When All Else Fails

Obama’s Minimum Wage Hike: A Case of Zombie Economics

from CATO

CAFE-freelunchPresident Obama’s proposal to increase the federal minimum wage is a case of what Nobel laureate economist Paul Krugman calls “zombie economic ideas.” According to Krugman, “a zombie idea is a proposition that has been thoroughly refuted by analysis and evidence, and should be dead—but won’t stay dead because it serves a political purpose, appeals to prejudices, or both.” In his New York Times column,”Rubio and the Zombies,” Krugman does not attack the minimum wage, but he should.

A fundamental law of economics—the law of demand—states that when the price of anything (including labor) increases, the quantity demanded will decrease, assuming other things affecting demand remain unchanged. In the case of labor, this means as the price of labor (the wage rate) increases, the number of jobs will decrease, other things constant. Moreover, the decrease in employment will be greater in the long run than in the short run, as employers shift to labor-saving methods of production.

Of course, other things seldom stay constant in the real world, so the law of demand is sometimes difficult to test. But just as when the wind blows a leaf upward, the law of gravity remains intact, so too with the law of demand. Public policy should be based on sound economics, not on politically popular myths.

Numerous studies have shown that when the real minimum wage is pushed above the prevailing market wage for unskilled workers, jobs are lost and others never created. The government can promise a higher wage rate, but if a worker loses her job, her income (hourly wage x hours worked) will be zero.

President Obama is practicing zombie economics when he ignores the law of demand and promises to raise the federal minimum wage from $7.25 an hour to $9, so that “no one who works full-time should have to live in poverty.” He believes that “this single step would raise the incomes of millions of working families.” If so, why not increase the federal minimum to $100 an hour and abolish poverty?

Read more here.