“The Right Minimum Wage: $0.00.” That was the title of a 1987 editorial in a major American newspaper. The editorial stated: “There’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage would price working poor people out of the job market.” You might expect the Wall Street Journal editors to write something like that. But the editorial wasn’t in the Wall Street Journal. It did appear, though, in a prominent New York newspaper. Which one? The New York Times.
In a 1970 economics textbook, a famous Nobel Prize–winning economist wrote of 1970’s minimum wage rate of $1.60, “What good does it do a black youth to know that an employer must pay him $1.60 per hour if the fact that he must be paid that amount is what keeps him from getting the job?” Who wrote that? It must have been free-marketer Milton Friedman, right? Wrong. The author of that statement was liberal economist Paul Samuelson.
Among non-economists and politicians, the minimum wage is one of the most misunderstood issues in economic policy. President Biden and almost all Democrats and some Republicans in the US Congress advocate increasing the federal minimum wage from its current level of $7.25 an hour to $15 an hour over four years. They argue that many of the workers earning between $7.25 and $15 will get a raise in hourly wage. That’s true. But what they don’t tell you, and what many of them probably don’t know, is that many workers in that wage range will suffer a huge drop in wages—from whatever they’re earning down to zero. Other low-wage workers will stay employed but will work fewer hours a week. Many low-wage workers will find that their non-wage benefits will fall and that employers will work them harder. Why all those effects? Because an increase in the minimum wage doesn’t magically make workers more productive. A minimum wage of $15 an hour will exceed the productivity of many low-wage workers.
The reason some workers earn low wages is not that employers are greedy exploiters. If exploitation were enough to explain low wages, then why would employers ever pay anyone over $7.25 an hour? Wages are what they are because they reflect two things: (1) workers’ productivity and (2) competition among employers.
Employers don’t hire workers as a favor. Instead, employers hire workers to make money. They hire people only if the wage and other components of compensation they pay are less than or equal to the value of the worker’s productivity. If an employer pays $10 an hour to someone whose productivity is $15 an hour, that situation won’t last long. A competing employer will offer, say $12 an hour to lure the worker away from his current job. And then another employer will compete by offering $13 an hour. Competition among employers, not government wage-setting, is what protects workers from exploitation.
We all understand that fact when we see discussions on ESPN about why one football player makes $20 million a year and another makes “only” $10 million a year. Everyone recognizes the twin facts of player productivity and competition among NFL teams. The same principles, but with much lower wages, apply to competition among employers for relatively low-skilled employees.
Open up almost any economics textbook that discusses the minimum wage and you’ll likely see a demand and supply graph showing that the minimum wage prices some low-wage workers out of the market. For textbooks published in the past twenty years, though, you might also find a statement that although some workers will lose their jobs, there’s controversy among economists about how many jobs will be lost. According to the textbook writers, some economists think the number will be large and others think it will be small or even imperceptible. You could easily conclude that there’s no longer a consensus among economists that an increase in the minimum wage would cause much job loss.
But that conclusion would be wrong. UC-Irvine economist David Neumark and Peter Shirley, an economist with the West Virginia Legislature’s Joint Committee on Government and Finance, showed that in a January 2021 study published by the National Bureau of Economic Research. Neumark is one of the leading scholars on the economic effects of minimum wages.
Neumark and Shirley chose a clever methodology. They read every published study of the effects of the minimum wage on employment in the United States that was done between 1992 and the present. They identified for each study the core estimates of the effect of minimum wages on employment. When that was difficult to do, they contacted the studies’ authors to ask them what they regarded as their bottom-line estimates. Sixty-six studies met their criteria and these criteria had nothing to do with the size or direction of the estimates.
Here’s what they found. The vast majority of studies, 79.3 percent, found that a higher minimum wage led to less employment. A majority of the studies, 55.4 percent, found that the negative effect of a higher minimum wage on employment was significant at the 10 percent level. Translation: for those studies, the probability that there was a negative effect on jobs was 90 percent. Almost half the studies, 47.9 percent, found a negative effect on jobs at the 5 percent confidence level. For those studies, in other words, the probability that there was a negative effect on jobs was 95 percent.
Moreover, found Neumark and Shirley, the evidence “of negative employment effects is stronger for teens and young adults, and more so for the less-educated.” They concluded that the commonly heard refrain that minimum wages don’t destroy jobs “requires discarding or ignoring most of the evidence.”
Moreover, virtually all the studies of the effects of minimum wages in the United States have considered increases in the minimum wage of between 10 and 20 percent. The US government has never raised the minimum wage by anything close to the 107 percent envisioned in the increase from $7.25 to $15.
Why does that matter? Because the higher is the increase as a percent of the existing minimum wage, the more certain we economists are that it will hurt job opportunities for unskilled workers. We are sure of that because of the law of demand, which says that for any good or service, the higher the price, the less is demanded. That applies whether we’re talking about iPhones, skateboards, or labor. So raise that price a lot, and the amount demanded falls more than it would fall if you raised it a little. And what employers don’t demand, willing workers can’t supply.
The effect of the $15 minimum wage would vary a lot from state to state. In New York in 2019, the median hourly wage was $22.44 and the average hourly wage was $30.76. So a $15 minimum would affect a fairly small percent of New York’s labor force. In Alabama, by contrast, the median hourly wage in 2019 was only $16.73 and the average was only $21.60. So the $15 minimum in Alabama could hurt a much greater percent of the labor force.
The University of Chicago’s Booth School has an Initiative on Global Markets (IGM) that occasionally surveys US economists on policy issues. Possibly because of the surveyors’ understanding that the $15 minimum wage would hurt some states more than others, the IGM recently made the following statement and asked forty-three economists to agree or disagree: “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.” Unfortunately, the question did not specify what is meant by “many.” Is it ten, twenty, thirty? Some economists surveyed pointed out that ambiguity. That ambiguity could explain why a number of the economists answered that they were uncertain. But of those who agreed or disagreed, nineteen agreed that it would cause job loss in many states and only six disagreed.
One economist who disagreed, Richard Thaler of the University of Chicago, gave as his explanation this sentence: “The literature suggests minimal effects on employment.” No, it doesn’t. As noted earlier, the federal government has never tried to raise the minimum wage by such a large amount and so there is no scholarly literature on such an increase. Would Thaler say that if putting a cat in the oven at a temperature of 72.5 degrees Fahrenheit doesn’t hurt the cat, then putting a cat in the oven at 150 degrees wouldn’t hurt the cat either?
While few economists have actually estimated the effects of such a large increase in the minimum wage, the US Congressional Budget Office (CBO) presented its economists’ estimate earlier this month. According to the CBO, the increase would reduce US employment by 0.9 percent. That might not sound like much, but 0.9 percent translates into 1.4 million workers put out of work.
But wouldn’t the increase in the minimum wage also increase wages for a lot of workers who keep their jobs? Yes, it would, and the CBO estimates that although the workers who lose their jobs would lose income, their loss over the years from 2021 to 2031 would be “only” 34 percent of the gain to the workers who gained wages.
But the gain in wages is not an unalloyed benefit to those who gain. The reason is that, as noted above, an increase in wage rates doesn’t automatically make workers more productive. So employers, looking for ways to avoid paying more to workers than their productivity is worth, would search out other ways of compensating. They might cut non-wage benefits, work the employees harder, or reduce training, to name three. Interestingly, on its website in 2006, when Congress was considering an increase in the federal minimum wage, the Economic Policy Institute (EPI), an organization funded partly by labor unions, admitted the last two of these three. It stated, “employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.” How would an employer make his workers more productive and reduce absenteeism? Probably by working the employees harder and firing those who miss work. How would he reduce training costs? By providing less training. In an article in the winter 2021 issue of the Journal of Economic Perspectives, UC-San Diego economist Jeffrey Clemens noted a negative correlation between minimum wages and employer-provided health insurance. In the workplace as in the rest of the world, there’s no free lunch.
The late economist Walter Williams has written about how, as a teenager, he learned many skills on the job that made him more productive and ultimately higher paid. I wrote recently that he could get those early jobs because the minimum wage was so low. Low-paid jobs are often crucial for black youths and other youths who need to build their work skills and work histories. These skills might be as simple as learning to show up on time. In 1967, when I was sixteen, I worked in a kitchen at a summer resort in Minaki, Ontario. The minimum wage at the time was $1 an hour and I was paid, if I recall correctly, $1.25 an hour. For the first three days of the job, I showed up about twenty minutes late. On the third day, the chef told me that if I was late the fourth day, I shouldn’t bother showing up because I would be fired. I was never late again. I learned the “skill” of punctuality. We adults take such things for granted. Kids don’t. Raise the minimum wage enough and a whole lot of young people won’t learn the basics, or won’t learn them until later in life. That would be tragic.
President Donald Trump has so much on his plate right now, it’s difficult to see how he prioritizes the actions he must take for the country’s good. There’s so much going on in so many different areas it’s hard to recall any president in recent memory having to face so much at any one time at any one time.
All presidents must deal with crises. How they lead is part of the way we judge their fitness for office. And there are a lot of folks who say his leadership lately has been lacking as the nation deals with the novel coronavirus.
That’s remarkably ungenerous. The president mobilized the federal government and private industry to respond in ways not seen in decades. It’s impossible to be certain but is nonetheless highly likely the interventions he led produced faster testing on a broader scale, more ventilators than needed, and helped keep the spread of COVID-19 under control.
We may never know. All the models produced by the so-called public health experts working in the smart institutions were way off, even when early-stage interventions are accounted for. Meanwhile, as the result of actions taken by many of the nation’s governors, mostly in blue states, the U.S. economy tanked, a record number of jobs were lost in a single month, and Congress spent so much money on relief that might not even have been necessary it will take at least a decade of above-average economic growth to recover.
For the immediate future, President Trump would be both politically smart and doing the best thing for the country if he focused on measures to get the economy open and off its back. Businesses need to reopen. Lockdowns, if they are needed again (if a still-at-this-point hypothetical second wave hits), need to be localized, targeted, and well thought out. People need to get back to work, pay down their debt, and start saving again.
Several steps can be taken to help bring about the V-shaped recovery most everyone is hoping for. There are lots of positive indicators in the economy that its possible. Every policy decision from now until at least the end of summer ought to be taken specifically to enhance the possibility that will occur.
Just as the president was right to postpone tax filings and payments from April 15 to July at the height of the crisis, he would be right to have Secretary of the Treasury Steve Mnuchin tell the U.S. Internal Revenue Service to postpone the payment of those taxes until sometime in 2021.
The economy has just started showing signs of life. Taking $1 trillion out of it – which is what it would be if all the federal personal and corporate income taxes, estimated payments for the self-employed, federal excise taxes, the taxes paid by job-creating small businesses, and the outstanding balance due on returns from prior years – would almost assuredly plunge it back into a recession and push the recovery off by months.
The National Bureau of Economic Research says the recession caused by the lockdowns resulting from the coronavirus panic started in February. The NBER – and they’re the ones who get to make the decision – called it steep but short-lived. July 2020 should be a month of recovery because of strong, perhaps stronger than normal, economic activity. But that only happens if people are engaged in productive activity, buying and selling goods and services in the marketplace rather than sending Uncle Sam back a good chunk of the so-called stimulus.
Several prominent economists have endorsed this idea as being curative. Influential political groups including the National Taxpayers Union and Americans for Tax Reform have also signed on. The president and Secretary Mnuchin have it within their power to make this happen. They should order it be done with all dispatch. Certainty is important as businesses plan what to do next, whether to hire or fire, whether to stay open or close, and whether to expand. Knowing that the taxes due would not have to be paid until sometime early next year gives them that much more time to use their available cash to put people back to work. Making America Great and Keeping America Great can only be accomplished if America is working.
A barber who had been cutting hair for more than 50 years never set out to make a stand. He just wanted to pay his bills.
When Winerd “Les” Jenkins first became a barber, Neil Armstrong hadn’t yet set foot on the moon. For over five decades, Jenkins has made a living with his scissors and razor. For the past decade, he’s worked his craft from a storefront in Inwood, West Virginia. At Les’ Place Traditional Barber Shop, you can get a regular men’s haircut for $16 and a shave for $14—but come prepared to pay the old-fashioned way: in cash.
His insistence on “cash only” isn’t the only thing that’s old-school about Jenkins. He lives with his wife of 52 years on a small farm, where the couple raises rescued animals. He believes in paying his bills on time. He doesn’t use the internet, email, or text messaging. And he’s skeptical that his profession can become illegal overnight merely on the governor’s say-so.
This combination of old-fashioned values led to the soft-spoken barber’s arrest this spring. His story shows how governments’ uncoordinated coronavirus response has caught working Americans in its crossfire—and how the apparatus of occupational licensing has functioned as the state’s enforcement mechanism to shut down small business.
When Les Jenkins first heard about the Wuhan coronavirus, his first concern wasn’t for his own livelihood but that of his wife, Sue. She is medically fragile, on oxygen after an illness left her with Chronic obstructive pulmonary disease (COPD) several years ago. “I thought long and hard about whether I should risk taking the virus home to her,” Jenkins told me. “But this is my only real source of income.”
Even before the state of West Virginia began issuing mandates to contain the virus, Jenkins was already putting his own protection measures in place for Sue’s sake. He wore a mask and gloves, sanitized tools and surfaces, and changed clothes upon coming home every evening.
On March 19, West Virginia Gov. Jim Justice ordered all hair salons and barbershops to close. Most salon owners got the message through the media. The West Virginia Board of Barbers and Cosmetologists (WVBBC) published guidelines on its website but didn’t proactively contact its license-holders.
“The West Virginia Board of Barbers never sent me any written instructions, never called, never sent an inspector to tell me to close,” Jenkins said. “The fellow who works with me saw it on the internet and told me about it.”
Jenkins initially complied with the order, using the time off to make renovations to his store. “After about three weeks, money started getting pretty tight,” Jenkins told me. At his local bank, he was turned down for a Paycheck Protection Program loan, due to operating an all-cash business. He called Workforce West Virginia to apply for pandemic-related unemployment assistance. “The unemployment office told me that in order to get assistance, I had to provide evidence that I’d been ordered to close.”
On April 10, to get the documentation needed for unemployment, Jenkins wrote to the WVBBC, requesting a signed letter to confirm the governor’s closure order. He never received a reply.
By the time two more weeks had gone by with no income, Jenkins was in real fear of losing his home, farm, and business. “I’m 72 years old,” he told me. “What else am I going to do if not this? Who’s going to hire me?”
On Wednesday, April 22, Jenkins quietly opened his shop and cut hair for seven customers—all walk-ins, including several police officers. It would be his only day in operation. The next morning a WVBBC inspector came to the door. “I’ve known her for years, and we talked for a little while about her family,” Jenkins said. “Everything was cordial.”
The inspector told Jenkins the WVBBC had received a complaint the prior week from another local hairstylist, contending that Jenkins was open for business during the shutdown. Jenkins denied seeing customers at the time of the complaint—he was in his shop making renovations—but he admitted to being open the previous day.
He told the WVBBC inspector that he would be willing to close his shop if she would provide him with a copy of the governor’s closure order, signed for verification. The inspector returned to her car. “I assumed she was going to get the letter I had asked for,” Jenkins recalls. Instead, she was calling the sheriff. Two deputies promptly arrived.
After some back-and-forth between the sheriff’s deputies, the state inspector, and the barber, things came to an impasse. “Mr. Jenkins stated that so long as [the inspector] provided him with a copy of the governor’s order with her signature, in writing, he would agree to close his shop,” the sheriff’s deputy wrote in his arrest report. Although the inspector did print a copy of the governor’s order, she refused to sign it, saying that “she was instructed not to provide her signature on the documentation.”
After noting that Jenkins didn’t believe an unsigned document was sufficient, the deputy concluded: “Mr. Jenkins then asked if he may lock up his shop before being placed under arrest, and this deputy allowed him to do so.” Jenkins told me that “no one involved raised their voice or said anything detrimental. Everyone was cordial, professional, and polite.” Nothing in the officer’s report contradicts this characterization.
Jenkins spent three hours in a holding cell before being charged with obstructing an officer and released on a $500 recognizance bond. The misdemeanor charge carries a possible sentence of $50-$500 in fines, and up to a year in jail. Jenkins also worries about potential punitive actions from the WVBBC, which could include fines, suspension, or revocation of his license.
Today, Jenkins is working again, making up for lost time after six weeks without an income. He never did succeed in obtaining any government financial assistance. “I don’t know if I would have qualified for unemployment,” he told me. “But they wouldn’t even give me the opportunity to try. One bureaucracy dealing with another doesn’t work.”
It’s unclear why the unemployment office told Jenkins he needed to prove he’d been ordered to close his business. Workforce West Virginia did not respond to a request for comment. However, in interviews, other self-employed West Virginians attested to a disorganized, confused, and delayed response in receiving pandemic-related unemployment assistance. The Workforce West Virginia website currently contains a notice that its “systems are experiencing intermittent disruptions and temporary outages” due to overwhelming demand.
It’s still less clear why the state licensing board was unwilling to issue a signed letter at Jenkins’ request. The WVBBC proved far more interested in catching Jenkins breaking the governor’s order than it was in helping him abide by it. Rather than simply provide a document to help one of its barbers obtain assistance from another state agency, the bureaucrats at the WVBBC preferred to see the 72-year-old business owner leave his shop in the back of a police car.
The WVBBC—which did not respond to multiple requests for comment—is just one of an entrenched network of state occupational licensing boards in West Virginia. Last year, the Cardinal Institute for West Virginia Policy released a study comparing the state to two of its wealthier neighbors, Ohio and Pennsylvania. Not only does West Virginia have the most licensing boards of the three, but it also has generally higher fees and more onerous licensing requirements.
Garrett Ballengee, executive director of the Cardinal Institute, doesn’t believe an entity like the WVBBC even needs to exist. He notes that while approximately 5 percent of occupations required licenses in the 1950s, today that number stands at higher than 25 percent. “It’s a protectionist racket,” he says. “If we’re going to have an entity like this for barbers and hairdressers, it should provide voluntary certification or consultative services. It certainly shouldn’t be an extension of the legal system, which it clearly is.”
Indeed, in many states, occupational licensing boards have been a key enforcement mechanism for governors’ shutdowns of small businesses. For instance, Michigan’s own shutdown-defying barber has already had his license suspended. Fortunately, under the direction of President Trump, the federal government has been working to relax the regulatory burden on businesses and restart the national economy. State governments should follow this lead. The last thing small business owners need is to be worried about heavy-handed bureaucrats looking to set examples.
As for Jenkins, he has now hired an attorney from his own pocket, helped out by a few donations from the community. “I don’t want to go to jail for a year,” he told me. “I don’t want to lose my barber license. They’ve got the power over me; they’ve got lawyers funded by the state. I never set out to make a statement or a stand. I just wanted to pay my bills.”
I recently had a conversation with an intensely conservative businessman whose first foray into politics was fighting for a tax hike on his business and others like it. The little town where he lived as a young man had no paved roads, waterworks, or sewage facilities, and the men who had the most invested in the town knew that it needed these to grow, which of course it did. That’s part of what Barack Obama and Elizabeth Warren are referring to with their “you didn’t build that” rhetoric, though they draw the wrong conclusions. They are also sometimes wrong in the specifics, too: The gentleman I was speaking with organized a few other businessmen to install streetlights at their own expense, with the understanding that the town fathers would pay them back when they could afford it. If you’re looking for an example of how small government is good government, a handshake deal to put in streetlights is a pretty good one. That is government at a scale that people can control, manage — and keep an eye on. Continue reading
“New incentives to save, invest, and take risks, so more wealth will be created at every level of our society.”
by Scott L. Vanatter
President Ronald Reagan dedicated his May 14, 1983 radio address from Camp David “the importance of entrepreneurs and how we’re trying to help them.”
He began by citing George Gilder’s book, Wealth and Poverty, where he developed the important idea that “… most successful entrepreneurs contribute far more to society than they ever recover. And most of them win no riches at all. They are the heroes of economic life. And those who begrudge them their rewards demonstrate a failure to understand their role and their promise.” Reagan went further, “Too often, entrepreneurs are forgotten heroes. We rarely hear about them. But look into the heart of America, and you’ll see them. They’re the owners of that store down the street, the faithfuls who support our churches, schools, and communities, the brave people everywhere who produce our goods, feed a hungry world, and keep our homes and families warm while they invest in the future to build a better America.” Continue reading
President Obama has been running around lately claiming he’s cut small business taxes more than a dozen times. That no doubt would be news to the nation’s small business owners.
Obama’s been bragging about these tax cuts lately because his soak-the-rich income-tax hikes would hit plenty of small businesses, most of whom file taxes as individuals.
Obama has tried to downplay this, claiming just 3% of small businesses would face higher tax bills. (Even if that were true, it would mean 900,000-plus small firms would see their tax bills climb.) Continue reading