How does minimum wage hurt workers? (again)

After watching Edgar the Exploiter, some people still don't follow exactly why we should suppose that raising or introducing the minimum wage will result in a greater number of workers judged to be capable of only low productivity by their employers end up jobless. This video will try to make it clear for anyone who's in that position.

So imagine a possible trade of labor between a restaurant owner and a guy who will hold a sign. He’s going to be employed by the restaurant owner. The sign will encourage people to visit the restaurant. The owner will not hire the guy for $11,000 per hour. The reason is that he believes this will ultimately leave him with less money than he'd have if he didn't hire the guy at all. But the restaurant owner will hire the guy if he's willing to work for only 1 cent an hour, assuming it was legal to do so. Why is that?

It's because the owner believes that the extra revenue from visitors following the sign will be more than 1 cent an hour. In other words, he reckons he'll ultimately get more money by hiring the Sign Guy at this very low wage. The restaurant owner doesn't know exactly how much extra revenue the Sign Guy will generate. But based on what he knows about his business and how effective he thinks the Sign Guy will be, he estimates that the Sign Guy will generate between one and two extra dollars for the restaurant before the Sign Guy's wages are paid.

That means for every wage level above $2, the owner is confident that he'll lose money on the Sign Guy, and for every wage level below $1, he's confident he'll make money by hiring him. The important thing here is that based on what we know about his beliefs, we shouldn't expect him to hire the Sign Guy for more than $2 an hour.

So here's Edgar again. He’s considering a group of candidates who are going to do various jobs in his factory. Based on his impression of each candidate, on what he knows about their background, on what kind of work they'll be doing, and on the general knowledge he has about how to run his business, Edgar makes an estimate about what each candidate is likely to generate for him in extra revenue before their wage is paid. For the first candidate, he expects that they'll generate between $1 and $4 an hour. For the second candidate, he expects they'll generate between $2 and $5 an hour. For the third candidate, he expects they'll generate between $1 and $7. The fourth candidate will generate, he expects, between $4 and $8. He expects the fifth candidate will generate between $2 and $4, and finally, the sixth candidate, he expects they'll generate between $1 and $3 an hour.

So for every wage above $3, Edgar expects to end up losing money, and every wage below $1, he expects to end up making money. So now we can look at what happens when the minimum wage is set to different levels. To make things simple, we'll assume that when Edgar's not confident about the productivity of a worker, he'll give them the benefit of the doubt, and he'll assume that their productivity is equal to the upper bound of his estimate.

Specifically, we're interested in how different minimum wage levels affect the number of employers that Edgar expects to be able to legally employ without losing money. When the minimum wage is set to $2 or $3 per hour, it doesn't prevent Edgar from hiring any of the candidates profitably. When it's $4 an hour, it prevents Edgar from hiring one candidate profitably. When it's $5 an hour, it prevents Edgar from hiring three candidates profitably. When it's $6 or $7 per hour, it prevents Edgar from hiring four candidates profitably. And when it's $8 an hour, it prevents him from hiring five candidates profitably.

So of course, notice that the number of employees who can't be employed profitably, at least as far as Edgar's expectations go, only gets bigger the higher the minimum wage level rises. It never gets smaller. And because this is only a small sample, not every increase in minimum wage level reduces the number of candidates who can profitably be employed. But if we bear in mind that similar calculations are happening across the whole economy with many thousands of firms and potential employees, we should expect that every increase in minimum wage will mean that somewhere an employer will turn down a job applicant who he may otherwise have given a chance to.

So this is why we should expect that the higher the minimum wage level, the more marginal workers will be unemployed. Now, some people want to ignore this reasoning entirely, not because they're able to find the flaw in it, but because they believe that if it were true, we'd be able to find statistical evidence that shows the trend. But they've looked at statistics from different countries and failed to find correlations between unemployment levels of unskilled workers and minimum wage levels.

I've explained this before, but it bears repeating: The lack of statistical correlation between these two things does not falsify the hypothesis that minimum wage harms marginal workers. The reason for this is that phenomena on the scale of mass human action are not carefully controlled scientific experiments of the kind that are possible in the natural sciences. In the natural sciences, it's possible to hold all variables constant to a very high degree and vary only one variable, and then observe the results.

By contrast, if we're thinking about the behavior of many thousands of people, we have the problem that we have many billions of variables that are not controlled. These uncontrolled variables may well obscure actual causal relationships that exist, or they may falsely give the appearance that a causal relationship exists when in fact none does.

So to conclude, we have a very strong chain of deductive reasoning that suggests that introducing or raising the minimum wage can be expected to harm marginal workers. And we do not have experimental evidence that falsifies this hypothesis.