Elizabeth Warren's Unwarranted Wage

Walter Block
Mar. 26, 2013

Murray N. Rothbard used to say that it is impossible to convince the economically illiterate with reductios ad absurdum. Why? This is because the very purpose of this type of logical argument is to embarrass our friends on the Left (and the Right too, sad to say, see below) by taking up the premises of their proposals and applying them to cases not contemplated by them. But suppose they are unable to be embarrassed? Suppose they cannot grasp the fallacy of their own position even when it is obvious to all of those with even half a brain? Then, while the logic of the critique is impeccable, it still cannot convince the intelligence-deprived true believers.

For example, to the advocates of rent controls who believe this legislation would help the poor, posit a rent control of 1 cent per month per apartment ($.01). Hopefully, these people who favor "social justice" in housing would then realize that at such a low monthly rental, no landlord could afford to pay for the expenses necessary to house tenants, and this would spell the death knell of the residential rental market. Then, the economist would point out that any rent below the free-market level would reduce, but not now necessarily to zero, the supply of apartments, and this would create a shortage, the exact opposite of what the rent control advocate supposedly wants and expects. But if this "champion of the poor" did not grasp the first point, instead steadfastly rejecting it, the second would not convince him either.

Something of the same sort is now occurring with regard to the debate over the minimum wage law. Obama wants to raise its level from $7.25 to $9.00 per hour. His policy is aimed, presumably, in the direction of helping the poor, by raising their compensation from the former to the latter.

Anyone, of course, who has even the slightest acquaintance with the dismal science (someone, for example, who has read and digested Hazlitt's Economics in One Lesson) knows full well that the minimum wage does not require an employer to hire an employee. Rather, it mandates that if he does, he must pay at least whatever the law stipulates: at present, $7.25 per hour, and $9.00 per hour if Obama can implement his new policy. But, suppose the worker's marginal productivity is, say, only $3.00 per hour. That means that if the firm offers such a person a job, it will lose an hourly $4.25, under present arrangements, and $6.00 per hour with the higher minimum wage. If the company does so, it will lose profits and thus the battle with competitors, and be inclined toward bankruptcy (always assuming no Detroit-type bailouts). Then, it will be unable to employ anyone at all.

So what is the reductio ad absurdum against this bit of economic insanity? It is to accuse Obama of being stingy. Given that the minimum wage law raises wages (who says I don't have a sense of humor?) why stop at a stinking lousy $9.00 per hour? No one can have a really good lifestyle based on that wage. The cheapskate Obama should raise the level to $90 or $900 or $9,000, or $90,000 per hour (you see where I'm going with this). Then, we would all be RICH. He has the power to do so. Our president is all that is standing in the way of curing poverty for once and all with the mere stroke of a pen. Aladdin's genie is nothing compared to Obama's potential economic power. Does our president advocate this more ambitious plan? He does not.

However, Senator Elizabeth Warren (D, Organized Labor) has put paid to the possibility of our use of this particular reductio. With her $22-per-hour minimum wage (or is it $33?) she has seen us, raised us, doubled down, and in every other way possible demonstrated that she is impervious to logic and basic economics. However, one wonders at her stinginess too. Why not an hourly wage of $220, or $2,200, or $22,000, etc.? Her answer might be that she was merely saying: "If we started in 1960 and we said that as productivity goes up, that is as workers are producing more, then the minimum wage is going to go up the same. And if that were the case then the minimum wage today would be about $22 an hour." Well, yes, that is what she explicitly articulated. But based on her follow-up questions at this Senate hearing, she was strongly implying that the minimum wage level ought to be raised, whether to this amount or to some other. To wit, she said further: "So my question is ..., with a minimum wage of $7.25 an hour, what happened to the other $14.75? It sure didn’t go to the worker."

Warren gets the $22 figure from a Center for Economic Policy Research report, which states:

If the minimum wage had continued to move with average productivity after 1968, it would have reached $21.72 per hour in 2012 ...

But even assuming that CEPR’s average productivity numbers are correct and meaningful (which is doubtful, since it is marginal, and not average, productivity that determines wage rates), why oh why Miss Warren should we assume that the marginal productivity of the least-productive workers necessarily rise in lockstep proportion with average productivity throughout the whole economy? Economically literate minds want to know! It is doubtful that the least-productive, lowest-skilled workers in today’s economy actually generate a marginal product of $21.72. If they did, their market wages would actually converge upon $21.72.

What do unions have to do with this? Why do I characterize Warren as representing "Organized Labor" and not Taxachussets? Why am I asserting in my usual witty way that Warren is carrying water (notice that great alliteration?) for organized labor? The real value of the minimum-wage level has been decreasing due to inflation. A minimum wage of $1.00 in 1960 in constant 1996 dollars was worth $5.30; a minimum wage of $3.35 in 1983 in constant 1996 dollars was worth $5.28. The present minimum wage (as of 2012) in these constant dollars is only $4.97. As the actual amount in terms of purchasing power of the minimum wage has fallen (since 1960 from $5.30 to a mere $4.97), union membership in the private sector has been declining (from 20.1% in 1983 to 11.8% in 2011; t'was 6.6 % in the private sector in 2012).

What does the one thing have to do with the other? Highly paid skilled unionists are always and ever in competition with less skilled, lower paid workers. Whenever organized labor demands a wage increase, the first thought of the boss is to substitute out of the suddenly more expensive factor of production and into the now relatively cheaper one. If members of the rank and file must be paid more, the idea is to fire some of them, and hire additional unskilled laborers. Within wide margins, the one is substitutable for the other (fixed proportions are a rarity). But the last thing the unions want is for some of their members to lose their jobs to the unskilled. In the old days, the former would label the latter as "scabs," and try to slash their tires, beat them up, etc. The problem was, the latter fought back. Since they were disproportionately black and Hispanic, and the unions disproportionately white, this didn't look too "progressive." But then wiser heads prevailed. Organized labor came up with a far more effective plan: price these competing workers out of the market. Get a law passed that would reduce the incentive for the firm to hire these "scabs" in the first place. You'll never guess what this legislation is? Yes, the minimum wage law. If it can be pegged high enough, labor union bosses need have no such fears of competition.

Should Senator Warren be placed in jail along with all others responsible not only for raising the level of the minimum wage, but for implementing this horrid law in the first place? Well, let us consider this notion, outlandish as it may appear upon first consideration. As we have seen, the minimum wage law, at whatever level it is pegged, makes it difficult, eventually even impossible, for those with productivity levels below that point to get jobs. A more accurate label for this legislation would be something along the lines of "A law mandating unemployment." Suppose Warren and Obama and all other guilty parties, instead of hiding behind the screen of raising wages were more honest and said, yes, at the point of a gun we are going to make it impossible for unskilled people to get jobs, any jobs. Anyone who hires them, we'll put them in prison for violating this law of ours. How would we deal with such people? As far as I know, there is now no law against compelling people to be unemployed. But, obviously, there should be. For it is a far greater rights violation to force would-be workers into a life of forced idleness than to steal their bicycles or cell phones. We certainly have laws against the latter. If we were logically consistent, we would do so for the former as well.

I am not talking about writers such as Krugman and Stiglitz who merely favor the minimum wage law, vicious as these people are. They have free speech rights, and, at worst, are merely inciting the ilk of Warren and Obama (Romney, by the way, also favored the minimum wage law; although he waffled on this as he did on just about everything else). No, I am talking about people who are part and parcel of the process of actually using violence to prevent the unskilled from getting jobs under the guise of raising their wages.

It is time to bring racism, ageism, and sexism into the discussion. The unemployment rate for black, male teenagers is higher than that for any other gender, age, or race cohort. Far higher. In December 2012, it reached 44.3%. No, that is not a misprint. (For more such statistics, see here, here, here, here and here.) And the numbers would be even greater but for some BLS legerdermain. These statistics exclude those who once sought jobs, became discouraged, are now not looking for jobs, and are thus no longer counted as unemployed.

According to some commentators who really ought to know better, and whose names I will not mention in order to protect the guilty, it is not true that all workers with (discounted marginal revenue) productivities below the minimum wage law will lose their jobs. Only some of them will. The others will experience a pay increase. Hah. Let me go further so as to include even the Cards, the Kruegers, the Stiglitzes, the Krugmans, and their ilk. In their view, the minimum wage will cost some few unskilled workers their jobs, they concede, but will increase the pay of the majority of people in this category.

Suppose someone, call him Mr. X, were to go into the inner city, where laborers at the low end of the skill scale disproportionately predominate, and steal $100 from one of the people he found there, call him Mr. Y. Then X distributes the $100 he robbed from Y to 20 other neighbors, call them Z. This would appear to fit the claim of the "left wing" analysts that the minimum wage law would cost very few workers their jobs, but would benefit many others. How could we characterize X's behavior? Would we say that X was a benefactor of the community? After all, thanks to his efforts, 20 out of 21 workers benefited, the Zs, and the economic welfare of only one, Y, was reduced.

We claim it is noncontroversial that X would properly be characterized as the thief he is, and summarily incarcerated for his illicit action. X would be considered a pariah in the neighborhood, not at all a benefactor. However, according to the analysis of the minimum wage we are here calling "left" there is a rather ominous parallel between this law and Mr. X's behavior. Both impoverish a minority of laborers, and, by stipulation, benefit the many. If we would place X in jail for his crime, why should those who perpetrate the minimum wage law on the community merit any different reaction?

While I'm on the subject of imprisoning people for minimum-wage-law crimes, let us consider the case of Sandra Day O'Connor, the first female Supreme Court Justice. In an interview on NPR on March 05, 2013 she stated:

On trying to get a job interview after finishing law school:
John O’Connor and I had decided to get married, and he was a year behind me. And so I was out of law school, and we both liked to eat, so that meant one of us was going to have to work, and that was me. I needed a job, and I wanted to work as a lawyer. I had graduated high in my class, and I thought I could probably get a job. We had notices on our placement bulletin board at Stanford Law School that said, "Stanford law graduates: Call us if you want to get an interview for employment. We’d be happy to talk to you" I called at least 40 of those firms asking for an interview, and not one of them would give me an interview. I was a woman, and they said, "We don’t hire women," and that was a shock to me. It was a total shock. It shouldn’t have been. I should have known better. I should have followed what was going on, but I hadn’t. And it just came as a real shock because I had done well in law school, and it never entered my mind that I couldn’t even get an interview.

At this point in her interview she went on (I could not access her exact words, so the paraphrasing here is mine):

"I did succeed, however, in obtaining one interview after all these bad experiences. It was with a public prosecutor in Arizona (California?). The good news is that he offered me a job. The bad news is that at that time he had no budget out of which to pay me. But, he said that as soon as he received an increase in his accounts, he would then put me on salary. So I worked for him for a few weeks (months?) doing what new lawyers do, picking up valuable skills and experience. Finally, his budget increased, and he was able to pay me a salary."

The point is, for a period of time, several weeks or months in the 1950s, Mrs. O'Connor worked for NO PAY! I am outraged!! The minimum wage law was in effect at that time (it began in 1938). So strictly speaking (and how else can we speak on a matter of such importance), this future Supreme Court judge (along with her boss, the public prosecutor) were in cahoots in violation of the minimum wage law. They should have then been prosecuted for their act of lawlessness! At least, in the libertarian legal code, as I understand it, there are no statutes of limitation in law. Therefore, it is not now too late. She (and he) should be clapped into prison forthwith, even at the present time.

In 1955, the minimum wage was $.75 per hour. Suppose O'Connor's productivity at that time was only $.50 per hour. Suppose a private law firm would have hired her at that amount, but not at $.75, for they would then lose, by stipulation, $.25 per hour on her. Would Mrs. O'Connor have been better off with or without the minimum wage of $.75 per hour? With it, her "salary" would have been zero, since she would not have been hired. With it, she could have earned $.50 per hour and gained valuable skills and experience. Of course, $.50 per hour isn't much. No one could live well on that amount even in the mid-1950s. But, $.50 per hour is a lot more than zero per hour. Wait, we can make an exact calculation: yes, $.50 per hour is better than zero by exactly $.50, apart from the aforementioned nonpecuniary benefits.

Let us conclude. A minimum wage of $7.25 per hour effectively unemploys all those with a productivity level of $7.49 or less (in equilibrium). If it is raised to $9.00 per hour, then all those additional people whose productivity falls in between $7.25 and $9.00 per hour will also be rendered unemployable. If it is raised to $22.00 per hour, as per Senator Warren (D, Big Unions), then all those additional people whose productivity falls in between $7.25 and $22.00 per hour will be rendered unemployable. And for what? Why all this immiseration of poor, unskilled, disproportionately black folk? It will be so as to create a monument to economic illiteracy and to pay off organized labor for voting Democratic.
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Walter Block is the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University, senior fellow of the Mises Institute, and regular columnist for LewRockwell.com. Send him mail. See Walter Block's article archives.