The American right is going through a period of heightened intellectual dishonesty. Whether it is birtherism, Benghazi or lawlessness in the White House, they either deny the facts entirely or ignore those that they find inconvenient. Whether they do this out of sheer evil or mere ignorance, I can’t say — some of them are evil, others are merely uninformed. Sometimes, it’s hard to tell. Take the case of the ridiculous proposal from Michael R. Strain of the not-quite-fascist American Enterprise Institute to slash the minimum wage for the long-term unemployed. I’m hoping he’s ignorant, because otherwise, it’s a big pile of evil.
His proposal showed up on Bloomberg a few days ago. In a nutshell, he’s proposing to cut the minimum wage for the long-term unemployed to $4 an hour. Then, the federal government will top off that wage with as much as an additional $4 an hour, essentially giving the worker $8 an hour, 75 cents more than the current minimum. This federal subsidy would be paid for by taking “some money the federal government spends on the highest-earning households and divert it to this program.” He suggests the mortgage interest tax deduction. His concern is that the long-term unemployed have a hard time getting work and this lower wage will spur businesses to hire them.
Right out of the box, this should set off alarm bells. A scholar at the AEI advocating a subsidy is rather like a Bishop arguing in favor of atheism. It goes against the basic premise of the think tank, that government should not get in the way of the market mechanism.
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Moreover, it is based on a mistaken belief about the labor market that has been empirically disproved. Fluctuations in the minimum wage actually have no meaningful effect on employment. Now, this doesn’t sound right to anyone who ever took economics. Supply and demand is lesson one, and if the price of something goes up, the demand for that something goes down. If a business will hire 100 people at the current minimum wage of $7.25 an hour, theory says that if the minimum wage is more than $7.25, the business will hire fewer than 100 people.
Study after study shows this isn’t true. A brilliant literature survey on this from John Schmitt at the Center For Economic and Policy Research from last February is pretty conclusive. The reason for this apparent paradox is what the economists call elasticity of demand. If demand for something is elastic, it means demand is sensitive to pricing. If it is inelastic, demand doesn’t change much with price. Demand for drinking water is pretty inelastic; you need a certain amount every day to stay alive, so you are pretty willing to pay whatever it takes for that first liter or two. Compare that to the price of champagne. Most people go through a whole day without bubbly, and as the price goes up, the number of buyers drops. Demand for water is less elastic than demand for champagne.
Basically, studies show that if you raise the minimum wage, the CEO is still going to hire someone to clean the toilets instead of doing it himself. Because the demand for labor is inelastic, as these studies have shown, cutting the minimum wage isn’t going to help the long-term unemployed — if the price goes up or down, the demand stays about the same. This is what the data proves.
Now, if I wanted to get rid of the minimum wage and couldn’t do it in one fell swoop, the political experience I have teaches me that I could kill it with a death of a thousand cuts. Find exceptions, like with restaurant employees. The long-term unemployed need help, so let’s find a compassionate way to undermine their minimum wage.
I don’t know Michael R. Strain, and so I cannot begin to fathom his motivations in suggesting a $4 minimum hourly wage as he has done. What is illuminating is how he tries to give the long-term unemployed a price advantage (even though the facts show such an advantage to be nonexistent). Rather than raise everyone’s minimum wage to $15 and let the long-term unemployed have a $10 minimum, he opted to cut the rate for the long-term unemployed from the current $7.25. It would seem that he is more interested in keeping the money in the corporate treasury than he is in actually creating a pointless price advantage to help the long-term unemployed.
Or maybe he’s just ignorant of the economic facts.
