Minimum Wage Debate

0:00My next guests are going to engage in a debate. I'm very proud to announce that we're going to have a debate here on I object justice examined between two eminent scholars on the subject of the minimum wage. And to the right, we are going to have Dr. Walter Block who earned his PhD in economics at Columbia University. He is a very prolific author and editor and and a co-editor of many books. He's written many journal articles. Some of his books include Defending the Undefendable, Lexicon of Economic Thought, Man, Economy and Liberty, Essays in Honor of Murray N. Rothbard. Plus, he's contributed to journals such as the Review of Austrian Economics, Journal of Libertarian Studies, and the Journal of Labor Economics. He is currently a professor and chair of economics at the College of Business Administration at Loyola University. And to the left, we have Dr. Jared Bernstein, who joined the Economic Policy Institute in 1992, and he has a new book out called Crunch, Why Do I Feel So Squeezed and Other Unsolved Economic Mysteries, which

1:09follows a book that he wrote earlier, Altogether Now, Common Sense for a Fair Economy. And he researches in the area of income inequality and mobility and trends in employment and and Earnings, Low-Wage Labor Markets and Poverty and Other Areas. He's also the co-author of eight editions of the book, The State of Working America. He holds a PhD in Social Welfare from Columbia University. Gentlemen, welcome. Nice to be here with you, Jerry. That's great. Well, I think to start out this debate, probably what we ought to do is have Dr. Bernstein, Dr. Bernstein, why don't you spend about three minutes making your case about why the minimum wage is a good thing and why it should be raised?

2:00Sure. The minimum wage is an important floor, if you will, on the labor market. There are a great deal of pressures on low-wage workers in our economy, and since the 1930s, when minimum wages were first introduced, we've recognized that if left to their own devices, market forces will push the wages of low-wage workers down to probation levels that are unacceptable to Congress and to society. Society. And it's not just market forces, there's discrimination in play, there's a lack of bargaining power, sometimes our lowest wage, least advantaged workers are heavily exploited and paid a lot less what they ought to be.

2:54The economic theory or textbook analysis of minimum wage is quite clear, it suggests that if you raise a minimum wage or impose a mandate that's one penny above what the supposedly The Theory of Money and Credit

3:38The New Textbooks Are Saying Different Things Than The Old Textbooks

4:08Well, in my view, Jared Bernstein correctly articulates the view that it's a floor under wages that is the argument in favor of minimum wages. I think most people see it as a floor. You raise the floor, and you raise everyone's wages to whatever the minimum wage level is. I don't see it that way at all. I see it rather as a hurdle over which you have to jump in order to get a job. Because the minimum wage law isn't an employment law, it's an unemployment law. It says it shall be illegal to pay anyone less than whatever the minimum wage level is, say $5.15 or $6 an hour, or whatever it is.

5:00It doesn't say that anyone has to be hired. It just says you can't pay less than whatever the stipulated wage is. But we have to dig a little deeper, and we have to ask why is it that employers want to pay wages to employees in the first place? And the answer is productivity, in general, or marginal revenue productivity if you want to be technical, namely, the employer is paying the worker because of what he can add to his bottom line. So, suppose you have a teenage worker whose productivity is, oh, $3 an hour. That means that if you hire him, your bottom line is $3 an hour better than it would be if you didn't hire him.

5:46Well, now, if the law says that you have to hire him at $5 or not at all, it's pretty clear that you won't hire him at all. Because if you do, you lose $2 an hour on him, and we're assuming profit-maximizing or profit-seeking behavior. And if you do that, then why would the employer want to hire the employee at all? So that's why I say it's not a floor. It doesn't raise anyone's wages. Rather, it makes it very difficult for people whose productivity is below the levels stipulated by the minimum wage law to get a job at all. Because if you hire someone whose productivity is $3 an hour and you have to pay him $5, you lose $2 an hour. Now it's not for nothing that we have Special exemptions from the minimum wage law, for example, for teenagers, we have a special lower minimum wage law for teenagers. We have a special lower minimum wage law for mentally handicapped workers, not physically handicapped workers, because physically handicapped workers

6:53have very high productivity. For example, we could have this debate between Professor Bernstein and myself if we were both in wheelchairs. But if you're mentally handicapped, then your

7:33with the passage of a legislative pen, we could, you know, solve poverty. We'd all be rich. Now, Dr. Bernstein says... Can we stick to our three-minute rule here? Dr. Bernstein, we have a little less than two minutes left on this. I noticed on your website or at the Economic Policy Institute that you guys dispute that this causes unemployment. Do you want to discuss that a little bit? I don't want to cut Walter off. Do you really want to say three minutes each or not? Well, why don't you go ahead and respond at this point? We only have about a minute and a half left on this particular segment. Okay, is that alright with you, Walter?

8:21I don't mind when you interrupt me. If I had the incorrect view, I'd probably be interrupting you. Oh, now Walter, that sounds a little rude. Be nice. Well, you were the one that interrupted me. No, no, I'm just saying that I thought the understanding was we each got three minutes. You were gone for longer than that. Right, but right now you're wasting time, so why don't you respond? I think what Dr. Bernstein said was that it's a matter of both theory and state at the same time. I'd like to discuss that, but I think the music is sort of cutting me off, is that right, Jerry?

9:09Well, if you, people who are listening out there on Radioland, if you put a supply and demand curve on a piece of paper, the equilibrium wage is where supply and demand crosses, and a minimum wage above that level will absolutely, definitively, apathetically cause unemployment of people below that level. Dr. Bergstein, why don't you reply to the assertion by Dr. Block that the minimum wage is an unemployment law as opposed to an employment law? Well, I think what Walter was espousing there was very much the theoretical view that I mentioned in my opening statement. And I totally agree that that is what theory used to predict around minimum wages. It doesn't really do so anymore.

9:57The Theory of Money and Credit The problem is that we have tested that theory, and in economics, if you don't test a theory, it's really not worth very much. This is not hard science. It's soft science in that regard. You have to see how these things play out in real life.

10:42How do you test it and what's your data? Okay, so here's the thing. In 1996, the minimum wage at the federal level was increased from $4.25 to $5.15 an hour. That's the federal minimum wage, but at the same time, over 30 states now have minimum wages that are above the federal level. And this has presented economists with the opportunity to do something we almost never get to do in economics, which is pseudo-experimentation. The Theory of Money and Credit

11:43make sense, really play out in the real world. And what that research has shown is that the minimum wage has absolutely nothing like the kind of impact that Walter suggested. We have never, ever had an experience where raise the minimum wage and every affected worker loses their job, which is precisely the empirical outcome of Walter's argument. This is not to say that no one has ever been disemployed or lost a job due to a minimum wage increase. Of course, there's no policy that's perfect in that regard, but some studies show a slight positive effect. Actually, minimum wage led to greater employment growth. Some studies show slightly negative effect. Most studies hover around zero, and the punch line is that these policies have their intended effect. They raise the earnings of workers at the Let me break in because I need to give Dr. Block a chance to comment on the data and the studies. Dr. Block, have you examined this data? What do you think of the legitimacy of it? Is it even really a good approach to analyzing this subject?

13:01No, I don't think that that is very important or very indicative of anything. And why is that? Because other things change. If a minimum wage law arises and these people don't lose their jobs and instead they get higher pay, something else must have changed also. You can't control everything. We live in a very complex economy. I'm not saying that every worker loses his job right away. There was an interesting historical case, Dr. Bernstein is interested in history and empirical analysis. What happened is in the 40s, I think it was the 40s or the 50s, the minimum wage law went up from 40 to 75 cents, which was the highest percentage raise.

13:47And when it was 40 cents, all elevators were manually operated. 75 cents. How many elevator operators, how many manual elevator operators do you think I fired in the next second? Zero. None. Because it takes a little while to put in automatic elevators and yet over the next two, three, four, five years all the elevators went from manual to automatic and it takes a little bit of understanding of economics to realize that the cause of it was not higher interest rates or this or that or real estate values but because of the minimum wage. At a 40 cent minimum wage, these workers, these low skilled workers, relatively low skilled workers were very competitive with the high skilled workers behind the automatic elevators.

14:35But at 75 cents, they lost their competitive advantage. Now again, this is an econometric study, but I noticed I went to Dr. Bernstein's webpage or at least the Economic Policy Institute with which he is associated, and they listed no fewer than 35 studies, all of which indicate what he is saying, namely that the minimum wage law is a flaw and not a hurdle over which you have to jump to get a job. Interestingly enough, out of the 35, only 19 of them were actually published. The rest were just working papers or discussion papers or unpublished papers. Now if you compare that number of studies, econometric studies, with the number of studies showing the opposite, there were literally thousands. So while I don't think that these empirical studies mean much, I'm much more of a theoretician, but when it comes to the empirical studies, I would estimate that oh, 75, 80, 85% of all empirical studies that have been published indicate that the minimum wage law is a hurdle, not a floor. So even

15:43Even on the grounds of empirical, statistical, econometric studies, it's very clear that the theory is correct. This theory doesn't change. This is basic, basic theory. It's similar to, you know, triangles have 360 degrees. You don't test that. You can only illustrate that. Well, let me get back to Dr. Bernstein, and I'd like you to respond to that, Dr. Bernstein, but I'd also like you to answer the question, a question I have, is why should the government have the right to do this. Let me respond to Walter first and you second. On our website we have examples of minimum wage research from all sides of the issue but I will say Walter is correct in that we don't have 70 years of research and that the old research I would argue is probably closer to the kinds of arguments that Walter is making though So not nearly so far-reaching. So for example, the old minimum wage research, and I'm thinking of really the conventional wisdom setting research which was done by an economist named

16:53Charles Brown and really kind of set the stage for years until this new pseudo-experimentation got underway, that suggested that if you raised the minimum wage 10%, 1-3% of affected teenagers would lose their jobs. So, 99% to 97% would keep their jobs and get a pay raise, but 1% to 3% would lose the old research. And by the way, I stress teenagers because this research could not find an effect on older workers. And by the way, Walter makes a very good point about capital equipment replacing workers, but the research that's worth its salt in in this work accounts for that by having what economists called lag indicators. That is, we're looking at the impact of not the minimum wage just today on employment, but the minimum wage last year and the year before and well before that. Now, you know, Walter I think really shows his hand in a way that I would argue is pretty much a checkmate for my side in this debate, which is that he said, look, this is pure theory. You can't test it. It's

18:05It's just not testable. It's just by definition. I absolutely think that that's the wrong way to view this. These kinds of economic principles have to be tested and tested carefully. Alan Blinder, by the way, former vice chairman of the Federal Reserve, Joe Stiglitz, a Nobel laureate in economics. There aren't too many of those. Both of them have changed their thinking on this based on this new research. Blinder, I'm going to quote him, my thinking on this has changed dramatically. The evidence appears to be against the simple-minded theory that a modest increase in the minimum wage can cause a substantial job loss. That is a former vice chairman of the Federal Reserve, one of the top economists in the country.

18:53I could quote Stiglitz as well. Nobel Laureate. Now, your point was, well, why should the government have a right to do this? Yes, or have the power to do this. You know, I think that was challenged. I think there was a Supreme Court challenge of that. Walter may know this better than I. Back somewhere in the 30s or 40s. And the challenge failed. I mean, the government is actually able to intervene in markets in lots of different ways with regulations. In this case, it's under the Fair Labor Standards Act. That's a set of standards, rules, regulations, including overtime law, minimum wages, You know, basic labor practices that firms have to observe, a well-established right.

19:39So basically because a bunch of men in black robes say it's okay, it's okay. Sounds like you may object to our legal system. Well, in some respects I do, and Dr. Block, what do you think of the analysis, his analysis of why the government should have this power? Well, I don't think they should have the power. I think it's a violation of contract. You know, we believe in capitalist acts between consenting adults and the idea of putting people in jail for offering a wage below a stipulated minimum. And that people agree to just seems very unconscionable to me. But what I wanted to do is get into this blinder comment. What he said is a modest increase. And he also said that 10% increase will only increase the unemployment by 1-3%. Well, 1-3% is, you know, 1-3% too many, and also it depends upon the time elapsed. As I said, when something occurs, the market doesn't react immediately. To get that 3% or 1%, the lag was very short.

20:46But if time goes on, then it'll be bigger. But look, you see, Blunder says a modest increase. So you're talking 10%. But why should it be a 10%? If it's really a floor in the wages, why not raise it to $100 an hour? Now, Blender or Stiglitz or any of those very famous economists who misunderstand economics, they would be appalled. This is an utter refutation. Now look, when I say that it's absolute necessity that the minimum wage law will create unemployment, And I'm not saying by definition, I'm saying based on the logic of it. And the logic is time immemorial. It doesn't change over time. If you're assuming profit-maximizing behavior and the wages higher than the productivity, then the guy can't keep his job. It's just a matter of finding out alternative arrangements. Now look, the reason older workers aren't affected is because older workers have higher productivity and they can jump over the hurdle Well, it's younger workers who can't. That's why you have to have an exception. The teenage

21:51minimum wage is, I don't know, something like $2 an hour, whereas $2 or $3. Well, I'm going to cut you off right here because I don't know that Dr. Bernstein can be on the last part. So you have about 30 seconds, Dr. Bernstein, to sum up, to sum yourself up. Sure. First of all, the 1 to 3 percent, as I mentioned, I didn't get it, I wasn't able Research. That's the old research. The new research, which actually looks carefully at these empirical tests, completely undermines this, you know, I would say pretty simple-minded notion that workers are somehow paid their marginal product or their productivity. Ask yourself why the top five hedge fund managers last $12.6 billion. We simply don't have a good, solid notion of paying people what they're worth. We get in the ballpark, but Thank you for being on the debate. I mentioned to everyone earlier in the introduction that he is involved with Austrian Economics, which although it's called Austrian Economics, to me it's the real

23:03I mentioned to everyone earlier in the introduction that he is involved with Austrian economics, which although it's called Austrian economics, to me it's the real economics. And Dr. Block, why don't you explain to people what is Austrian economics and how is it distinct from other areas in economics? Well, first of all, Austrian economics has nothing to do with the economics of the country Austria. The reason it's named Austrian Economics, and you have to make that point, I think, is because the leaders of it, the founding fathers of it, Menger, Boehm-Bawerk, Mises, Hayek, all came from Austria. Similarly, you have the Chicago School of Economics after Milton Friedman and George Stigler. It's got nothing to do with the economics of Chicago. It just so happens that it started at the University of Chicago in Chicago.

23:53Now, the difference is that the main difference is methodological. and Mathematical. Austrians see economics as a branch of logic, not as a branch of empirical science. So for us, the claim that trade is mutually beneficial in the ex-ante sense, which means suppose I buy a newspaper for a dollar, it means that in the anticipation sense, I value the newspaper more than a dollar and the newspaper vendor values my dollar more than the newspaper. Now how are you going to test that? You really can't test that. If you understand the English language, you understand, now later on I might regret it, I might find there was no news or something and I regret my purchase, but at the time of purchase it's absolutely undeniable, not definitional, but apodically true that I value the newspaper more than the buck and the newspaper vendor values my buck more than the newspaper, otherwise why are we making a deal?

24:50Now for the Austrian all of economics is like that, it's a series of axioms that you

25:25I want to get in here. It sounds like Dr. Bernstein is Keynesian. Is he Keynesian? He may well be. I wouldn't put it past him. But what he said about the minimum wage law doesn't definitively tie him as a Keynesian. It just defines him as far as I can see as a person who doesn't understand the functioning of the minimum wage law. The thing he was talking about, this controlled experiment, you have two states nearby, one next to the other.

26:22In a meaningful way, and these studies are not meaningful, so I'm not unappreciative

26:44of that, I'm just saying, if we're going to do it, let's not do it in a sloppy way, Let's do it in a meaningful way, and these studies are not meaningful. A very small proportion of low-economic studies are the blender and stiglitz kind of studies. The overwhelming majority of empirical studies show that Austrian economists expect, namely, the higher the minimum wage law, the more unemployment for people who have productivity levels below the levels stipulated by the law. Well, another point is that one distinction between Austrian economics and the Chicago School with its econometrics and Keynesians is that the Austrian School totally disavows central planning, whereas the other disciplines seem to at least advocate some level of central planning, which to me is what a minimum wage is, and also deciding to have a minimum wage I think what you're saying is historically accurate, but not philosophically accurate.

27:50In other words, both Austrian economics and mainstream economics, whether Chicagoan or Keynesian, and Chicagoans are Keynesians, is a value-free science, whereas libertarianism is a value-laden discipline. So an Austrian, quite Austrian, couldn't say the minimum wage minimum wage law is good or bad or just or unjust, he could just say, or she, that it has such an effect. Now it just so happens that you're absolutely right that virtually all Austrians, without exception, are very free enterprise and the Chicagoans and the Keynesians and the Marxists certainly are not. But it's not because they're speaking qua economists, because, you know, an Austrian could favor central planning, like if he was a misanthrope and hated people, he could say, look, I realize that central planning Well, thanks to Dr. Bernstein's buddies in Washington, Bernanke and other central I don't know that there are any like that, but there could be one like that.

28:47So we have to be very careful when we're treading on philosophical thin ice. Well, why don't you tell me, in the little time we have left, where do you see our economy heading right now? Well, thanks to Dr. Bernstein's buddies in Washington, Bernanke and other central planners in Washington, D.C., It's in a very, very poor state. But the answer is when the government creates successive money supplies or even has fiat currency as opposed to the gold standard, what they do is they create inflation and they create the business cycle by artificially lowering interest rates below the level that would otherwise obtain and thus encouraging investment in very heavy basic industries that can't be sustained based on the savings and consumption decisions of the populace.

29:38In addition, what they did on the housing market and the, what's that, the corn market with oil. Oh, the commodities. You know, they're making corn into fuel. Yeah, the commodities. Right, and creating all sorts of starvation around the world and high food prices. And what the Boston Fed thought, they found out that there was discrimination against black people because businesses weren't lending them home mortgages, really it was because they didn't have collateral and they didn't have a good financial record. So what the government-made banks do is give people mortgage loans where they had no collateral, where they had to make zero down payments, where they had no equity in the House whatsoever, And then the financial institutions catapulted on top of this lousy paper. So that created the housing crisis. It's sort of like 1929 when the government screwed up the monetary policy and then they had the Smoot-Hawley tariff. I tell you, if Hillary or Barack get in and they start in with their protectionism, that'll be just like Smoot-Hawley and it might

30:43be the final straw in creating another 1929 depression. So I'm not a big fan of the economy. I don't think we have free enterprise. I think we've got socialism and fascism here. And also, the government screwed it up, but they're going to try to shift the blame to someone else by demonizing these companies, the mortgage companies and all that when they create the mess. That's what government does. Yes, well it's greed and capitalism that are always to blame for these people and it's just nonsense on stilts. The real cause is we don't have laissez-faire capitalism. Yeah, according to the government, it's never misjudgment or cronyism on their part, is it? Oh, no. Certainly not. How could you even think that? I'm ashamed of you, Charlie. Well, Dr. Block, thank you so much for being with me today. It was nice to have you.

31:31And we'll have you and Dr. Bernstein back for part two of the debate later in the year. That'll be wonderful. Take care. Thank you for being with me.