President Obama gave his State of the Union address Feb. 12. But “State of the Union” is a misnomer. For decades, the so-called “State of the Union” has not been what the name suggests — a presentation of the nation’s current condition and future challenges. Instead, the address has been a feel-good campaign speech, downplaying America’s problems and promising that America’s best days lie ahead. Obama’s speech was no exception to this dishonest tradition. His speech was not a presentation of the nation’s state. Instead, listeners endured trite platitudes. Americans learned that they need “Stronger families. Stronger communities. A stronger America” and that we must “build new ladders of opportunity into the middle class.”
Between the empty rhetoric, the president proposed a few policies. One proposal was raising the federal minimum wage to $9.00 per hour. The president unequivocally claimed that a higher minimum wage would help “businesses across the country.” But basic economic theory and empirical evidence disagree. In fact, raising the federal minimum wage will increase unemployment.
The theoretical case against a higher minimum wage is a standard topic in any introductory economics class. The argument is that labor, like any other good or service, has a market governed by a supply curve and a demand curve. The intersection of the supply and demand curves determines the going market wage. A minimum wage sets a price floor in the labor market. The price floor causes a surplus of labor, since employers are willing to hire less labor at a higher price while more workers are willing to work for a higher wage. As a result, employment decreases. This theory against raising the minimum wage is crystal clear and can be found in most textbooks, including Gregory Mankiw’s, used in ECON 0110: “Principles of Economics.”
The empirical evidence about the minimum wage is more mixed. A prominent 1994 study of employment in New Jersey fast-food restaurants after an 18.8 percent minimum wage increase concluded that the hike in the minimum wage actually increased employment in fast-food restaurants. But this study is far from conclusive about the relationship between the minimum wage and employment. A follow-up study found that the 18.8 percent minimum wage increase in New Jersey had no effect on employment or in fact decreased employment.
Despite the mixed empirical evidence, the economics profession leans strongly toward endorsing the textbook view that a minimum wage increases unemployment. A 1978 article in the American Economic Review reported that 90 percent of surveyed economists believe the minimum wage increases unemployment for low-skilled workers. A similar 1992 survey found that 79 percent of survey economists believed a minimum wage increases unemployment for low-skilled workers. In general, empirical studies do not provide enough evidence to reject the theoretical model.
With a mixed empirical record but a resoundingly clear theoretical description, the minimum wage should not be readily accepted as good policy. If it were true that a minimum wage increases unemployment, then it would be harmful, particularly in today’s weak economy when many low-skilled workers are already out of work.
Brown students will be quick to praise the president for his minimum wage proposal. Naturally, it is always easier for someone to ignore the negatives of a policy that does not affect him or her. But what if the minimum wage were applied to unpaid summer internships? If there was a minimum wage for summer internships, many fewer internships could be offered, as the theoretical model suggests. Some students would get paid internships who had previously only gotten unpaid internships, but many students who would have gotten unpaid internships would not get any internships.
From the point of view of the whole economy, the minimum wage for internships would prevent many would-be interns from completing productive work. The economy would be weaker, and Americans in general worse off. From the point of view of the student, his or her future would have worse prospects, since he or she would not have the chance to gain skills and increase productivity. The result of a minimum wage for internships is bleak for students and Americans generally.
The internship example should make us ask: If willing students are allowed to work for free, why shouldn’t anybody else? Does it really matter that something is called an “internship” as opposed to a “job” if it is productive work in both cases?
Obama’s “State of the Union” presented the minimum wage as a silver bullet of economic growth. It’s time that Brown students and the American people in general ask themselves whether that is really true, instead of simply taking the president’s word for it.
You can call Oliver Hudson ’14 a cold-blooded ogre by sending your comments to oliver_hudson@brown.edu.
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