Why The Minimum Wage Creates Jobs

When Seattle became the first major city in the country to enact a $15/hour minimum wage back in 2014, mainstream economists and the business community predicted that it would end up hurting those low-wage workers it was meant to help. The cost of living would increase dramatically, as businesses increase prices in order to absorb their rising labor costs. Jobs and working hours in the service industry would be cut, leaving thousands of workers unemployed.

Five years have passed since then, and we now have a lot of data on the impact that the new minimum wage has had for Seattle workers. The evidence is clear: the wage hike has overwhelmingly benefited workers in Seattle, and the city’s economy as a whole. Employment in the food service sector has steadily increased since 2010, with no discernible slowdown due to the minimum wage increase, even though restaurants tend to have some of the highest labor costs of any industry.

Seattle employment

The wage hike seems to have had little to no impact on the cost of living in Seattle, with consumer prices going up an average of 2.3% from 2014 to 2017, compared to 1.9% from 2011 to 2014. This could easily be statistical noise, but even if it isn’t, low-wage workers’ 50% wage hike (going from $9.57 before the increase to $15 today) more than makes up for the rising cost of living.

Seattle isn’t the only city that has increased its minimum wage in recent years, and the data from those municipalities tell the same story. But have you ever wondered why minimum wages don’t lead to unemployment and major price increases? This is the question I’d like to answer.

The argument against the minimum wage

The basic argument that mainstream economists make against the minimum wage is quite simple; it’s based on a naive supply-and-demand model of the labor market. These economists argue that when the price of any commodity goes up, the demand for that commodity will go down. Since labor is a commodity under capitalism, it is assumed that firms will demand less labor if the price of labor (the wage) is propped up to an artificially high level. You may remember these supply and demand diagrams if you ever took an introductory economics class in high school:

Neoclassical min wage

The market wage is plotted on the vertical axis, and the number of jobs offered is plotted on the horizontal axis. Demand for labor is assumed to be “downward-sloping” because less labor is demanded as the wage increases. It’s argued that a minimum wage reduces demand for labor without reducing its supply, leading to unemployment.

The Keynesian critique

keynes

The flaw in this point of view was exposed by the British economist John Maynard Keynes in the 1930’s. The thirties were a time of mass unemployment, and mainstream economists were using the exact same supply-and-demand model of the labor market to argue that mass unemployment was a result of wages being too high. Workers were simply too prideful to accept lower wages in the midst of the Great Depression, and they were getting in the way of the market automatically self-adjusting to return to full employment.

But Keynes pointed out that there is a kind of feedback loop between workers’ wages and employment. Businesses will only employ more workers if they need to boost production in response to increasing demand. But most demand comes from workers’ wages— if wages fall, demand will also fall, causing businesses to lay off even more workers, in a downward spiral. On the other hand, if wages rise, demand will rise, causing businesses to hire more workers. This is a fundamental instability in capitalism. Once the economy starts going downhill, market forces will tend to make the downturn even worse. Government intervention is needed to prop up demand during recessions and get the economy out of slumps.

Effects of the minimum wage

If we apply this Keynesian reasoning to the minimum wage, we will find that a minimum wage increase should increase consumer demand, and thereby create jobs, rather than destroying them. Of course, there are limits to this. If the minimum wage were increased to some very high level, say $100/hour, prices would have to increase dramatically in order to keep up with costs and the chaos and uncertainty involved would likely cause a recession.

Additionally, if a state with a lot of manufacturing jobs tries to boost its wages much higher than surrounding states, companies will likely start to move those jobs to lower-wage states. Service jobs are very unlikely to leave an area in response to wage increases, because they basically have to locate themselves wherever the customers are. The same is not true of manufacturing or tech companies, which is why it’s important for the federal government to implement strong labor protections and to pursue a trade policy that protects American workers from the global “race to the bottom.”

Automation McDs

It is sometimes argued that higher minimum wages encourage the automation of low-wage jobs, because they make hiring human workers more expensive relative to robots. Over the long run, there is actually some truth to this— but this is a good thing. Here’s why. First of all, technological progress will eventually lead to the automation of most low-wage jobs anyway, so higher minimum wages simply speed up an inevitable process. Furthermore, in the context of high consumer demand created by a minimum wage hike, workers laid off by automation are likely to find other, better jobs relatively quickly. Besides, the Left should want to speed up the automation low-wage jobs. These are mundane, boring jobs that most people don’t want. They key thing is to use government policy to ensure that those who lose their jobs due to automation are able to find better, higher paying, more fulfilling jobs quickly. Free college and job training programs, along with aggressive stimulus programs to keep the economy running at full employment, can ensure that all workers benefit from automation.

American workers deserve a raise

To sum up, minimum wage increases have four positive effects:

  1. Low-wage workers’ incomes increase, lifting many households out of poverty;
  2. New jobs are created, due to increasing consumer demand;
  3. Pressures to automate increase, eliminating the most menial jobs over time;
  4. Inequality is reduced, as income is redistributed from profits to wages.
LPR
Labor force participation rate, 2008-2018

American workers could certainly use a substantial minimum wage increase. Income inequality is high, and the labor force participation rate, which measures the proportion of working-age adults who are either working or looking for work, has never recovered from the Great Recession. This means that there are millions of Americans out there who would like to work, but have given up the job search. Increasing the federal minimum wage to $15/hour would reduce income inequality, and would help to employ discouraged workers by stimulating the creation of new living wage jobs. Pegging the minimum wage to the cost of living and productivity gains would also help to ensure that workers share in economic growth going forward.

The next time an Econ 101 student tries to tell you that the minimum wage kills jobs, you can tell them that they simply don’t understand how the economy works.

Elizabeth Warren Doesn’t Deserve Your Vote

Today, Elizabeth Warren announced that she will be forming an exploratory committee to consider a presidential run in 2020. That means she’s almost certainly running for president.

Certain progressive groups are celebrating Warren’s announcement, hailing her as a champion of “bold, inclusive populist ideas.” Even many committed Bernie Sanders supporters view the announcement as a positive development, since it guarantees that at least one progressive candidate will be in the race.

Warren’s Problematic Past

It’s true that Elizabeth Warren has worked hard in the last few years to cultivate a reputation for being a strong progressive leader, in the same vein as Senator Bernie Sanders. But if we look underneath her populist façade, we will find that her basic political philosophy profoundly neoliberal and committed to free market capitalism.

The most striking evidence of this is the fact that Warren spent much of her adult life as a member of the Republican Party. When asked about this in 2011, she explained:

“I was a Republican because I thought that those were the people who best supported markets. I think that is not true anymore,” Warren said. “I was a Republican at a time when I felt like there was a problem that the markets were under a lot more strain. It worried me whether or not the government played too activist a role.”

In these telling remarks, Warren makes it clear that her most fundamental political commitment is the protection of free markets and private property. In fact, her reasoning for becoming a Democrat in 1995 was that Reagan’s neoliberal agenda had actually undermined markets, rather than protecting them. She apparently failed to realize the tremendous harm that Reagan’s policies were inflicting on workers, the environment, and the poor while Reagan was in office. Indeed, when she was asked whether she voted for Ronald Reagan in 1980 and 1984, she declined to comment.

Warren’s deep, enduring commitment to capitalism is the common thread that connects her early days as a Reaganite Republican with her liberal progressivism today. In a recent interview, she reaffirmed her support for free markets, declaring that she is “capitalist to the bone.” This is a fundamentally right-wing and neoliberal perspective, because it prioritizes markets and private property over human needs. No progressive, let alone democratic socialist, should support a candidate with views like this.

Elizabeth Warren’s long history of conservatism stands in stark contrast to Bernie Sanders’s record. Senator Sanders has been an outspoken socialist for over 50 years. As a student at the University of Chicago, Sanders was a member of the youth wing of the Socialist Party USA, and was deeply involved civil rights activism throughout the 1960s. In the 1970s, he ran for office on the Liberty Union Party ballot line multiple times, championing socialist and anti-war causes. In 1981 he was elected mayor of Burlington, Vermont as an open socialist, and spent the rest of the decade battling developer interests in the city and building affordable housing. As a US Representative in the 1990s and early 2000s, he consistently opposed Bill Clinton’s right-wing policies, and was an early opponent of the Iraq War and the Patriot Act.

An Unreliable Progressive

Since Warren joined the Democratic Party in the 1990s, she has been a very unreliable supporter of progressive causes. During her 2012 campaign for the US Senate, she refused to endorse Medicare for All— a shortcoming for which her primary challenger, Marisa DeFranco, criticized her on numerous occasions. When she was asked about her views on Medicare for All in June 2012, she explained:

“I think right now what we have to do — I’m serious about this — I think you’ve got to stay with what’s possible. And I think what we’re doing – and look at the dust-up around this – we really need to consolidate our gains around what we’ve got on the table [the Affordable Care Act].”

This quote is very telling about her overall political philosophy: Warren is an unwavering pragmatist, focused on incremental improvements to existing institutions, rather than radical change. In this respect, Elizabeth Warren is much closer to Hillary Clinton than to Bernie Sanders.

It wasn’t until 2017, after Bernie’s presidential campaign popularized Medicare for All, that Warren publicly endorsed the idea. Even today, it’s not clear how committed she is to the principle of publicly provisioned healthcare for all Americans. She has repeatedly proposed halfway measures that would actually expand the subsidized private health insurance market that Obamacare created. Her commitment to pragmatism means that a Warren administration would, at most, carry out a modest expansion of the Affordable Care Act’s programs. Like Obama, Warren would likely weaken her bargaining position from the outset by conceding the “political unacceptability” of Medicare for All, and instead advocate for more subsidies and tougher regulations on private insurers.

Tellingly, Senator Warren refused to endorse Bernie Sanders during the 2016 Democratic primaries, instead assuming a position of “neutrality.” Presumably Warren was concerned about maintaining her strong relationship with the establishment wing of the party. But the 2016 primaries were not a contest that any principled progressive could sit out. It was the most high-profile struggle yet between the two major wings of the Democratic Party: the neoliberal establishment wing, and the insurgent, social democratic wing. If Warren had endorsed Sanders, it likely would have tipped the scales in his favor during the Massachusetts primary, which he ended up losing by just 1.4 points. Warren’s cowardice during the historic 2016 primary race is simply inexcusable.

Warren Would Lose to Trump

Furthermore, we have good reason to believe that if Elizabeth Warren were to win the Democratic nomination for president in 2020, she would likely lose the general election to Donald Trump. At the very least, she would be much less competitive against Trump than other potential Democratic nominees, especially Senator Bernie Sanders.

She underperformed in her home state

One sign of Warren’s poor electability is her weak performance in her re-election campaign for the US Senate. In November, Elizabeth Warren won re-election by 24 points. That may sound like a lot, until you realize that Hillary Clinton managed to win Massachusetts by 27 points in 2016— a much less favorable year for Democrats overall. In fact, Harry Enten from FiveThirtyEight has shown that Warren was one of the worst performing Democratic Senate candidates of 2018. When taking into account the demographics and overall partisanship of Massachusetts, her vote share was 7 points lower than what would be expected from a generic Democratic candidate.

One potential reason for Warren’s weak performance in her re-election campaign is the massive public relations blunder that she made in October, when she released the results of a DNA test that supposedly proved that she has some Native American heritage. Native leaders quickly denounced this PR stunt, pointing out that DNA is irrelevant to the legal and cultural criteria for Native American heritage that are accepted by all Native tribes in the United States.

She’s unpopular

Warren’s cynical ploy to gain media attention and recognition for her alleged Native identity clearly backfired on her. A recent Politico/Morning Consult poll found that just 30% of voters view Warren favorably, while 38% view her unfavorably.

Warren favorability

It seems that Americans like Warren less, the more they get to know her. Back in August 2017, a Gallup poll found that 34% of voters viewed Warren favorably, compared to 31% viewing her unfavorably. In other words, Elizabeth Warren’s net favorability rating has gone down by 11 points in just over a year. This is a terrible sign for Warren’s general election prospects, if she were to win the nomination in 2020.

Compare these dismal poll numbers with those of Senator Bernie Sanders. Gallup has found that 53% of voters view him favorably, compared to 38% viewing him unfavorably. These numbers have stayed quite stable since September of 2016:

Sanders favorability

Senator Sanders’s 15% net favorability rating should speak for itself. Sanders enjoys a much broader appeal than Warren does, especially among those independent voters that we need to win over in order to have any chance of defeating Trump in 2020. Among independents, Sanders has a 54% favorability rating, compared to a dismal 22% for Warren (see here, pg. 351). Given these numbers, nominating Elizabeth Warren would be suicidal.

She’s a spoiler candidate

In short, progressives and socialists should not be happy about Elizabeth Warren’s candidacy. Elizabeth Warren has been sliding in recent polling among likely Democratic primary voters, and she’s not likely to get very far, but it’s important that she drops out of the race as quickly as possible. A prolonged Warren primary campaign would pull valuable funds, volunteers, and votes from Bernie Sanders, effectively splitting the progressive wing of the party and benefiting the more explicitly establishment candidates, like Joe Biden.

The 2020 elections offer a historic opportunity to make an avowed democratic socialist president of the United States. Urgent social democratic programs, like Medicare for All, free college tuition, and a Green New Deal would have a real chance of being enacted under a Sanders administration. By entering the Democratic primary race, Elizabeth Warren is getting in the way of all of this. She simply does not deserve your vote.