|Peter Boettke|
Lost in much of the discussion surrounding the raising of the minimum wage is the cummulative effect of inflation, though it is obviously a major part of the analysis. Look at this widely circulated chart:
The grey line is the nominal minimal wage, the blue line is the real wage in today's dollars. As can be seen, the real minimum wage has declined significantly since the late 1960s, while the nominal minimum wage as risen significantly.
What is this telling you about the cummulative effects of inflation during that same period?
Obviously, the minimum wage is but one price in the economic system, whereas inflation impacts all prices in an economy. So the distortions in exchange relationships throughout an economy caused by cummulative inflation should be a topic of discussion in our professional and public dialogue.
In addition to the costs of inflation, the impact of inflation on the real minimum wage as a binding factor in labor markets should be recognized --- a minimum wage set below the market clearing wage does not cause disemployment, only a minimum wage set above the market clearing wage in that labor market will result in disemployment (and remember there are multiple margins on which disemployment can be realized). So all the claims about ambiguity in the results might once again be a function of simple analytical confusion combined with inability to capture the multiple margins of adjustment in the empirical examination of the issue.
So please note 2 things -- First, you cannot claim "Where is the inflation?; There is NO inflation!", and also claim, "Look the real minimum wage has declined to below what it was in the 1970s." Either the cummulative effect of inflation is the decline in the real minimum wage, or it isn't. Second, there are multiple margins of adjustment that economic actors engage in when confronted with differing costs associated with public policy changes. But always keep in mind a very basic and simple proposition -- if you raise the cost of doing something, people will do less of it; and if you lower the cost of something, people will do more of it. As Casey Mulligan has pointed out, governmental policies for the past decade or more has raised the costs of hiring individuals, and lowered the costs of those individuals not finding employment. This isn't rocket science, and it ain't the dismal science either -- but it is the basic logic of the worldly philosophy.
Comments