Minimum Wage Boosters Don't Know Basic Economics

Minimum Wage Boosters Don't Know Basic Economics
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On Thursday the Service Employees International Union is organizing strikes at 100 restaurants throughout America. Last Monday, in his New York Times column, Princeton professor Paul Krugman reiterated his plea to raise the minimum wage to $10.10 an hour, amounting to a 39 percent increase for minimum wage workers.

Any increase would be a mistake, because it would harm employment opportunities of teens and low-skill workers. Fewer than 3 percent of American workers make minimum wage, and they use these entry-level jobs to get their feet on the first rungs of the career ladder.

Doug McMillon, who will take over as Walmart CEO next February, started out as a teen unloading trucks at a Walmart distribution center.

According to data from the Labor Department and the Census Bureau assembled by Heritage Foundation economist James Sherk, the average family income of minimum wage workers was $53,000 in 2011, higher than average household income of $51,000. This is because minimum wage work generally supplements the income of other family members.

But the chorus calling for increases in the minimum wage is growing, organized by unions and their public relations firms, and joined by left-of-center economists such as Krugman and University of Massachusetts professor Arindrajit Dube, another New York Times contributor. Over the weekend Financial Times columnist Edward Luce also advocated a minimum wage hike.

"This support [for raising the minimum wage] doesn't come just from Democrats of even independents; strong majorities of Republicans (57 percent) and self-identified conservatives (59 percent) favor an increase," wrote Krugman.

It does not take a neurosurgeon, or even a McDonald's cook, to know the right answer when an opinion pollster asks you whether you are in favor of raising the minimum wage. Practically everyone with a heart is in favor of raising wages as long as those higher wages are paid by someone else.

No pollster asks whether a person would be eagerly willing to pay 39 percent more for a service. The answer to such a question is generally no, and not politically acceptable.

It does not hurt to try to influence public opinion, so that thought leaders such as Krugman can reach the right answer. Fast food workers, who constitute 44 percent of minimum wage workers, have their own public relations firm, Berlin Rosen. In July I was interviewed on National Public Radio with Terrance Wise, who worked at Burger King in Kansas City, Missouri, and who was represented by Danny Massey of Berlin Rosen.

Berlin Rosen's Danny Massey and Laura Brandon sent out a media advisory on strikes they are helping organize at fast food restaurants in 100 cities on Thursday. According to the media advisory, "the fight for $15 an hour and the right to form a union without retaliation continues to grow."

Berlin Rosen's clients include the SEIU as well as the United Food and Commercial Workers International Union, the Communications Workers of America, and the left-wing activist group

The SEIU, which is trying to unionize fast food restaurants, believes that the 39 percent wage increase for marginal workers proposed by Krugman is inadequate. The union wants a more than 100 percent wage increase for even the weakest of workers.

Krugman believes that raising the minimum wage helps the economy, because low-wage workers have more money to spend. He writes, "hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers' earnings." He defends increasing the minimum wage by saying that negative effects of raising the minimum wage do not show up in state-by-state comparisons.

The most well-known state by state comparison is an examination of fast food restaurants in New Jersey and Pennsylvania in 1992 by University of California professor David Card and Princeton University professor Alan Krueger, later chairman of President Obama's Council of Economic Advisers.

Card and Krueger, in a pair of studies published in 1994 and 2000, concluded that an increase in the minimum wage in New Jersey had no effect, or a small positive effect, on employment in fast food restaurants in New Jersey. They compared New Jersey with neighboring Pennsylvania, which did not raise the minimum wage.

The studies had a number of problems. Card and Krueger do not include information on the portion of employment at minimum wage at any date in time. No information was given on whether the minimum law was binding, and to what extent, for this sample.

The studies did not include information by county, such as income, unemployment, teen unemployment, labor force, and labor force participation rates. Neither did it include changes in state taxes and franchise fees.

The regression statistics explain little variance, and practically none of the coefficients is significant. Card and Krueger infer that minimum wage policy makes no difference. A more likely interpretation is that their equation excludes important variables.

Card and Krueger focus exclusively on fast food establishments, but many other minimum wage employment opportunities in the service industry, particularly the hospitality industry, are also likely affected.

Finding effects of raising the minimum wage is challenging, because 97 percent of American workers now make above the minimum wage-not because it is the law, but because employers have to pay higher compensation packages to retain workers. That is one reason why some academic studies do not find major negative effects of minimum wage increases.

Those who would be harmed by increasing the minimum wage are young people. Half of minimum wage workers are under 25, and 24 percent are teens. This group's unemployment rates are already higher than the 7.3 percent average rate. The teen unemployment rate is 22 percent, and the African American teen unemployment rate is 36 percent. The youth unemployment rate is 12.5 percent.

It is the unemployment rates of these workers that would rise if the hourly minimum wage rose to $10 or $15.

The next time a columnist opines that the minimum wage is too low, ask yourself three questions. First, why do some Americans work for minimum wage, and why do many more Americans covet those jobs? The answer of course is that those are great jobs, and many young people start successful careers with minimum wage jobs.

Second, would you be equally willing to pay $13.90, or $20.00, tomorrow for a service for which you pay only $10.00 today? If you answer this question as "yes," you obviously have not mastered basic economics. Of course you would not buy as much of the service if the price increased.

Third, why do new outlets publish on the same theme, at the same time as Berlin Rosen is organizing strikes? That question is only a little harder, but a coordinated political agenda is one possible answer.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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