Saturday, 22 July 2017

Minimum Wage Hikes Reduce the Demand for Labour

Magical Thinking about Minimum Wages

The laws of supply and demand apply to labor, too.

By Kevin D. Williamson
National Review Online

Thanks to a new study from economists at the University of Washington, American progressives have learned that the laws of supply and demand apply to the labor market. Everybody already knew that, except for professional economists.

The study, commissioned by the city government of Seattle and published by the National Bureau of Economic Research, found that Seattle’s law incrementally raising its minimum wage — to $13 an hour last year, en route to $15 — resulted in low-wage workers’ earning less money rather than more. This surprised many in Seattle, who had been assured by all the best economists, including Paul Krugman, that such a thing would not come to pass.

So, what happened?

The short version is: You can pass a law saying you have to pay low-wage workers more, but you cannot pass a law that says you have to hire them in the first place, or that you cannot cut back on hours when the price of hourly labor goes up. As businesses responded to the new higher labor costs by reorganizing their processes in less labor-intensive ways (the classic examples here are the replacement of wait staff with computer screens in restaurants and the replacement of bank clerks with more sophisticated ATMs), the law that was supposed to increase low-wage workers’ incomes actually reduced them — substantially, by an average of $125 a month.

The first lecture in Economics 101 is that supply and demand interact through prices. (And a wage is a price — the price of labor.) Producers will produce more of any given product at a higher price, and consumers will consume less of it at a higher price. At some point, producers’ preferences coincide with those of consumers, and that is the market price that emerges. That’s a rough model, of course, but it describes the basic reality of how commercial transactions actually happen. . . .

Our progressive friends like to talk about how much they love science, because there is a great deal of prestige attached to science, and that prestige is relatively easy to misappropriate for progressive political ends. For example, the question of what to do about climate change is not really a scientific question at all — it is to a certain degree an economic question and to a much greater degree a political question. But deputizing “science” in support of one’s positions, and lampooning the opposition as knuckle-dragging flat-earthers, is rhetorically effective. But sometimes science, and the social sciences, aren’t on progressives’ side, especially when the dismal science is called into service. . . .

A great deal of economic policy is marred by magical thinking. The Left has its supernatural Keynesian multiplier effect, the Right has its self-financing tax cuts, and everybody clings to the myth about Henry Ford bootstrapping his business into greater profitability by paying his factory workers enough to buy his cars, which is a complete fiction. The truth is that demand curves slope downward: If you raise the price of something, including an hour of fry-guy labor, buyers will want less of it.

But magical thinking is much easier, and much more amenable to the political cast of mind, than undertaking the very hard, thankless, and uncertain work of doing the things necessary to turn low-skilled, low-earning workers into more productive and prosperous workers. Magical thinking is how you get a major political party and its hothouse intellectuals seriously convinced that the way to make health care more affordable is to pass a law called the Affordable Care Act. It is how you get Republican budget proposals that involve jacking up spending on the military, keeping Social Security and Medicare on their current stratospheric trajectories, cutting taxes, and . . . balancing the budget in ten years. (“But we’ll cut foreign aid!”)

It’s how you decide to fix the problem of illegal immigration with a wall on the southern border when most illegal immigrants do not enter by sneaking over the border. It is how you spend 60 years thinking your prissy little moral declarations about the necessity of good public education for every child will result in a good public education for every child; and how you come to believe that shouting “Health care is a human right!” will somehow summon general practitioners from the vasty deep and exnihilate hospital beds into existence.

But the next time you are tempted to indulge in that sort of intellectual laziness, consider that a lot of poor people in Seattle are going to have trouble paying their rents or feeding their children because policymakers who did not want to face the economic facts allowed themselves to be led astray by Professor Krugman, a first-rate economist who devolved into a second-rate newspaper columnist, who lent the considerable prestige of his Nobel prize to a policy proposal many of his fellow progressive economists knew to be defective even as they refused to criticize it in public.

The poor people in Seattle know that there is no such thing as a free lunch. If only the economists did, too.

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