03/11/2013 07:00 pm ET Updated May 11, 2013

Mainstream Myths About the Minimum Wage

It's no surprise that President Obama continues to make missteps on economic policy -- such as returning again and again to the "Grand Bargain", more apt to result in a "Grand Take-Away".

It's no surprise because of the people he has surrounded himself with to discuss and design economic policy. Take Christina Romer, past chairwoman of President Obama's Council of Economic Advisers. Last week in the New York Times (The Business of the Minimum Wage, March 2, 2013) she wrote an authoritative and absolutely wrong column, dismissive of actual evidence, regarding the minimum wage.

Ms. Romer asserts that raising the minimum wage is more popular with the general public than with economists. Really. But this broad stroke covers up a lot of fact-based findings about the minimum wage among economists, some of whom are even quoted by the New York Times, like Dean Baker and Paul Krugman!

According to Ms. Romer, economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty. Is that all economic analysis? Fact-based? Fantasy-based? It sure seems like the latter. She explains that "competition between employers... can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone -- perhaps not when unemployment is high, but certainly in normal times." Wake up, Ms. Romer. With unemployment stubbornly hovering between 7 and 8 percent, and with the employment-to-population ratio having dropped 7 percent since 2007, these are not normal times, nor have they been for the past five years. The minimum wage is about the only tool that low-wage workers have to protect their wages. Without it, employers could assume a take-it-or-leave-it attitude. You don't like $7 an hour, how about $6 then?

Ms. Romer's textbook is nostalgic for perfect competition, in which small employers are pitted against each other, none with significant market power. That's a world without Walmart, McDonald's, Starbucks, Burger King, or Target. In real life America, corporate concentration of retail business gives those corporations great leverage over workers. That's how benefits like health care and pensions have been whittled down or disappeared altogether. The minimum wage prevents compensation from being cut back over and over again.

When Ms. Romer talks about the impact on jobs from a minimum wage increase, she ventures into the land of ifs and more ifs. "But it's possible that productivity also rises because the higher minimum attracts more efficient workers to the labor pool. If these new workers are typically more affluent -- perhaps middle-income spouses or retirees -- and end up taking some jobs held by poorer workers, a higher minimum could harm the truly disadvantaged." If a higher wage attracts more efficient workers (as opposed to increasing the tenure of current workers)... If new workers are higher income (as opposed to working to make ends meet)... this "could harm the truly disadvantaged." In this economy, most American workers are disadvantaged. Just check out the stagnation in wages and the drop in median income. What about "truly"? ... That's a pretty fuzzy descriptive.

Liberals and conservatives like to pose the debate on the minimum wage as a tool to reduce poverty. That distracts us from the labor vs. capital equation, in which workers have seen their share of national income fall significantly in the past three decades, while their productivity has accelerated. One brake on labor's share is the fact that the minimum wage has stagnated, not keeping up with inflation, and not keeping up with increases in productivity. As Dean Baker notes (Minimum Wage: Who Decided Workers Should Fall Behind?, 02/18/2013), "(i)f the minimum wage had risen in step with productivity growth (since 1968) it would be over $16.50 an hour today. That is higher than the hourly wages earned by 40 percent of men and half of women." (We could consider these as Ms. Romer's "truly" disadvantaged -- about 45 percent of workers in the United States.)

What has happened to that increase in productivity? It has been scarfed up in corporate profits and CEO compensation. What Ms. Romer ignores (strange, for a thoughtful economist) are the macro-economic effects of the positive redistributive powers of the minimum wage. Let's assume that the 440,000 employees of McDonald's get a 50 cent per hour increase, thanks to a bump in the minimum wage. That's about a half of billion dollars a year of extra income for these employees. They will spend that money in their local communities, and that creates a multiplier effect with greater consumption and greater employment.

What would happen in that money stayed in corporate profits or was given out as dividends? Half a billion dollars is about 10 percent of net income for McDonald's. Shareholders might get an even bigger dividend. The CEO might see his pay bump up from $8 million to $9 million. Retained earnings could increase. Would the CEO and the shareholders spend an extra $300 million in consumer purchases in the United States? More likely, they'll take another trip to Paris, or gamble some more in the stock market. None of that helps the U.S. economy. What would McDonald's do with its extra $200 million? The U.S. market is saturated, so they will likely invest in new stores in other countries. Again, no help for the U.S.

Economics is not an objective science, as Ms. Romer might want us to believe. It is derived with unprovable assumptions, biases, and in most cases in America, a wish-based idolatry of the market. If anything, the stagnation of the minimum wage over the past thirty years is part of the transfer of income from low-income and middle class workers to the already privileged. Raising the minimum wage so that it keeps up with the increases in productivity of the American worker is not a half-rate measure. Rather, it is one important tool in rebuilding the middle class.