Video: The State of the Minimum Wage debate

Our speaker Sam Bowman gave an energised and thorough review of the arguments over the minimum wage. This was not the first time he had tackled the issue so he came with a lot of detail. Starting with “Econ 101″ the idea that if the minimum price of a good exceeds the market clearing price you get a surplus of the good, which for labour means unemployment. Sam expressed surprise that such a simple idea is so hotly disputed but he was not surprised, following Hayek, that the empirical evidence was unclear.

Sam believes that the argument for a minimum wage as a way of caring for the poor is not as strong as the argument for abolishing the minimum wage for the same reason. Sam seems to smuggle a moral premise into his “pure consequentialist” thinking, but I do agree with him (as an ethical objectivist) that ensuring the poor are not starving is a valid policy consideration. We also agree that “Econ 101″ ultimately holds true, just not in the ways you might assume.

Sam talked about the work of Card and Kruger, who defended a minimum wage in an important and well-respected 1992 paper which opened up a debate that had previously centred on crude time-series regressions and found only the expected disemployment effect. The paper’s findings were supportive of a minimum wage but did not, however, show any explanation for why “Econ 101″ does not apply. Later Arindrajit Dube (an Indian male, name pronounced “doo-bay”) used quite a sophisticated technique. He looked at adjacent counties that straddled a State boundary where different State minimum wage laws applied. He found no strong relationship between minimum wage and unemployment. Sam believes that the simple Econ 101 a priori conclusion might be outweighed by empirically observable chaos that defies explanation or quantification. This chimes nicely with Hayek’s observation that the progress of technology and commerce is impossible to predict for similar reasons.

However, according to a literature review (TL:DR) only 15% of the 33 best empirical studies found no effect on unemployment, and 85% do show a direct impact on employment (66% for all studies). However, if you were to listen to Left, they would have you believe that there is no, or only very poor, evidence for a direct impact. So we are off to a good start, despite the protestations of the Left, there is a clear “consensus” of “peer-reviewed” research that shows the unemployment effect. Were we operating to the epistemological standards of climate change propagandists we would be done here, but we are not.

What might outweigh the obvious impact on employer incentives?

Sam describes the arguments of Richard Murphy who believes that better evidence of the effect of minimum wage may be found in labour market participation rates. Simply, changing the price of labour may attract experienced vulnerable workers (such as retirees) into the market at the expense of less experienced vulnerable workers (the unproven young).

Sam also describes a new working paper that looks at over overall growth rate in employment. The claim, which has been challenged, is that employers face short-term disincentives, such as workforce morale issues, that cause them to simply stop hiring, or try to get more from existing workers (I would venture to add knowledge management issues to the list of possible disincentives).

There are also a large number of papers and good historical data that shows that the barrier to finding work at the beginning of people’s careers, while they are unproven and cannot show they are worth the minimum wage, has the effect of reducing earnings over the long-term. The short period of difficulty caused by minimum wage, while difficult to observe in the chaos, has a very clear effect on the acquisition of skills, career progression and earnings potential.

Reasons to be fearful

John Maynard Keynes argued that in a crisis, “sticky wages” can lead to unemployment. it is inconsistent at best for progressives who favour Keynes to argue in his favour about business cycle theory and also advocate for a minimum wage. Fixed wages either causes unemployment or they do not.

Chillingly, anti-black racists from South Africa and more recently anti-hispanic racists in California, as well as Guardian columnist Polly Toynbee with regards to Romanians, rightly observe that minimum wages can be used to exclude ethnically different and undervalued outsiders. This excercised the audience somewhat, as you might expect.

Basic Income Controversy

Controversially, Sam also tacked on an argument for legalised plunder of the wealthy (as Craig Biddle put it) that he borrowed from the Bleeding Hearts. He argued that a Citizens Basic Income or Negative Income Tax would help to allay fears that people would be left to die on very low wages if the law was to be abolished. His concern was to help the progression of policy in the right direction. The audience was not persuaded on that point, and nor was I.


Although he doesn’t mention them, Sam ends with another interesting nod to the success of climate alarmists. If you were, like an alarmist, to invoke the “precautionary principle” then you must conclude that raising or introducing the minimum wage is, empirically, such a unproven method of helping the poor that it is not a safe policy to persue. That is, that raising the minimum wage is not necessarily a priori harmful but that harm is empirically probable and best avoided. Sam adds that this is especially true if it is not your neck on the line but someone elses, as is the case for any responsible statesman.

Simon Gibbs

Simon is a London based IT contractor and the proprietor of Libertarian Home. Working with logic and cause-and-effect each day he was naturally attracted to nerdy libertarianism and later to harshly logical Objectivism. Find him on Google+