unemployment steadily increased by, on average, a third of a percentage point.
Next, look at quarterly percent change in GDP following passage of each hike. Average percent change in GDP for all quarters from 1950 to 2012 was +3.31 percent. In contrast, average percent change during the first quarter after each wage increase was +2.48 percent, almost a full point lower. In the second quarter, percent change was +3.00 percent; in the third it was +2.63 percent.
Other economists have done more detailed studies to isolate the harmful effects of minimum wage laws. But even the cursory analysis in this article confirms that Krugman is a loon if he thinks placing restrictions on employers’ employment practices will increase hiring and strengthen the economy. (Other pet theories of Krugman’s are that wearing leg irons helps you walk faster and having laryngitis makes your voice sound more smooth and musical.)
If liberals want a minimum wage hike, why don’t they just come right out and demand more redistribution of wealth? Could they spare us the act of dressing up their request in convoluted economic theories with conclusions no common-sense person believes?
