On Minimum Wages and Maximum Signaling

So, Obama wants to raise the federal minimum wage from $7.25/hr to $9/hr. Like many generally conservative persons, I oppose the minimum wage on principle, expressed by countless others but most recently by The Crimson Reach:

if I want to hire someone to do a thing at $X/hour and that someone is willing to do the thing for $X/hour, or vice versa, this arrangement between we two is none of anyone else’s… business

Smart People and Smarter People

A large number of Americans, however, do not seem particularly interested in such limiting principles, and will happily accept government interventions that appear to make their lives safer, or healthier, or more comfortable, or that appear to correct market failures that unfairly exploit them. It is easy to find polls like 73% of Americans support raising the minimum wage to $10/hr. Most of these people may be uneducated about economic matters, but let us take the charitable view that they genuinely believe such policies would help the poor and/or themselves.

A smaller number of Americans claim to be somewhat educated about economic matters. They understand some basic principles about supply and demand and how, ceteris paribus, raising the price of something will lower its supply. These Americans excitedly post on the social networks how Obama clearly doesn’t understand anything about economics, or they quote Milton Friedman about how “the people who have been hurt most by the minimum wage laws are the blacks” that minimum wage proponents often think they are helping. Let us take the charitable view that they genuinely believe such policies would hurt the poor and/or themselves.

An even smaller number of Americans, whom we affectionately call the “Smart People,” claim to know even more about economics while conveniently arriving at the same interventionist conclusions supported by the uneducated masses. So you get the Paul Krugmans and Matt Yglesiases of the econosphere declaring that raising the minimum wage isn’t the best way to help the poor, but it’s “the only politically feasible option” because after Obama “did a payroll tax holiday, then when that expired Republicans wouldn’t extend that either.”

These sorts of predictable partisan prognoses rely on revisionist history, requiring you to forget that 1) Republicans helped extend the payroll tax cut the first time it expired, and 2) leading Democrats like Pelosi didn’t even want to extend it the second time. But regardless of who we blame, where do we get the idea that an imperfect minimum wage hike is still a “good” option?

All Of The Studies

We get this idea from Smart People Studies (where else?). Smart People do lots of Studies on the minimum wage to uncover the elusive Empirical Answers. Apparently sometimes minimum wage hikes are associated with higher unemployment, but sometimes they’re not, and we’re not exactly sure why.

It may be because it encourages higher productivity and lower turnover, but it also may be because the costs are hidden in lower benefits and higher prices. All these real-world complications provide plenty of room for certain Smart People (including one of Obama’s economic advisers) to declare that Raising the Minimum Wage could be (must be?) a Very Good Thing.

I think this Twitter exchange best encapsulates the opposing perspectives:

@mattyglesias Minimum wage proponents rarely recognize the existence of enormous loopholes which are necessary to minimize the effects. — PEG (@pegobry) February 13, 2013

Federal Conformity

But even if we accept the uncertain possibility that it might be good to increase the minimum required productivity of inexperienced workers, that still doesn’t mean it’s a good task for the federal government. The rigid conformity of a national minimum wage ignores the large discrepancies in costs of living among various states due to geography, demand, local policies, and other factors.

Many states already have set minimum wages higher than the national minimum, and they can continue to set their own levels as they see fit. If liberal states want to continue to risk higher unemployment to feel like they are helping the poor or the young, it is their prerogative to do so, but I see no reason why conservative states should be forced to join them.

Maximum Signaling

It’s a complicated world, and I admit it is possible that increases in the minimum wage could genuinely help the poor and inexperienced in certain situations, though it is by no means certain.

What is certain, however, is that proponents of increasing the minimum wage look like they want to help the poor, who tend to be the most likely to think that such increases will help them. Furthermore, since such a national increase seems unlikely in the present political climate, these proponents will not even have to face the possibility of their actions having negative consequences.

Thus they are free to reap the political benefits of signaling how much they care until they finally have enough power to act on it – and by then it won’t matter. As long as the minimum wage continues to grow slower than inflation (or even if it indexes at a level lower than if we had started indexing a long time ago), at least any negative effects won’t be much worse than they’ve pretty much always been.