Why Economists Used to Agree on Minimum Wage

Fast FoodThe argument over raising the minimum wage rages on, especially as cities are now looking at increasing the minimum wage above the federal level, with New York City being one of the most recent examples. While this is a contentious topic for workers and employers, the issue has historically been a big yawn for economists. Previously, it was almost unanimously agreed upon by economists that higher minimum wage laws result in increased unemployment. But they are now changing their tune. Unfortunately, this isn’t because the economic profession was wrong on the minimum wage issue. It is because economics today is erroneously being treated like a natural science, rather than a science of logic and deduction.

In 1976, a survey by the American Economic Association found 90% of its members agreed that “increasing the minimum wage raises unemployment among young and unskilled workers.” Fast-forward to 1992 and only 79% agreed; by 2000 only 73.5% agreed and, of this subset, only 45.6% fully agreed with the statement. In a recent debate at FreedomFest, New York Times columnist and economist Paul Krugman stated he has changed his position on the minimum wage issue, noting “…looking at what are very clear experiments, you cannot find evidence that raising the minimum wage reduces unemployment.”

Krugman is just one example of economists increasingly relying on empirical studies to come to conclusions about the implications of public policies like the minimum wage. These empirical studies attempt to look at the unemployment data where the minimum wage was increased and then compare it to a similar or nearby area where it was not increased. While this may seem simple and intuitive at first, this is not how economic studies should be performed.

Economics is certainly a science. By this we mean the conclusions of economic study are not merely opinions. The principles of economics are truths that are universal through time and geographic location. Further, these principles are arrived at through logical deduction and reasoning. Many times, people refer to this as ‘the economic way of thinking.’

While there is certainly room for empirical analysis in economics, logical principles and theories need to come first. This is where economics as a science differs from other sciences that we are familiar with. In the natural sciences, such as physics or chemistry, scientists can perform repeated experiments with control groups and make observations; from there, they can form theories or laws. But since economics is the study of human interaction and exchange, there is rarely, if ever, any way to perform an experiment in this way.

An example helps to make this distinction clear. In fields such as mathematics, a formula, equation or relationship can be proven to always be true. These ‘proofs’ show a logical step-by-step deduction by which you can arrive at this truth. A classic example would be the Pythagorean theorem. You do not need to sample hundreds of triangles to know that the Pythagorean theorem is true. Instead, you can see the logical deduction of why it must be true and be confident in the result.

Economics as a science is similar. Economists know by using the basic building blocks of supply and demand that if a government imposes a minimum wage (a ‘price floor’ in econo-speak), there will be too much supply and not enough demand. With a minimum wage, the supply of labor will increase as more people will be willing to work at the higher wage and the demand will decrease as companies will not be able to afford all of the labor they previously did, resulting in a mismatch and unemployment. You can read more about this here.

Economists do not need empirical studies to arrive at this conclusion. Of course, empirical studies could confirm this, and despite Krugman’s claim that there is no evidence, there are many studies that indeed do provide evidence. But this is missing the point of how to perform economics well. The problem with empirical studies in economics is that they cannot hold all other factors equal, so we shouldn’t be surprised when a few studies may find no change in unemployment, despite an increase in the minimum wage in some areas. This is because there could be a host of other underlying factors that cannot be controlled or accounted for.

It is always good in any scientific field or profession to continue to question and debate ideas and theories, even long-held ones. But at the same time, economists cannot just ignore economic laws of supply, demand or incentives in the face of a few seemingly contradictory empirical studies. Proponents of the minimum wage should therefore not be trying to argue their point with more statistical studies, but instead should be arguing why they believe economic laws do not apply.

Chris Kuiper CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.