The Minimum Wage At The Tip Of The Roman Spear

Every now and then I read Elizabeth Stoker’s blog on Christian ethics. As a Christian myself and someone who takes an interest in ethics I find the discussion interesting even though I can’t agree with her conclusions. Her latest post was about my pet issue, the minimum wage, and the alleged exploitation of paying employees only the minimum.

I’ve been critical of her in the past for treating means as ends in themselves rather than acknowledging there’s a scientific component to selecting the appropriate means. Policies often have consequences that are worse than the problems they intend to solve. You cant select a policy by ignoring the economic implications and assuming it will work out exactly like you want. That mentality is largely what has created intractable social problems like institutionalized poverty.

This time, however, she does at least briefly acknowledge there is an economic component to the minimum wage debate. Unfortunately, she appears to just cherry picks the evidence that confirms her political bias. This problem isn’t unique to those on the political left. All sides have a tendency to seek out evidence that corroborates their world view and discount evidence to the contrary. However, if you take a more balanced view at the evidence I don’t think you can dismiss the idea that the minimum wage will reduce employment opportunities that quickly. I’ll try to be brief in discussing the economics of the minimum wage  (I don’t know if that’s possible) before returning the ethical arguments.

Minimum Wage Economics

We can evaluate economic theories in two ways: (1) by evaluating their theoretical strength, that is, is the theory logical? Do the conclusions flow from the premises? And (2) by evaluating the empirical strength, does the theory fit with experience? In the case of the minimum wage, economic theory strongly suggests that it will reduce employment opportunities up to and including unemployment, particularly for those who are already the most vulnerable. The idea that maximum price controls cause shortages and minimum price controls cause surpluses is really a core doctrine in economic science. But not only is the theoretical case against the minimum wage strong, but nearly every empirical study conducted up through the 1990s confirmed that the minimum wage does, in fact, cause job loses for low skilled workers. The combination of a compelling theoretical reasons to expect unemployment combined with numerous empirical studies confirming this theory is why there was a near consensus among economists in the 20th century that the minimum wage reduces employment opportunities. This is what lead Nobel Prize winning economist James Buchanan to say this about the minimum wage:

The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests.

Starting in the 1990s and continuing through today, a number of empirical studies have been published finding no disemployment effects from minimum wage increases. Why would the data suddenly diverge from all prior studies? The reason given is that starting in the 90s some state governments started raising their minimum wages above the federal minimum wage creating the opportunity to conduct “natural experiments”. One could compare the change in employment in a state that raised it’s minimum wage to that of an adjacent state that didn’t. In other words, better research designs are the reason for the different results.

Unfortunately, for much of the “new wave” of minimum wage research, this isn’t true. In many instances the different results are not due to better experiments, but rather differing statistical techniques used for interpreting the data. Many of these “new” studies add additional controls to their statistical model that are subject to a fair amount of controversy. When one analyzes the exact same data, but without the additional controls, you get the normal (and expected) result that, yes, the minimum wage increase did reduce employment. Needless to say, the validity of these techniques have been debated in academia. This is the abstract from a 2012 paper by labor economists Nuemark, Wascher, and Salas:

We assess new studies claiming that the standard panel data approach used in much of the “new
minimum wage research” is flawed because it fails to account for spatial heterogeneity. These new
studies use research designs intended to control for this heterogeneity and conclude that minimum wages
in the United States have not reduced employment. We explore the ability of these research designs to
isolate reliable identifying information and test the untested assumptions in this new research about the
construction of better control groups. Our evidence points to serious problems with these research
designs. We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages
for some against job losses for others, and that policymakers need to bear this tradeoff in mind when
making decisions about increasing the minimum wage.

Note that this paper largely critiques the research designs of the economist Elizabeth cites to justify the minimum wage, Arin Dube, among others. Now statistics is not my strong point so I’m probably not in the best position to offer an opinion as to who is correct. But I will say that the argument advanced by Neumark and Wascher certainly makes logical sense. These studies analyze the employment in states where the minimum wage was increased in one state but not the other. So in a sense, by using this research design you create a form of a controlled experiment. But then these new studies proceed to add additional controls to an already controlled experiment to “correct” for employment trends in each county. When Neumark and Wascher write that, “these new studies use research designs intended to control for this heterogeneity”, they suggest that the experiments already control for “employment trends” and the extra controls are distorting the results.

Also, my friend Bob Murphy  points out that to the extent that employment trends differ in these counties, it’s likely due to different state government policies affecting the labor markets in different ways. Government policies are either neglected or presumed to have no effect in these studies.

Finally, the claim that the empirical data shows no evidence that the minimum wage creates unemployment is dubious given the strength of the theoretical argument against it. Are we to just totally discount the theoretical side of the analysis? Strong theoretical arguments in support of the minimum wage are noticeably lacking. The most popular argument is for labor market monopsony, but come on, that is about as weak of a theory as you can get. Certainly in the low end of the labor market where competition is the strongest. And even in other markets with imperfect competition, we still see price controls creating shortages, likely due to the dynamic nature of the supply and demand conditions versus a rigid price control.

So to conclude the economic part of this post, while an objective non-partisan observer likely wouldn’t be able to say with certainty that a minimum wage would reduce employment he would still have to conclude that there is a significant probability that it will, all things considered. From an ethical standpoint, even if the minimum wage had only a 50% probability of disemploying people (I’m pretty sure it’s much higher), you couldn’t justify recklessly intervening in people’s lives on the off chance that it wont thrust already low income people out of their jobs. Especially when there are much better ways to eliminate poverty.

Minimum Wage and Exploitation

A constant theme of her blog post is that business that pay only the minimum wage are exploiting their workers. I think it’s this flawed notion of exploitation that is very prevalent on the left that leads to so many bad policy recommendations. Here’s a few examples from the post:

This tracks well with what we established of poverty above: poor people are in special need, and because that need is so dire, they can be easily exploited by manipulating it. We’re also told that the ruination of a poor person is morally wrong, even if legal — thus even interest owed on a loan legally made is (especially) ill-gotten gain. The parallel ‘case’ in Proverbs — that God will take up the case against the exploiters in His court — indicates that cheating the poor out of sustenance and into ruin is a matter of grave injustice, even if one does it legally.

Not exactly. The way I see it, there are two ways into this proscription: we can end the exploitation itself (raise the min. wage) or end the source of the exploitation without using wages (eliminate the dire need.) Ryan could suggest that we relieve the suffering of the poor through cash transfer programs or a UBI, thus eliminating the dire need that is exploited by employers offering extremely low wages. In that case, even if people worked low-income jobs, they would not be suffering the harms of poverty, and would therefore not be subject to exploitation and ruin.

Instead, as an answer to poverty, he prefers the laws remain as they are and we instead rely upon volunteerism — that is, private charity — to eliminate the suffering and need of poor people. He differs from Augustine, then, in that he’s good with there being no legal answer to the exploitation of the poor by nature of their poverty.

What I’m saying is this: if a law (like a very low minimum wage) is understood to be exploitative to the poor, we’re obligated ethically either to change the law or eliminate the source of the exploitation. If we opt to do neither, our commitment to Christian ethics is seriously, seriously questionable.

Now in my opinion this notion of exploitation cannot be debunked hard enough. It stems from a fundamental misunderstanding of the nature of economic exchange. And while it sounds like a moral argument, it’s really an economic fallacy wrapped in a moral argument.

Let’s start by pointing out that there are two mutually exclusive ways that one can acquire wealth. The first is by serving other people. That is, you provided someone with something that they, want, need, or value and in exchange for your service you are rewarded. Both sides to the exchange benefit from the gains through trade. If this is the only method of wealth acquisition permitted by the legal system, it is impossible for someone to become wealthy by “exploiting” people since wealth can only be acquired through service and the uplifting of others. The more value one creates for his fellow man, the more wealth he creates for himself. It’s really a beautiful system of mutual service if you stop and think about it.

Unfortunately, this isn’t the only method of wealth acquisition permitted by the legal system. The second method, which is enabled and encouraged by the government, is the parasitic seizure of the fruits of other people’s labor either by directly threatening physical violence until they cough up a subsidy for some special interest group (usually wealthy corporations) or by coercively “regulating” away competition (almost always by convincing leftists it’s for the “public good”) so that the gains from trade become skewed in favor of the special interest.

Our present economy is a mix of  both. Unfortunately, most on the political left (including Elizabeth in her post) focus on the alleged exploitation of the first method while usually assuming no exploitation is taking place in the later. Again because they tend to believe the coercive regulations are there to help people while either ignoring or remaining unaware of the unintended (or intended in the case of the special interest groups that do the lobbying) consequences of these interventions.

I’m not sure if Elizabeth holds to the Marxist exploitation doctrine where exploitation takes place if anyone gets paid less than the full product of their labor and if the business owner earns any return on his initial investment. Hopefully not, but I’ll give her the benefit of the doubt (For a thorough demolition of the Marxist exploitation doctrine see here). More likely she envisions exploitation taking place along the following lines:

Suppose a business owner is looking to hire a worker. The maximum the owner would be willing to pay is equal to what that worker can produce on an hourly basis. Let’s just say $25/hr. The minimum the worker is willing to work for is $1/hr, say. Any less and he will just find some other way to earn that much. Maybe washing windows of cars in stopped traffic for tips, mowing lawns, etc.

So we can conclude that trade in this situation is, in fact, mutually beneficial and the worker will be hired by the business owner. But at what wage rate? Given the above valuations, we can tell that whatever wage is paid will be between $25/hr and $1/hr. We can’t, however, say exactly what the wage rate will be. It will depend on bargaining. If the business owner is a better bargainer than the worker, he might get a deal that is skewed in his favor. If the business owner is wealthy and doesn’t feel any pressure to hire the worker, he might be able to negotiate the worker’s wages downwards. If the worker is extremely poor and desperate for subsistence, he might have no choice but to accept the job at $1/hr. So far so bad.

I’m pretty sure this is Elizabeth’s view of capitalism. Poor people have no choice but to accept subsistence level wages because the firms hold all the power in the negotiation, hence “exploitation”. The problem with this narrative is this isn’t how markets actually work. What I described above is an isolated two-person exchange. In such situations, sure there is room for bargaining and it’s quite possible the bargain could be lopsided. However, our economy doesn’t consist of Crusoe and Friday on an isolated island; there are thousands (millions) of buyers and sellers all competing against each other. If you can think back to your microeconomics class, didn’t the models suggest that prices were formed by supply and demand? Why was there no talk of bargaining? Because the more buyers and sellers in any given market, the narrower and narrower the zone within which bargaining can take place becomes. In a developed market economy like ours, the room for bargaining is close to zero. Textbooks omit it because this zone is negligible.

So in the real world, if the employer were to offer this employee $1/hr, he would turn down the offer because there are hundreds of other employers also looking to attract labor and are willing to pay more to do so. Wages are formed by supply and demand. Not by who drives the harder bargain. Even in a situation where the employer is extremely wealthy and the worker is desperate for subsistence, the worker will still earn the going market wage. No more, no less. It’s hard to see how paying the market wage could be considered exploitation in any meaningful sense. Especially when artificially paying more implies less than full employment as mentioned in the first section.

The Ethics of Minimum Wage Laws

What if, for some reason, the market wage just isn’t enough to provide subsistence? In that situation it would seem we have several options for lifting people out of poverty. Elizabeth recognizes this when she writes:

Does this immediately tell us that those, like [Paul] Ryan, who oppose raising the minimum wage, ought to be automatically expected to support raising the minimum wage, so as to to go about securing justice for the poor?

Not exactly. The way I see it, there are two ways into this proscription: we can end the exploitation itself (raise the min. wage) or end the source of the exploitation without using wages (eliminate the dire need.) Ryan could suggest that we relieve the suffering of the poor through cash transfer programs or a UBI, thus eliminating the dire need that is exploited by employers offering extremely low wages.

Noticeably absent from her list is economic growth! In my experience this is typical of the political left. Wealth is treated as something that has just sort of mysteriously come into existence and, usually, managed to make it into the hands of a few people. The only question they ask is, “How can we most fairly redistribute this fixed body of wealth?” Rarely is the question asked, “How can we create more wealth?”

Of the three options available to us, a minimum wage, UBI, or economic growth, only growth can actually lift people out of poverty. Why is that? It would not surprise me to find out that Elizabeth has never considered that the global GDP per capita, that is the average income per person, is only about $12,000/yr―less than what one would earn on the minimum wage. So in other words, if we actually took her policy of redistribution out to it’s logical conclusion, everyone would be thrust into poverty in the name of eliminating poverty! If Elizabeth intends to say that a $10 or $15 minimum wage or UBI should only apply to Americans or Europeans, she would need to explain why her philosophy exempts the third world from her compassion.

Obviously, only economic growth can lift people out of poverty. As I mentioned in a previous post, It’s Impossible to Deny the Progress of Capitalism, the number of people living on less than a dollar per day has dropped by 80% in just the last 30 years. That is due to one thing only, increasing globalization, free trade, and entrepreneurship. In other words, capitalism. And it isn’t just the world’s poor who have benefited. Also mentioned in that post is that those living on the minimum wage today largely have standards of living equivalent to those of the middle class 50 years ago. Does that mean the entire middle class 50 years ago was exploited? Or does the definition of exploitation change as society becomes wealthier? And again, it wasn’t redistribution that did that, but stunning economic growth.

Moreover, the very policies that she advocates are antithetical to growth―the minimum wage reducing employment, the deadweight loss of taxation, the disincentives of welfare programs, the reduced capital investment from redistribution. All of these things reduce economic growth. The end result of which is to slow the pace by which we can actually lift people out of poverty. If you consider compounding returns, it’s an absolute certainty that you will eventually make the poor in a redistributionist economy worse off than they would be if you just left people free to trade and invest.

Violence or No Violence?

Having demonstrated that there is a third way to lift people out of poverty―economic growth―it’s appropriate to consider the morality of the alternative policies that Elizabeth advocates.

The activities we undertake in a free market―freely exchanging with one another, starting a business, innovating, saving and investing―are all inherently peaceful social activities. The alternatives―minimum wages, UBI, income redistribution―all involve a degree of harmful coercion. If some wishes to keep the fruits of his labor, which again were obtained in the process of uplifting others, he is given no choice but to capitulate or else have agents of the state show up at his door with weapons and exercise physical violence against him.

As I wrote in a previous response to Elizabeth:

So why is it that so many Christians seem oblivious to the violence pregnant in socialism? I think part of it has to do with the fact that the violence is many steps removed from the person advocating it. When you go into a voting booth and pull the lever for a candidate who promises to tax and redistribute, you aren’t actually the one donning the stormtrooper gear and breaking down someone’s door with an assault rifle while training a laser sight on their chest. You many never see the face of the people who are the victims of the violence you voted for. It’s a case of out of sight, out of mind. Add to that the fact that governments frequently employ indirect coercion as their modus operandi because direct coercion strikes many people as brutal, unfair, and wrong.

A second reason is likely that Christians, like most people, believe that otherwise unjust and immoral acts somehow become legitimate when performed by the State. Almost everyone would recognize that it would be morally wrong for me to personally show up at your door with my .40 caliber and demand you cough up for charity, yet it’s said to be morally legitimate when an agent of the government does this. But why is this? How can it be moral for a group of people to do something that is immoral for the individual members of the group to do?

People have all kinds of reasons why they believe political authority is legitimate. I believe they all fail. Nevertheless I can’t see how any of those accounts of political authority could be compatible with Christianity. The Gospel is replete with examples of Jesus condemning violence and preaching pacifism. That’s why I entitled this post, Minimum Wage at the Tip of the Roman Spear, it’s impossible to imagine that Jesus would have sanctioned Roman soldiers going into the homes of innocent people with spears because they didn’t pay their workers a state decreed minimum.

Elizabeth asks, “Are we under any special obligation to adjust the laws in question in one direction or another?” Rephrasing it to more appropriately capture the reality of the situation, “Are we under any special obligation to exercise violence in one direction or another?” The answer from both an ethical and a Christian perspective is NO.

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