Jan 07, 2014

    Who says minimum-wage increase is good?

    "IN MARCH, every Republican in the House voted against a measure to raise the minimum wage. 'When you raise the price of employment, guess what happens? You get less of it,' said Speaker John Boehner in February, espousing a party-line theory that most economists agree has been discredited." - The New York Times editorial on Thursday.

    This is one of the more outrageous political statements dressed up as economic theory from the editorial board of The New York Times. They should be ashamed of themselves.

    As for the discredited theory - the law of supply and demand - here's Nobel prize-winning economist Paul Krugman in The New York Times on Feb 17 last year:

    "Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook - mine included - lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, US$20 (S$25) an hour would create a lot of problems."

    But Professor Krugman goes on to support an increase in the US$7.25-an-hour minimum wage, relying on a 20-year-old study of the fast-food industry that found no adverse effect on employment. In fact, it stands out like a sore thumb.

    Economists David Neumark and William Wascher reviewed more than 100 studies on the minimum wage in a 2006 paper for the National Bureau of Economic Research. Here's a summary of their findings: "The oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect."

    What's more, almost all the papers they reviewed "point to negative employment effects" for the United States and many other countries. The effect is greater for low-skilled workers, whom the minimum wage is designed to help. Overall, the authors found very little evidence of positive effects from raising the minimum wage.

    They responded to an "unbalanced" Sunday Review article on the effect of the minimum wage in a Dec 8 letter to the editor. And The Washington Post's Fact Checker gave President Barack Obama two Pinocchios for his repeated assertion that "there's no solid evidence that a higher minimum wage costs jobs".

    Economists will admit that they know very little about the macroeconomy, which is why they use models to predict things like employment and inflation.

    But they do know a few things about the behaviour of individuals and businesses in the marketplace. Lowering/raising the price of a good or service increases/decreases the quantity demanded. Similarly, producing less/more of something will raise/lower the price.

    If you don't believe it, ask a small-business owner about what goes into the decision to hire an additional employee.

    Isn't it about time opinion writers stopped using economics to justify a moral issue?

    Our hearts go out to those who can't earn a decent living, find a job, get laid off for no good reason or find themselves in harm's way.

    If we, as a society, want to provide support to those in need, fine. But The New York Times does a disservice when it makes wild, unsubstantiated claims about basic principles of economics.