This is cross posted on my personal blog.
Frequently, one hears the following argument: "if raising the minimum wage from, say, 8 dollars an hour to 10 dollars an hour, why not make the minimum wage 50 dollars an hour, or even a 100 dollars an hour"?
Unfortunately, I've heard such "arguments" repeated on national television by so called "economic experts".
NOTE: since my comments on this matter have generated some confusion on newspaper message boards, I'd like to make this clear: I am NOT making an argument FOR having a minimum wage here nor am I stating what such a wage should be.
Rather I am attacking a bad argument against raising the minimum wage (or having one at all); I'll leave it to those better versed in economics to make the case for raising the minimum wage.
More below the fold.
You see this sort of argument often; this was put in print by a professor at a local small college:
As 2014 approached and I was inundated with commentary about Republican resistance to increasing the “minimum wage,” I had a moment of clarity. The government should increase the minimum wage to $2,500 an hour and legislate 51 weeks mandatory vacation for all workers. This may sound crazy at first, but hear me out.
With every worker getting paid $100,000 a year and working one week, they’ll have the time and money to spend and invest. Stores, faced with far more customers with bulging wallets, can sell more, providing them with the income they need to pay workers $100,000. It’ll be a virtuous cycle!
The rest of the Peoria Journal Star letter continues in a similar fashion. But there is a very elementary mistake in logic here, and this mistake is made by people who have a much higher profile than this professor.
I decided to respond: (the response has yet to appear; I am not sure that it will)
This is in response to Dick Johnson's letter to the editor regarding the minimum wage published in the Peoria Journal Star on January 4, 2014.
Professor Johnson's satirical letter makes a very elementary mistake that many other opponents of the minimum wage makes make: they assume that if an economic model posits that an increase in the current minimum wage will derive benefit, then an even bigger increase will derive a greater benefit (e. g. "if raising the minimum wage to 10 dollars and hour is good, then why not, say, 100 dollars an hour or even 2500 dollars an hour?".
The mistake is this: there could well be an OPTIMUM minimum wage; having the minimum wage either below this optimum or above the optimum is harmful to the economy.
Here is a analogy (albeit a simplistic one): suppose one wants to maximize revenue to a sporting event; revenue is "cost per ticket" multiplied by "number of tickets sold". If one charges too little per ticket (say, a dollar a ticket), one sells out but gets little total revenue because the price is too low. If one charges too much (say, 500 dollars a ticket), one gets a lot of money per ticket but sells too few tickets to generate the desired revenue.
The optimum price is somewhere in between those extremes.
The same principle could well apply to the optimum value for the minimum wage. Of course, this is a worthy policy debate, and this issue deserves better than what Professor Johnson and some of the other detractors give.
Here is my idea in graphic form: the "y" axis (the vertical one) is some economic benefit, the "x" axis (the horizontal one) is the minimum wage, expressed in some arbitrary units.
Now I am NOT saying that macroeconomics can be modeled so simply; it can't. But I am saying it is reasonable to assume that there IS something (or might be something) akin to an optimum minimum wage; those of us who want to see a raise in the minimum wage do NOT believe that "more is always better."
In fact, often, we have to try a policy out to see if it works as predicted: (Jared Bernstein)
I will not rehearse the age-old arguments about unintended consequences, primarily job loss among affected workers. The economist Arindrajit Dube, who himself has made important contributions to our understanding of this issue, does so admirably in a recent comprehensive review. The fact is that along with the many changes in the national minimum over time, we now have dozens of states and localities with minimum wages higher than the federal minimum. If there were a problem with widespread job losses among intended beneficiaries, we’d probably know. [...]
Does that mean completely ignoring the “laws” of supply and demand and setting the minimum at any level we want? Of course not. Workers may not be paid their “marginal product,” but there is some rough correlation between their pay and the value of their work (the great labor economist Richard Freeman gets at this by using the flat edge of the chalk to draw demand curves). History teaches that moderate wage increases — say, those including not much more than 10 percent of the work force in their sweep — have nothing like the job-loss effects that opponents claim (which isn’t to say “zero,” but the beneficiaries far outnumber those hurt by the policy).
The larger points here are twofold. First, policy makers must be mindful not only of the quality of the people in the work force, but also of the quality of jobs they inhabit. And second, be very wary of those who use the “rules” of economics, particularly at the micro level, to tell you why we can’t enact a progressive policy change. More often than not, we won’t know the impact until we try it, and in the case of the minimum wage, we know that moderate increases have their intended effect.
So there is a second fallacy inherent in the "why not raise the minimum wage to some ridiculous level" argument: micro laws aren't always macro laws (in economics anyway).