September 18, 2014
By Oren M. Levin-Waldman
In his blockbuster book Capital in the Twenty-First Century Thomas Piketty observes that the history of the distribution of wealth has always been deeply political and cannot be reduced to so-called neutral economic mechanisms. But much of this has been obscured by the economic discipline’s “childish passion for mathematics,” an obsession that has only served to create the appearance of being scientific, without having to answer the far more complex question posed by the real world in which we live. The same critique, however, applies to the minimum wage debate.
When it comes to the minimum wage debate, the question that we as a society should be asking is why has there been a tendency to defer to the neoclassical economics model that holds that increases in the minimum wage will lower employment. We know that there are other models that predict otherwise. The efficiency wage model holds that increasing the minimum wage will lead to greater productivity and efficiency. The macroeconomic model holds that higher wages increase purchasing power which over time will lead to economic growth. And yet, the neoclassical model has become the reigning orthodoxy. Why?
Arguably the case could be made that we have a long history going back to the Progressive period in American history of deferring to expertise. Policy decisions based on scientific models, we assume, must be correct. Therefore, if the model says that minimum wage increases will lead to lower employment, and these are “scientifically” trained experts telling us this, it must be true. Unfortunately, that does not explain why we defer to this model when others are just as valid. It also does not explain why we continue to persist in believing this model when a wealth of empirical evidence, grounded in equally scientific methodology, says otherwise.
If nothing else, neoclassical economics has succeeded in making efficiency the unquestioned objective of economic theory, largely because there is a parallel with utilitarianism in liberal thought. Utilitarianism assumes the greatest happiness will be achieved when the greatest number of people are happy, or in economic terms are made better off. That is, they will only be happy when the greatest benefit occurs with the least amount of pain, which similarly translates to the least cost. Applied to the minimum wage, we all will be better off when the greatest number of people are employed, even if the wages they earn are too little to live on.
The first reason the orthodoxy is so entrenched is because of our commitment to a particular definition of efficiency. Why this definition? Because the experts said so. The second reason has to do with the composition of the minimum wage labor market itself. Because only a small fraction of the labor market actually earns the statutory minimum wage, the potential benefits are presumed to be so small that they could not possibly offset the more likely larger costs.
Of course, this misses the obvious reality that the minimum wage labor market is considerably larger when constructed in terms of who earns the “effective” minimum wage — various wage ranges around the statutory minimum. If a larger number of people are affected by the issue, not only might there be a greater sense of political urgency, but the reigning understanding of efficiency may be called into question. Is the economy really efficient when a sizeable number of workers have to rely on various publically provided subsidies to subsist?
A third reason for the prevalence of the orthodoxy has to do with ideology and a general anti-labor bias built into economics models generally. Because the economics profession produces what society takes for economic knowledge, it has assumed the role of determining society’s vision of how the economy works. The reigning model of competitive markets assumes unemployment to be caused by high and rigid wages. And because labor market institutions like the minimum wage serve to raise wages, they obviously are forces driving up unemployment.
Competitive market theory is also anti-labor because it treats labor as a commodity. Workers are simply inputs in the production process, and as such have no personalities of their own. Therefore, as competitive market theory assumes a full employment economy, the minimum wage orthodoxy is not only a product of those assumptions, but it nicely serves the interests of those who believe that all government interventions, whatever their form, greatly undermine free market ideology and free choice.
A fourth reason the orthodoxy may be so entrenched is because there is simply a crisis in vision, as Piketty allude to. Modern economic thought simply lacks a sense of how society ought to be ordered and how modern scientific analysis ought to be put in the service of that vision. Because of this we often miss the potential for the minimum wage to serve other policy interests, such as making for a more just and democratic society precisely because it may help restore the middle class.
Lastly, the orthodoxy may be so entrenched because it well serves a set of economic interests. Various studies in the political science literature have found that when it comes to the minimum wage, members of Congress tend to be far more responsive to the wealthy than they are to the poor or even the middle class. To the extent that this is true, minimum wage advocates do nobody any favors when they present it as an anti-poverty measure. Moreover, as long as elections in this country continue to be financed through private donations, especially soft money, then it is a foregone conclusion that the model that best serves those interests will continue to reign supreme.
At the end of the day, the minimum wage orthodoxy predicated on competitive market theory reigns supreme because it politically serves wealthy interests to whom policymakers are more responsive to because they also happen to be in the top 1 percent of the income distribution. It would appear that minimum wage policy, along with other social policies, has fallen victim to the polarization of the U.S. that is intimately tied to the growth in income inequality. On the one hand, we cannot raise the minimum wage because legislative bodies being more responsive to the wealthy is a consequence of growing income inequality. But on the other hand, a higher minimum wage that helps the middle class through its ripple effects will reduce the gap between the top and the bottom. It is for this reason that the minimum wage has to be marketed as a middle class issues, whose benefits can be said to extend to all.