 I'm going to be lecturing this afternoon on the minimum wage and this lecture is meant to sort of illustrate what can be done with Austrian economics, the method that you've been exposed to so far this week and I've taught it several times in the past. It's been taught I think virtually every year of Mises University and there's a lot of great lecture content but one of the things I felt is that I kept on getting drawn down further and further into the weeds of the debate and these paid-for studies for all of the local increases in the minimum wage or state increases in the minimum wage. You know that there's been a lot of increases locally and by various states in recent years even though the federal minimum wage hasn't been moved in like 13 years so we have made a little bit of progress but not very much and I think in much the same way that my lecture over time has been drawn further and further down into these weeds of these local debates I think the American public has been dragged down in terms of their understanding and so what I want to do this year and this afternoon is to go back to the very beginning and to look at what was the reason for the minimum wage law what was its purpose originally and why it was so very successful okay when you look at the situation you look at the history I would have to admit that the people who first advocated the minimum wage and why they advocated it have been very very successful in pursuing their own political goals okay so it's going to be a little bit different I'm not going to completely dump the basic analysis or the more nuanced Austrian analysis of the minimum wage but we do want to have some insight as to what the whole purpose of this exercise is and when I say the American public seems to be kind of bamboozled about all of this and they certainly are 90 percent of Americans believe that the minimum wage in contrast to what I've been talking about for years and years they believe that the minimum wage should be increased a majority of Americans think it should be increased to at least $15 an hour now of course if you set them aside and you ask them well if $15 an hour is a good thing then maybe $80 an hour would be a great thing now first of all the minimum wage is obviously a political and legalistic phenomenon and it's always been about regulating labor in the pursuit of the goals of those who are in power those who are in political power have used labor legislation and minimum wages for their own benefit the first attempt at regulating wages was not to establish a minimum but to establish a maximum wage rate in England after the Black Death of the 13th and 14th century the king in the nobility wanted to have a maximum wage rate in the overall economy because so many workers died off that the market value of their wages was rising and it was taking all of the revenues of the landowners and the nobility as a result in the classical period John Stuart Mill who is known in here at least for his methodical inconsistency on matters would talk about you know how labor and wages are a market phenomenon but then he introduced the exception to the rule due to the power of the factory owners that collective bargaining might be a remedy for at least England and its factories now of course lost in this period is the fact that western civilization in Europe England France Germany and elsewhere uh first developed and flourished really for the first time once we get into the industrial revolution without any kind of real minimum wage laws economy wide so they certainly weren't necessary they weren't viewed as a good thing for developing economies and even in modern times we can look at different political uh areas cities regions states and we can tell that economic growth and economic development are much better in areas where there are no minimum wages or very low minimum wages New Zealand and Austria in the 19th century used uh minimum wages but that was more of an attempt to advertise to get new workers to migrate to places like Australia in New Zealand they had plenty of land they had plenty of opportunities but they had very little labor and they couldn't resort to previous attempts at things like slavery and indentured servitude so they used advertising campaigns like like establishing a minimum wage to attract labor and of course that doesn't really do much harm to an economy it's an attempt to sort of reach out to attract new workers now in contrast to that what we're going to be looking at here today is the minimum wage movement in the United States roughly 100 to 150 years ago and of course it culminated about 80 years ago with the first federal minimum wage law but this is something that was advocated and promoted and established at the local level at the state level especially and then only in the 1930s did we get a federal minimum wage law in the United States and this was part and parcel or went hand in hand with the American eugenic movement okay and the minimum wage was a stopgap measure not to encourage labor to come to the United States but really is a way of keeping more immigrants out of the country 120 130 years ago 100 years ago one of the crisscross thoughts in the American mind was hey we've got this country and we've established a really good economy and we've become a world military power boy we must be great we must be successful in success at that time started the thinking started that it was genetically oriented okay Mendel Darwin this genetic idea survival of the fittest all of these sort of pseudo scientific thoughts were entering the American mind and the American academic mind of the time and so their conclusion was hey us white Anglo-Saxon Protestants we did it it was us it was being white it was being protested it's being on you know coming from immigrants and you know building this great country and so they wanted to exclude everybody else they wanted to create sort of a utopian version their version of utopia here on earth and their minimum wage along with immigration restrictions and other restrictions and requirements were designed to hopefully keep all of these new people colors and so forth countries didn't speak our language keep them all out so that's what we're going to be looking at here today and what we're in my mind at least what we're going to find is that there are no clear basis at all in economics or ethics matters of efficiency matters of fairness that support the idea of a minimum wage law and in fact all in all of these criteria basically they fail now Murray Rothbard and other Austrian economists have written about this subject it's interesting and we'll see why Murray wrote about this minimum wage not a whole lot even in his book on the progressive era the minimum wage is but one of many things that the progressives were up to in in molding their view of what America should look like but he has a short little section on minimum wage laws and unions so that's an important thing even if you don't know what that means right now it's important now in the current American debate we sort of have divided ourselves into two categories on the one side is the pro minimum wage side of the debate where we need a minimum wage we need to increase it we need to expand the minimum wage for matters of survival matters of equity and matters of fairness especially and again like I said 90 percent of Americans agree that there needs to be some increase in the federal minimum wage law and then more to my point when I talk later in the week about inequality is the fact that currently it's the perception is that the rich are getting richer and the poor are getting poorer now you're going to get several doses including probably right after my lecture to the fact that labor is really not doing as poorly as people believe and in my lecture that income inequality is not correctly presented to the American people so the one side is very much for increases in the minimum wage and the other side says no the minimum wage it only creates unemployment and it allows for discrimination in the workforce and we'll see why that why discrimination becomes a big problem now the Austrians agree with this second group that the minimum wage does increase unemployment but what I'm again what I'm going to try to show in here today is that the types of problems that you see in these empirical studies in Washington or San Francisco or San Jose where the numbers seem trivial sort of clout over a much bigger problem than most people realize and it what they fail to realize is that legislation cannot increase overall pay and overall benefits in an economy it can really only distort and destroy markets it can only distort and destroy jobs and employers so we'll go back to the drawing board here quickly now the minimum wage most of this I've already mentioned it's a law that sets a floor a minimum wage in the economy and you you can pay higher wages of course but not lower wages except with some legal exceptions and currently the federal minimum wage is seven dollars and 25 cents an hour and it's been that way for over 12 years when I was born the minimum wage was one dollar an hour goes to tells you how freaking old I am and my last minimum wage job was I think three dollars and 45 cents an hour and I thought that was great it was a great job at a great wage again portraying how old I am but I didn't have to do much work so it was like a make work job and so I was very happy to get it increases in the minimum wage have been widespread during this period of agitation political agitation from the media from academia and political rights groups even demonstrations for higher minimum wages you've probably all seen this the sign-carrying activity where 15 dollars you know promoting the idea of a $15 an hour job is a fair wage and then of course cities have increased their minimum wage I think in Washington DC the minimum wage now is 16 dollars and 10 cents which seems pretty high except there's you can't afford any place to live there so kind of a mirage of a job now here's the conventional economic analysis on a graph this is a highly exaggerated graph it really only refers to a small sliver of the overall labor market in the economy the basically the unskilled or very low skilled jobs in the economy and it starts with an equilibrium between supply and demand here in the center of the supply and demand curve which tells us the equilibrium wage and the equilibrium quantity of labor jobs and so at that equilibrium wage there's an equilibrium quantity of jobs given and taken and so that market is in equilibrium in the free market it's sort of harmonious in that anybody who wants a job at that equilibrium wage can get a job so there's no conflict there's nobody being kept out there's no unemployment in the marketplace now the minimum wage up here is a legal barrier wages cannot go below this bare minimum represented by the minimum wage over here and on the horizontal axis the quantity supplied increases from equilibrium in other words this higher minimum wage has brought more people into the labor force but it's also destroyed jobs okay so this area along here is the unemployment caused by the minimum wage now of course this is an exaggeration typically the minimum wage is not much higher than the equilibrium wage and the amount of unemployment especially when you look at the compared to the overall labor market is relatively small in terms of numbers the nut the percentage of our workforce currently working a minimum wage job as of a couple years ago was less than two percent of the of the total overall labor market so this is an exaggeration for visual effect right here but it's just meant to convey the conventional economic wisdom concerning the minimum wage so even amongst professional economists you can get very different views on the minimum wage if we walked over to the economics department at Auburn you'd probably find you know a few people who were against the minimum wage and a few people who wanted to have $15 an hour minimum wage we don't even have a minimum wage in the state of Alabama none and actually several of the southern states don't have minimum wage laws and that should also tell you something or it will tell you something about the minimum wage so and then in between i'm sure you'd find some people over there who would say well yes i want to increase it but i want to have you know a subcategory and i want to have some wages subsidies for this group and you know training for other groups and the you know the the technocratic mind of mainstream economists would go into overdrive and you'd see a little smoke coming out of their ears by the time you got done talking to them so there's all sorts of people and if i had money to dole out to all of these people i'm sure i could come up with a thousand people on one side and a thousand people on another professional economist who would give us basically the two views and on the one hand when asked what would the minimum wage do you might hear something like well there's just no evidence that raising the minimum wage cost jobs at least when starting the starting point is is as low as it is in modern america this apparent defiance of the laws of supply and demand occurs because quote the market for labor isn't like the market for say wheat because workers are people now quote any econ 101 students can tell you the answer the higher wage reduces the quantity of labor demanded and hence leads to unemployment clearly these advocates of the minimum wage law very much want to believe that the price of labor unlike that of things like gasoline or Manhattan apartments can be set based on considerations of justice not supply and demand without any side effects and so i said you know you can find a thousand economists on one side and a thousand economists on the other so who said these things that's paul krugman and that's paul krugman poor paul he said so much that he's just a constant target especially of bob murphy so that's the sort of current state and austrians find this current state of the debate very disappointing with one side saying minimum law minimum wage laws are necessary and critical and the other side saying no it just causes unemployment and discrimination but hidden in this debate are at least three critical austrian criticisms of this technocratic in this case progressive mindset and the mindset of economists and particularly statisticians first of all the us debate is in terms of short-run analysis they're only really concerned about the short run what would the impact be in the short run and they never as far as i can tell they'd never gone back and say well what has this done over the long run second of all it's wage rate analysis only labor is a contract between employer employer and wages is the most important thing but it's not the only thing that a job involves either for the employee or the employer and third it's statistical analysis and this has some inherent weaknesses in terms of being informative especially when you combine it with only a short run analysis and only a wage and unemployment analysis they're missing the general points that frederick bastiat henry haslett and so many other austrians have made that you don't want to look at just the direct short run effects of a piece of legislation you want you don't want to look at just the beneficiary of a piece of legislation but you want to look at the impact on everybody in an economy and you want to look at that impact over the long run so it misses the entire picture of austrian emphasis and it misses the whole idea that a job is more than just a wage and it misses the market process analysis of austrian economics and what i'm advocating here is that only the austrian analysis provides a clear correct method in theory that is consistent with the facts and provides a global understanding of the issue now in terms of where this came from well it developed among progressive thinkers and progressive thinkers were believers in eugenics eugenics quoting from the slide during the early 1900s was also known as american mentalism eugenics or mainline eugenics and it was a mix of scientific and pseudoscientific studies and beliefs popularizing the rediscovery of the work of mendel and darwin eugenical programs such as immigration restriction focused either on the elimination or foster fostering of heritable traits so if we can keep out you know immigrants from this country or that country we won't be injecting all of their inferior genetic traits and we'll be strengthening the genetic gene pool that already exists we won't be watering it down i think was a phrase they used quite a bit many of these people believed in compulsory sterilization is a way to effectively get rid of the inferior populations who already exist so they were for immigration restrictions preventing people from coming in for those inferiors who already got in the advocated compulsory sterilization and what's called institutionalization and i'm still not perfectly sure what that means but it's part welfare part race racial colonies and institutionalization of the insane the criminal all that sort of stuff so prisons of various sorts for this invalid population and i'm taking a lot of this stuff not from Rothbard but from a guy thomas lenard who published a book called illiberal reformers race eugenics and american economics in the progressive era which is roughly 1900 to 1920 into the 30s and it involved all of the main top thinkers in american economics but also sociology and history and government the bureaucrats they all basically believed in this progressive approach to economic policy that should be racially based and eugenics this this pseudo scientific idea of eugenics was a major part of progressivism and of course it was also of nazism in germany and it was a central tenet of american economists so they would frame all of their economic policy into its conventional effects but also you know with this advantage or disadvantage the long-standing domestic population or would it disadvantage or advantage the weaker um new people coming into the economy uh so it was central the american economic association lenard quotes and references several presidents of the american economic association in his book about the fact of connecting the minimum wage to racial policy uh of discrimination and he says that this is the exact opposite of liberalism there weren't a lot of liberals left in academia even back then but liberalism as austrians know it classical liberalism primarily because it was racist and it was sexist and it didn't make much economic or scientific sense either and progressivism you know nowadays if you're a progressive that means you're a modern american liberal to the extreme but in actual fact the progressive movement was kind of a conservative fascist type of movement so they wanted to conserve the white anglo-saxon protestant nature of america and so it's it's not necessarily modern american conservatism but they did want to conserve and promote this uh this whiteness in this protestant anglo-saxon background uh in america so it doesn't even really hold up to dictionary definitions of what we think of progressivism today it was unless the progressives are can be identified clearly as socialist and fascist which you can do but progressivism is not what a lot of people think and it's not scientific even though it was done by scientists but rather a normative and incorrect scientific view it really didn't hold sway with mendel's work darwin's work it was not really survival the fittest even as i understand it and i'm not a scientist um it was just a giant crackpot theory of uh what those people wanted at the at that time in fact liberals again as austrians understand it celebrate the benefits of diversity and inequality and we're going to i'll take a look at that in my next lecture so they began with immigration restrictions uh president teddy roosevelt claimed that immigration into the country was race suicide of course there was a there was a big wave of irish and then italian eastern europeans and so forth um in the 19th century and early 20th century until they shut the door um but it it was in their mind it was race suicide to allow these people into the country it was the greatest problem of the civilization as roosevelt understood it and it's all based on very dubious reasoning they wanted immigration restrictions based on race ultimately they got based on nations without much rhyme or reason uh anglo-saxons and germans were allowed in because of their purity even though historically you know they those were highly mixed peoples uh in the area of generally northern european europe and england and they even defined the irish people as alpine people and i haven't done extensive explorations of the irish island but i i i do believe that the alps mountains do not cross the english channel and and then the irish sea and onto ireland so and their their their ideas about skull science which they thought was great you know the head's got to be big and it's got to be nice it's it's got to be like all of our other heads and faces and if you didn't have a big head or your your face looked different that was a sign that we didn't want you uh but of course that was shown to be scientific nonsense and i just put edward atkinson and david wells here because um there were so few people in my reading who turned out to be good guys that i thought i'd put them in my notes so i can go back and read more about them so the the immigration restrictions were enacted but they didn't really do the job they shut the door of immigration after the fact so the horse had already gotten into the barn or something and before they shut the door so they were left with all of these people that they didn't want um so the minimum wage was the next best solution it replaced immigration restrictions and literacy literacy tests but it allowed discrimination in the american workforce so if you had a high minimum wage you had like on the graph you had more people applying than jobs that you had available so you could pick and choose who you wanted for the job okay that surplus in unemployment was allowed employers to pick and choose so they could pick white men for the jobs and they would by discrimination exclude blacks minorities funny looking foreigners uh women children uh so on and so forth and so progressives viewed it as helping the race and removing the they call these people invalids as a general category and the minimum wage would help deter migration and detect the unproductive unproductive meaning racially or genetically unproductive so this was good for the racial health of the country and all of the progressives and all of the leaders of the american economic association agreed and this also helped them discriminate against women to keep women out of the workforce because women were in the workforce they were 45 percent they were 45 of the professional workforce and so they were definitely in the workforce before any of this happened and the progressives wanted them out they wanted women in the home procreating the race they didn't want them being bound up with a job so they enacted maximum hours they invoke in invoked minimum wages and even stipends for unmarried women with children to keep these women these pesky women out of the workforce richard t eley said there should be no night worker jobs for women because it was injurious to the female organism interesting way to put that but the idea was to protect white male jobs from women from children and from particular immigrant groups like the chinese by setting wages higher than equilibrium levels they allowed employers who were almost all white anglo-saxon protestants to pick people of that looked in the same as they did so there was this mothers of the race argument that we had to keep women in the home and i was going to read this quote by ross on page 179 of lenard's book but i decided i couldn't do that so when looking when austrians look at progressives they don't understand the issue and that the current debate focusing on short term wage only and statistics disguises the issue um doesn't really look at discrimination and we look at the long run discrimination we find the unemployment rate over this long period of time was the worst ever during this 50 years was 10 percent the best ever was 2.5 percent that includes blacks and minorities if you look at the black labor force the worst unemployment was 20 percent twice the overall and if you look at black teen unemployment the worst period was 50 percent more than twice the black population of black labor force excuse me so clearly what we're seeing if we isolate the black labor force is much higher rates of unemployment due to discrimination because of minimum wage laws and other labor regulations in the economy so that's the long run effect systematic and powerfully painful to minorities minimum wage effects in the longer run this study found that minimum wages when you were young had continuing negative effects as that that cohort of labor worked its way through its lifespan so if you were disadvantaged or discriminated against because of the minimum wage early in your life in your teens that would have a carry over negative effect throughout the rest of your career you weren't likely to reach managerial levels within the firm for example until much much later if at all and this study pinpoints that effect that longer term effect stronger for blacks on the minimum wage and these negative effects are more significant than the contemporaneous effect on youths that are the focus of much of the policy debate so it has a long run effect so just because you're disadvantaged as a teenager it does mean the disadvantage lasts over time so austrians are going to be looking at a lot of different things with respect to the jobs and you know that there's more things related to the jobs vacation and sick days which i'll come back to but there's also the basic idea that these studies are looking at cities a type of industry like restaurants and they're looking at unemployment employment over the short very short run there's just a lot more factors that can come into play that are going to give you the wrong results because of your narrow focus so you know the famous study in 1994 that said an increase in the minimum wage can increase restaurant jobs was seriously flawed in its basic approach but it's been cited a thousand million times and it's still an argument today okay and a higher minimum wage can actually lead to lower compensation there was a study done and published in the harvard business review that looked at a chain of fashion stores in california in texas in california the minimum wage was going up and in texas it stayed the same and so what they found is every dollar increase in the minimum wage in california um led to lower overall compensation so there were more workers employment went up but all the workers on average had fewer hours so their checks their monetary compensation actually went down as a result of increases in the minimum wage by 14 percent for every dollar increase in california and they went on to look at workers who got 20 hours or more 20 hours or more before the increase and 20 hours or more after the increase and they found that the people who had 20 hours or more that number fell by 23 percent and as a result they lost all of their retirement benefits which don't get included in the wage but can come and go according to the employer if the employer needs to attract workers they offered more benefits but in response to the minimum wage increase they offered less and with 30 hours or more they saw a 15 percent decrease in that worker population and that if you lost if you went below 30 hours a week you lost your health care benefits so the monetary reward fell by over 20 percent and then some workers in this larger pool actually lost their retirement benefits and lost their health care benefits as a result so that almost all of the payments that employers had to make were offset by all of these compensation changes and then they also had to work more shifts for shorter hours and the shifts were more variable and it made it very very difficult for new mothers and people with other obligations to maintain their job so job tenure at this company went right down the toilet so the big picture is the progressives wanted this minimum wage law and it was fairly effective in promoting discrimination against disadvantaged groups particularly immigrants particularly minorities blacks Hispanics and so forth in the economy and that those populations have been disproportionately institutionalized in things like welfare the percentage of black population who has um on welfare at any one time or on welfare at any point in their life is three times higher than the white population the population of black Americans who have been incarcerated in prison or who are incarcerated in prison now is up to 10 times higher than the white population and of course that greatly diminishes your ability to prosper in the marketplace if you've been quote unquote institutionalized as a result of these laws in the government and what they've been intending to do their intentions may not be the same anymore and not everybody has those intentions but that was the original intent and I think we need to know that and realize that and exploit that um because austrians view these things as completely unnecessary they're only distorted they're only harmful uh and that the free market eliminates unemployment with the exception of frictional unemployment which means you're quitting your job to go get a better job and we're perfectly okay with that thank you very much