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Writing in The Atlantic, law professor James Kwak makes a very ill-advised case for ignoring economic theory, logic, laws and reasoning and supporting higher government-mandated minimum wages for unskilled workers in an essay (“The Curse of Econ 101“) that I would characterize as a 3,000-word logorrheic bouillabaisse of misunderstandings, non sequiturs, half-truths, and false presumptions (to channel Don Boudreaux). It ranks right up there along with articles by John Komlos (“Why a $15 minimum wage shouldn’t scare us“) and “America’s Worst Minimum Wage Pundit” Nick Hanauer (“The claim that if wages go up, jobs will go down is not a theory — it’s a scam“) as one of the most misinformed, flawed and misguided articles ever written about the minimum wage. (I responded to those last two articles here and here.) Rather than take the time to refute the many economic errors, misunderstandings, and half-truths in Kwak’s article, let me instead revise some of his original text below to expose his main deficiency, which is his claim that economic laws, theory, logic, and reasoning are a “curse” when it comes to understanding government price controls (e.g. the minimum wage) because Econ 101 is “more misleading than helpful.”
Since Kwak is a professor of law, let me edit and re-focus his essay supposing that there’s a minimum wage for his profession, i.e. a minimum wage for low-skilled lawyers. There should be nothing materially or substantively different from a minimum wage law for unskilled workers in general compared to a minimum wage law for a specific occupation like the provision of legal services by unskilled lawyers. That is, if it is true, as Kwak proposes, that the minimum wage law for unskilled workers provides positive economic benefits overall and that it’s only the “curse of Econ 101” that blinds us to realizing those benefits, then it should also be the case that a minimum wage for low-skilled, unskilled, and limited-experienced lawyers should likewise generate net positive economic benefits. On the other hand, if 200 years of economic theory, logic and reason correctly predict the net negative consequences of government price-floors like minimum wage mandates, then the example below of a minimum wage for low-skilled, unskilled, and limited-experienced lawyers (say $150 an hour) should help us understand the adverse and predictable outcomes of that policy including: reduced employment opportunities for low-skilled lawyers, higher unemployment rates for unskilled lawyers, reduced hours for attorneys who do keep their jobs, the substitution of capital investment in labor-saving legal technologies (e.g. legal software), the outsourcing of legal research to countries like India with lower labor costs, the substitution of higher-skilled attorneys for lower-skilled attorneys, reductions in fringe benefits, reductions in bonuses and profit-sharing, and less on-the-job training.
In other words, if Econ 101 really is a curse, that curse will prevent us from seeing that both minimum wage laws for unskilled workers and minimum wage laws for unskilled lawyers will generate positive net benefits for workers and the economy. On the other hand, if Econ 101 is not a curse, but a scientific framework of analysis that allows us to make accurate and systematic predictions of the consequences of government price controls, then we should be able to determine that both a $15 minimum wage for unskilled workers and a $150 an hour minimum wage for unskilled attorneys will have similar negative effects. In that case, we can conclude that it’s a curse to not follow Econ 101, which I think should be self-evident and obvious. Here are my edits for “The Curse of Not Following Econ 101″:
When it comes to basic policy questions such as the minimum wage for low-skilled lawyers, introductory economics can be more misleading than it is helpful.
The argument against increasing the minimum wage for low-skilled, inexperienced lawyers often relies on what I call “economism”—the misleading application of basic lessons from Economics 101 to real-world problems, creating the illusion of consensus and reducing a complex topic to a simple, open-and-shut case. According to economism, a pair of supply and demand curves proves that a minimum wage for unskilled lawyers increases unemployment for young lawyers and hurts exactly the low-wage workers limited-experience lawyers it is supposed to help. The argument goes like this: Low-skilled labor lawyers with limited experience is are bought and sold in a market, just like any good or service, and its price should be set by supply and demand. A minimum wage for low-skilled lawyers, however, upsets this happy equilibrium because it sets a price floor in the market for legal labor. If it is below the natural wage rate, then nothing changes. But if the minimum (say, $7.25 $72.50 an hour) is above the natural wage (say, $6 $60 per hour), it distorts the market. More people want jobs as lawyers at $7.25 $72.50 than at $6 $60, but companies and law firms want to hire fewer employees lawyers. The result: more unemployment for young, inexperienced lawyers. The people who are still employed are better off, because they are being paid more for the same work; their gain is exactly balanced by their employers’ loss. But society as a whole is worse off, as transactions that would have benefited both buyers (law firms) and suppliers (low-skilled lawyers) of labor will not occur because of the minimum wage for lawyers. These are jobs that someone would have been willing to do for less than $6$60 per hour and for which some company would have been willing to pay more than $6$60 per hour. Now those jobs are gone, as well as the goods and legal services that they would have produced.
The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage for inexperienced unskilled lawyers. But on its own, it has limited predictive value in the much more complex real world.
The idea that a higher minimum wage for low-skilled lawyers might not increase unemployment for lawyers runs directly counter to the lessons of Economics 101. According to the textbook, if legal labor becomes more expensive, companies and law firms buy less of it. But there are several reasons why the real world does not behave so predictably. Although the standard model predicts that employers and law firms will replace workers low-skilled lawyers with machines, computer software or lawyers in India if legal wages for lawyers in the U.S. increase, additional labor-saving technologies and legal software are not available to every company and law firm at a reasonable cost. Small employers and law firms in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers lawyers. Therefore, some companies and law firms can’t lay off employees low-skilled lawyers if the minimum wage for lawyers is increased. At the other extreme, very large employers law firms may have enough market power that the usual supply-and-demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers lawyers (only those willing to work for low pay), just as a monopolist can boost prices by cutting production. A minimum wage for lawyers forces them to pay more, which eliminates the incentive to minimize their workforce of low-skilled lawyers.
In the above examples, a higher minimum wage for unskilled lawyers will raise labor costs. But many companies and law firms can recoup cost increases in the form of higher
pricesfees for legal services; because most of their corporate customers are not poor, the net effect is to transfer money from higher-income corporations to relatively lower-income families headed by lawyers. In addition, companies and law firms that pay low-skilled lawyers more often benefit from higher employee lawyer productivity, offsetting the growth in labor costs. They motivate people lawyers to work harder, they attract higher-skilled workers lawyers, and they reduce employee lawyer turnover, lowering hiring and training costs, among other things. If fewer people lawyers quit their jobs, that also reduces the number of people lawyers who are out of work at any one time because they’re looking for something better. A higher minimum wage for low-skilled lawyers motivates more people to go to law school and enter the labor force, raising both employment and output. Finally, higher pay increases workers’ lawyers’ buying power. Because poor people low-skilled lawyers spend a relatively large proportion of their income, a higher minimum wage for lawyers can boost overall economic activity and stimulate economic growth, creating more jobs for lawyers. All of these factors vastly complicate the two-dimensional diagram taught in Economics 101 and help explain why a higher minimum wage for unskilled lawyers does not necessarily throw people young lawyers out of work. The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage for unskilled and low-skilled lawyers. But on its own, it has limited predictive value in the much more complex real world.
In short, whether the minimum wage for lawyers should be increased (or eliminated) is a complicated question. The economic research is difficult to parse, and arguments often turn on sophisticated econometric details. Any change in the minimum wage for lawyers would have different effects on different groups of people, and should also be compared with other policies that could help the working poor low-income lawyers.
Nevertheless, when the topic reaches the national stage, it is economism’s facile punch line that gets delivered, along with its all-purpose dismissal: people who want a higher minimum wage for limited-experience lawyers just don’t understand economics. Many leading political figures largely repeat the central theses of economism, claiming that they have only the best interests of the poor lawyers at heart. In the 2016 presidential campaign, Senator Marco Rubio opposed increasing the minimum wage for lawyers because companies and law firms would then substitute capital and specialized legal software for labor: “I’m worried about the people lawyers whose wage is going to go down to zero because you’ve made them more expensive than a machine.” Senator Ted Cruz also chimed in on behalf of the poor lawyers, saying, “the minimum wage for lawyers consistently hurts the most vulnerable lawyers – those who are young and lack experience.” Senator Rand Paul explained, “when the minimum wage for lawyers is above the market wage it causes unemployment for unskilled lawyers” because it reduces the number of employees lawyers whom companies and law firms can afford to hire. For Congressman Paul Ryan, raising the minimum wage for lawyers is “bad economics” and “will hurt the economy legal industry because it raises the price of labor for lawyers.”
This conviction that the minimum wage for low-skilled lawyers hurts the poor inexperienced lawyers is an example of economism in action. Economists have many different opinions on the subject, based on different theories and research studies, but when it comes to public debate, one particular result of one particular model is presented as an unassailable economic theorem. This happens partly because the competitive market model taught in introductory economics classes is simple, clear, and memorable. But it also happens because there is a large interest group that wants to keep the minimum wage low: businesses and law firms that rely heavily on cheap labor lawyers.
Federal minimum-wage legislation for lawyers has become the best hope for propping up wages for low-income and low-skilled workers lawyers. And again, the worldview of economism comes to the aid of employers and law firms by abstracting away from the reality of low-wage work lawyers to a pristine world ruled by the “laws” of supply and demand.
MP: If it’s obvious from the revisions above that a minimum wage of $150 an hour for unskilled lawyers would be bad public policy, it should also be equally obvious that a $15 minimum wage for unskilled workers is equally bad. What Kwak is proposing is that we implement important public policies including government price controls like minimum wage laws by completely ignoring and disregarding the fundamental principles and laws of the one and only profession – economics, not law – that actually provides a systematic framework of analysis for evaluating the inevitable and predictable implications and consequences of those government price controls. That to me seems like a completely irresponsible and dangerous approach to public policy. Once we ignore the only systematic framework of analysis for evaluating the effects of government price controls, we move from a world of scientific and objective economic reality into a fantasy world disconnected from economic reality (law, politics). And that’s a dangerous and irresponsible world that guarantees political mischief and malpractice, which is guaranteed to makes us collectively worse, not better, off.
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