Almost Everything Jeff Dorfman Says About the Minimum Wage is False

The State of the Union has once again brought up the minimum wage, and the endless debate between economists came back as well. A perfect example this is an article on the minimum wage from Jeff Dorfman, a "professor at the University of Georgia [and] libertarian." Although it should be enough to see the bias from someone who wrote a book against the welfare state publishing an article in Forbes, we can dig into the issue too. For anyone that wants to follow along, here's the OP. It's pretty standard stuff, which makes it a good target.

The Democrats, their union supporters, and liberals in general are making a hard and concerted push for an increase in the minimum wage. President Obama mentioned the subject prominently in his State of the Union address on Tuesday night and even promised to take executive action to increase the minimum wage federal contractors must pay their workers starting in 2015. While Republicans and small business owners are sure to resist this push, it is important that everyone on both sides debates the issue with the correct facts. Much of what you hear about the minimum wage is completely untrue.

Dorfman's article rests on three basic points, we can refute each separately.

1) "First, people should acknowledge that this rather heated policy discussion is over a very small group of people." Statistics don't lie, but you can lie with statistics. Dorfman is inching awfully close to the latter. His definition of low wage people concern only those people making less than 9 dollars an hour. Since most proposals to raise the minimum wage are looking at something from 10-12 dollars an hour, this is a bad arbitrary cut off.

His argument has a lot of this sort of "fuzzy math," which rests mostly upon the reader being lazy or intimidated by numbers. For example, Dorfman writes, "this group of workers is also shrinking. In 1980, 15 percent of hourly workers earned the minimum wage. Today that share is down to only 4.7 percent." This statistic only makes sense if the value of the wage was constant since 1980, which it has not been.

It was closer to 10 dollars back then (in current currency), and a whopping 30 percent of workers earn about that much or less in today's terms (15,000 dollars or less in annual terms). Looking more closely at the data, clearly Dorfman missed something (probably it was intentional). The liberal side of the argument says that the effects occur on a much broader scale. The Brookings Institute (which is itself not all that liberal) estimates that about 35 million workers would benefit from a minimum wage increase. That's about 30 percent of the workforce, and it's not far off from what the SSA says for earners in the economy.

That's a lot of people getting a raise! And a lot of them will be seeing their salaries increase indirectly. They might make slightly about the new minimum wage, but they'll get a raise anyway. The mechanics of this can be technical from an economic perspective, but the behavioral theory on it is quite nice. It comes from anchoring. People often set their wages in relation to a strong data point, and the minimum wage serves that standard. If the minimum wage goes up, there is strong psychological pressure to raise other wages.

2) "I want to bust one more myth about the minimum wage: the relationship over time between the minimum wage and labor productivity." For the most part in this section, Dorfman is right. The $22 minimum wage report that he references is terrible. It benefits his argument to talk about a terrible report, to make "liberals" seem "out of touch."

I don't support a 22 dollar an hour minimum wage for all of the suppply-side problems that Dorfman is concerned about. But that's a lot different that a 12 dollar an hour minimum wage, indexed to inflation (which is as liberal as any Congressional plan on this issue gets). The US already has the third lowest minimum wage, when compared to other OECD countries, so there is little doubt that we could increase it without large negative consequences.

Even more importantly, as Dorfman roughly gets right, total compensation and productivity are not actually all that different in the US. And the "huge gap" that people reference in the productivity numbers definitely does not seem to be an issue until the aughts. There is obviously a concern over the last few years (where we see a gap), but there was a recession.

This descent into a terrible report on productivity masked what is actually a much larger issue. Income going to capital has begun to accelerate away from income going to labor. This, more broadly, is the reflection of a society growing much more unequal. Pay, when it's going out, is going out in the form of stock options to people alreadly vastly wealthier than everyone else.

From Felix Salmon at Reuters.

This transformation has everything to do with the fact that median income (moving away from wages) is definitely declining. And that brings us to the most important point of all this.

3) Dorfman adopts a completely hysterical tone, but he nails the debate exactly.

These numbers reveal not just the selective statistics employed by the proponents of raising the minimum wage, but also that the debate has little to do with helping the poor. Instead, this is really a debate about income redistribution. Raising the minimum wage is actually just an attempt by liberals to punish a subset of business owners by redistributing a share of their supposed wealth to their employees. It is just another attempt at class warfare.

This is totally true. The minimum wage does not matter as much for poverty, or employment, as it does for wage distribution and a just society. If you do care about those other two things, you should focus on getting back to full employment first (and the minimum wage doesn't matter as much at full employment anyway). The best thing for a poor person is a job.

Given that caveat, there is still plenty of evidence that minimum wages help reduce poverty (a little), when people have jobs. The EITC, which Dorfman endorses, is a complement to the minimum wage, not a substitute. Both policieis work to increase wages and a balanced approach to poverty reduction should include both.

So why care about the minimum wage? Because, before government efforts, the income distribution in the US and Sweden are basically the same.

And while plenty of loveseat economists love to trot out theories about how minimum wages has a disemployment effect, we should keep two things in mind. Full employment depends mostly on broad monetary and fiscal policy. Getting an ideal level of minimum wages is irrelevant when those two factors are driving up employment. People while hire anyway. The conflicting data on employment effects illustrate this, and regardless of the side you fall on, the effect is modest.

So why care about the minimum wage? Because inequality is almost exclusively an issue of public policy. For many, that might seem strange. The debate on inequality often focuses on "global forces" and "technology," but this is a red herring. You know this as soon as you look abroad. Income inequality in Sweden is almost exactly the same as that of the US, before taxes and transfers.

Take a second to digest that, before policy, the most unequal country in the OECD and the most equal look exactly the same.

High levels of inequality is a problem that economists have been concerned about since Adam Smith. It damages growth, since the rich consume less. It corrupts institutions, since it becomes more beneficial to extract wealth than encourage growth. And it causes social instability. As my dad, a noted philosopher often featured in this space, often says, "you don't see big gaps without big revolutions."

And that, more than anything else, is what Dorfman gets wrong. Acemoglu and Robinson wisely pointed out last year that economists and economic theories often focus too strongly "market efficiency" too the harm of political and institutional well-being. No doubt, there are strong theoretical arguments against raising the minimum wage. The minimum wage is not necessarily the most important anti-poverty program either (FULL EMPLOYMENT!!!). But income distribution is critical to the effective functioning of our society and democracy. Raising the minimum wage and indexing it to inflation is a good place to start solving these problems.