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Piketty’s Historic Minimum Wage Errors

Diana Furchtgott-Roth | 04/22/2014 |
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Professor Thomas Piketty of the Paris School of Economics has come to America to tell us that many of our problems could be solved with higher taxes on wealth and an increase in the minimum wage. Sunday’s New York Times called him a Rock Star. 

Most of the analysis of Piketty’s 671-page tome Capital in the Twenty-First Century has focused on his examination of income inequality and his recommendation to increase taxes on capital and wealth. But how about his prescription to increase the minimum wage?

The political biases of Capital are nowhere more obvious than in Piketty’s errors in his recent history of the U.S. minimum wage. Piketty, in his introduction, portrays his policy recommendations as “lessons based on historical experience,” but he cannot even offer an accurate historic description of the minimum wage.

Piketty states, “From 1980 to 1990, under the presidents Ronald Reagan and George H.W. Bush, the federal minimum wage remained stuck at $3.25, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008.” (Page 309).

Wrong, Professor Piketty. The federal hourly minimum wage rose twice in the presidency of George H.W. Bush, from $3.35 to $3.80 in 1990 and then to $4.25 in 1991, a 27 percent total increase. Then, under President Clinton, it rose to $4.75 in 1996 and $5.15 (not $5.25, as Piketty states) in 1997, a 21 percent total increase.

The next increase in the minimum wage, from $5.15 to $7.25 over three years, a 41 percent increase, was signed into law in 2007 by President George W. Bush. The federal minimum rose to $5.85 in 2007, to $6.55 in 2008, and to $7.25 in 2009. President Obama has not yet signed a minimum wage increase into law, despite beginning his first term with the political advantage of a Democratic Congress. 

One might overlook one isolated error as sloppiness to which we are all susceptible. But Professor Piketty’s supposed wage history is not tarnished by a single error, but by a vast array of systematic errors. 

His history is pure revisionist fiction, and revisionist fiction with a political purpose: making Democratic presidents look magnanimous and Republican presidents look uncaring. Yet, over the past quarter century, the period Piketty describes as showing a dramatic increase in inequality, Republican presidents signed into law larger percentage increases in the minimum wage than did Democratic presidents.

Piketty’s analysis of the advantages of increasing the minimum wage neglects negative employment effects on low-skill individuals. He states that increasing the minimum wage lowers inequality at the bottom of the income distribution by raising the pay of low-income individuals. 

That is partly correct. Measured inequality declines because the difference between the lowest wage in the economy and the average wage is reduced, even if some of the low-wage workers lose their jobs because they are no longer employable. But what Piketty fails to admit is that raising the minimum wage prevents people with skills lower than the minimum from getting jobs. 

When the minimum wage is increased, the earnings of the unemployed are nonexistent or unreported. Hey presto—more equality. But the low-skilled are not better off by not working, they are worse off, even though the country in which they are no longer able to work has a “better” income distribution.

Piketty suggests an increase in the minimum wage to $9.00 an hour, based on President Obama’s February 2013 proposal, when Capital in the Twenty-First Century went to press. (In January, Obama proposed a $10.10 minimum wage.) For even more equality, defined as a smaller difference between the lowest wage and the average wage, it could rise to $15 an hour, as is advocated by worker centers such as Fast Food Forward and New York Communities for Change. 

Few Americans earn the minimum wage, but those who do tend to be young and unskilled. In 2013 fewer than three percent of employed workers, 3.3 million, earned the minimum wage or the lower tipped minimum wage. Half of those were under 25. About two-thirds were employed in service industries such as leisure and hospitality, where it is easy for people to get jobs for short periods of time and then move on to other positions. 

Piketty suggests that America copy France, where the minimum wage in 2013 was 9.43 euros ($13 dollars) an hour. But the consequences of the minimum wage can be seen in the differences in youth unemployment rates in the two countries. In 2013, young people aged 15 to 24 had an unemployment rate of 24 percent in France and 16 percent in the United States, according to OECD statistics. Germany has no minimum wage: its youth unemployment rate was 8 percent last year.

Another reason we might not want to copy France: OECD data also show that in 2012 France’s per person GDP was 70 percent of per person GDP in the United States. France might have less inequality, but it is poorer.

Piketty writes that “there is no doubt that the minimum wage plays an essential role in the formation and evolution of wage inequalities, as the French and U.S. experience show.” It also plays an essential role in employment. Without a job, you cannot be counted as a player in the income inequality game.

 

Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.

A longer version of this article appeared in RealClearMarkets on April 22, 2014.

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