Matt Mastricova’s article last week, “Time to wage war for minimum wage,” defends President Obama’s recent State of the Union proposal to raise minimum wage from $7.25 to $9 per hour by 2015. Mastricova cites studies from the University of California, Berkeley and the Center for Economic Policy and Research, which show that minimum wage increases have no impact on employment. He concludes that minimum wage increases can only be good, as they give higher wages to low-skilled workers. What Mastricova forgets is that the social sciences are not exact sciences.
Running a simple regression of unemployment on minimum wage reveals an R-Squared value of only 0.002. This means that only 0.2 percent of the variation in unemployment can be explained by variation in minimum wage. Put another way, there is an incredibly large subset of factors that have an impact on unemployment; the effect of minimum wage is negligible. Minimum wage didn’t change during the recession, yet we saw unemployment jump above 10 percent in late 2009.
According to the Bureau of Labor Statistics (BLS), North Dakota has the nation’s lowest unemployment rate at 3.2 percent. Economists attribute this low unemployment rate mostly to the energy boom that’s going on in that region. The low rate has absolutely nothing to do with any policy North Dakota has put in place, but simply shows that North Dakota got lucky with its natural resources.
In social sciences, there is no way to run perfect tests. The only way to imply causation is to test one factor while holding all other factors constant. This is impossible to do with economics because the economy doesn’t operate in a vacuum. You can’t test the effect of just one thing on a system where billions of people are constantly moving money around for reasons spanning from the federal reserve’s quantitative easing to sheer whimsical thought.
With this in mind, the studies that Mastricova cites seem less relevant. Minimum wage workers only comprise 5.2 percent of all hourly paid workers and 2.5 percent of all workers in the workforce, according to the BLS. These studies are based on the unemployment rate, which includes all workers. With 97.5 percent of workers unaffected by changes in the minimum wage, it’s easy to see why studies that account for all workers as their population don’t find any effect in minimum wage changes.
We can, however, see a demographic greatly affected by minimum wage changes. According to the BLS, about half of minimum wage workers are under the age of 25. A study on the U.S. minimum wage and teenage employment conducted by economists from the University of Cambridge, University College London, and Claremont McKenna College found statistically significant evidence that increases in minimum wage negatively affect teenage unemployment, holding all other factors as constant as possible.
In economic theory, we see that minimum wages have destructive effects on the employment of low-skilled workers. Employers don’t hire employees if they lose money by doing so. Minimum wages ensure that employers don’t hire any employee whose value is below the government-set threshold; 97.5 percent of workers fall above this threshold and are unaffected.
The real losers to minimum wage are workers whose skills cannot earn them wages above the minimum. They don’t make more because of minimum wage. They just don’t get hired.
With this in mind, it doesn’t make sense for President Obama to push for wage increases that prevent job growth for the lower class. The real motivation for Democrats and liberal research institutions to push for minimum wage is that many union contracts set wages as a multiple of the minimum wage. Raising the minimum wage is just a way for Democrats to throw a bone to some of their biggest donors.
Because the social sciences are inexact, we have to rely on economic theory at times to make policy decisions. In this case, we can see that minimum wages are destructive and discourage the hiring of low-skilled workers, while having a negligible effect on overall employment. Though Mastricova’s argument is well intentioned, the studies he cites use incorrect metrics to gauge a reality that is ever changing. Economic theory still holds. Raising the minimum wage only harms the low-skilled workers it intends to help.
The original article can be found here.