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Minimum-Wage Foes Tripped Up by Facts

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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We interrupt this holiday season to revisit the minimum-wage experiment going on in various cities and states, paying special attention to those opposed to plans by some locales to eventually adopt a $15 hourly wage.

The forecasts of these critics -- that jobs would be lost and businesses would close -- have, so far, been proven wrong. Although this is interesting, what’s most important is why they were wrong. In many cases, they suffer from the sort of systemic bias that is typically observed in the self-destructive tendencies of too many investors. To many of these minimum-wage foes, government can do no right, and any effort to ameliorate some of the defects or inefficiencies in the free market will always and everywhere prove counterproductive.

The modern minimum-wage debate traces back to the seminal 1993 research by Alan Krueger and David Card. The two economists looked at employment in the fast-food industry when minimum wages were raised in one market but not in the adjacent market. Their studies found no reduction in job growth in the market where pay was increased, and in fact, the opposite occurred. Many subsequent studies confirmed their findings -- modest increases in minimum wages don’t lead to job losses.

Those studies colored my view that taxpayer-funded benefits shouldn’t subsidize the low wages of full-time employees at private-sector companies. This led to my 2013 rant in these pages describing how Wal-Mart and McDonald’s had become welfare queens.

The extent to which taxpayers subsidize profitable public companies that game the safety net is serious business. One study noted that U.S. fast-food workers receive more than $7 billion a year in public assistance; another pegged the Wal-Mart taxpayer subsidy at more than $6 billion. Alan Grayson, a former congressman from Florida, observed:

In state after state, the largest group of Medicaid recipients is Walmart employees . . . the same thing is true of food stamp recipients. Each Walmart ‘associate’ costs the taxpayers an average of more than $1,000 in public assistance.

Politifact reviewed his claims and found them to be “mostly true.”

The economic impact of modest increases in the minimum wage may be well-established, but you wouldn’t know this based on the claims of opponents. When you begin your analysis with an ideological belief, the usual selective perception and confirmation bias that we have discussed so often in these pages is inevitable.

How else can we explain why even before minimum-wage increases went into effect the critics were already assigning blame for rising unemployment? This began a seemingly endless back and forth between those who were reviewing the actual data as it came in and those who a priori knew the outcome. It should come as no surprise that the data-oriented folks were much more accurate in their assessments than the people working off ideological assumptions.

Consider as an example what Mark Perry, at the American Enterprise Institute, wrote a month before the first phase of Seattle’s new minimum-wage law went into effect. The city’s “government-mandated wage floor … guarantees reduced employment opportunities for many workers.”

As one of my colleagues wrote last week, the “unemployment rate in the city of Seattle – the tip of the spear when it comes to minimum wage experiments – has now hit a new cycle low of 3.4%.” Meanwhile, a University of Washington study on the minimum wage law found little or no evidence of job losses or business closings.

Although you can never declare a game over until the final whistle, this experiment is starting to look like a rout.

I noted earlier this year that the minimum-wage increases in various cities and states were an interesting experiment:

I suspect that during the next five years, we will have tons more data from all of these experiments in raising the minimum wage. My hunch is that the increases won’t hurt much because putting more money in the pockets of those who spend almost everything they make is a pretty good economic stimulus.

I continue to believe that we should assess the data as it comes in, honestly and as free of bias as possible. This is a complex issue -- Seattle, with its vibrant tech industry, high median household income and growing population, is different from many U.S. cities. States and cities must adjust their minimum wages to fit their local conditions; this is why a national minimum wage should rise at a pace different from the most economically vibrant locales.

But so far the early data continues to confirm the work of Krueger and Card: Minimum-wage increases are not the automatic job killers depicted by their opponents.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Barry Ritholtz at britholtz3@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net