It’s Economic Logic: Increasing the Minimum Wage Creates More Unemployment

by State Brief




People operate within a framework of means and ends; they use various means to secure ends. We can also establish from the above that people’s actions are conscious and purposeful.

Some economists believe that the increase in the minimum wage will boost unemployment, while other economists think otherwise. Hence, they believe that raising the minimum wage would raise the living standards of workers.

For example, in a study conducted in the 1990s, economists David Card and Alan Krueger examined a minimum-wage rise in New Jersey by comparing fast-food restaurants there and in an adjacent part of Pennsylvania, finding no impact on employment. Other economists, however, found that the increase in minimum wages increased employment. Given the contradictory results, is there an alternative approach to decide whether an increase in the minimum wage will result in an increase or reduction in employment?

Can Historical Data Inform Us on How the Economy Works?

Note that the so-called data that analysts are looking at is a display of historical information.

According to Ludwig von Mises, “History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies.”

Also, in The Ultimate Foundation of Economic ScienceMises argued,

What we can “observe” is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: Over a definite period of the past the miner John in the coal mines of the X company in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from the assemblage of such and similar data to any theory concerning the factors determining the height of wage rates.

Furthermore, “The historian does not simply let the events speak for themselves. He arranges them from the aspect of the ideas underlying the formation of the general notions he uses in their presentation. He does not report facts as they happened, but only relevant facts.”

Contrary to the natural sciences, facts in economics cannot be isolated and broken into their simple elements. The realities of economics are complex historical facts that have emerged from many causal factors.

In the natural sciences, a scientist can isolate facts but not know the laws that govern them. All that he can do is hypothesize regarding the “true law” that governs the behavior of the particles identified. He can never be certain, however, regarding the “true” laws of nature. On this Murray Rothbard wrote:

The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.

In economics, however, we do not need to hypothesize, for in economics we can ascertain the essence and the meaning of people’s conduct. For instance, one can observe that people are engaged in activities, such as manual work, driving cars, walking on the street or dining in restaurants. All these actions are purposeful.

Furthermore, we can establish their meaning. For example, manual work may be a means to earn money, enabling people to achieve various goals like buying food or clothing. Dining in a restaurant can be a means of establishing business relationships, while driving a car will allow one to reach a particular destination.

People operate within a framework of means and ends; they use various means to secure ends. We can also establish from the above that people’s actions are conscious and purposeful.

The knowledge that human action is conscious and purposeful is certain and not tentative. Anyone who objects contradicts himself for he is engaged in a purposeful and conscious action to argue that human actions are not conscious and purposeful.

The conclusions derived from this knowledge of conscious and purposeful action are valid as well. The theory that human action is conscious and purposeful stands on its own regardless of what data might show and does not require statistical verification.

Contrary to natural sciences, we don’t hypothesize in economics, which means we do not have to set a hypothesis and then test it. For instance, we know that all other things being equal, an increase in the demand for bread will result in an increase in its price. We do not require statistical verification for it to be true.

Minimum Wage and Unemployment

Given that everyone’s ultimate goal is improving their own well-being, a businessperson is unlikely to pay a worker more than the value of the product that the worker generates. If a worker generates per hour a value of ten dollars for the business, then the businessperson will not pay more than this amount. Therefore, if the minimum wage is set at fifteen dollars per hour while the worker can only generate a value of ten dollars per hour, the business under the law would be forced to pay a worker above that worker’s value to the company.

Consequently, in such a scenario, the business would be forced to lay off the worker since employing the worker for fifteen dollars per hour is going to undermine the firm’s profitability. It is only through the increase in capital goods that labor could become more productive and earn a higher hourly wage. Thus, one can see that a policy of raising the minimum wage could backfire and likely result in more unemployed individuals.

There is no need for statistical studies based on complex mathematics to determine that an increase in the minimum wage will result in an increase in unemployment. All that is required is a logical discussion that most human beings could follow.

Conclusion

Contrary to the popular way of thinking, we do not test a theory in respect to whether it corresponds to the data, but on the contrary, we assess the data by means of a theory. There is no need for statistical verification to establish the effect of the increase in the minimum wage on employment. A simple logical analysis shows that an increase in the minimum wage will increase unemployment.


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