There never seems to be a legitimate consensus when dealing with the minimum wage due to the multitude of studies pointing in different directions. Some studies show that the minimum wage decreases employment while others say it actually increases employment. What is the true study and what does it say about the minimum wage? Unfortunately using the methodology of empiricism, we get nowhere like a camel walking in an endless desert with an oasis absent from the picture. It’s quite frustrating to get into those debates in which studies are just shot off like bullets from a minigun as if it has any form of persuasive element to them. In order to get to the truth of the minimum wage, we must look past the fog of empirical data and approach the issue by applying Austrian Economics.
The Austrian method uses logic or a prioristic statements instead of the cloud that is empiricism. Knowledge that is a priori can be shown without the use of experience. This includes math like two plus two equals four. We know that two plus two objectively equals four without having to test it out or look at experience. We can work out what two plus two equals logically instead and reach the result of four. Austrian economics applies this methodology to the economy as opposed to empiricism, which is a common methodology in other schools of thought within economics. In order to see why the methodology of logic and a priori knowledge is supreme, we must critique empiricism in general.
Suppose I have a purple wooden block. It makes logical sense that if I took the block to another country, the color would remain the same. This is not enough for someone using an empirical approach. For empiricists, the block must be observed to be purple within other countries. By the block being purple in the United States, empirical knowledge doesn’t tell us if the block will be purple in China, logic does however. Location is an obstacle for empirical knowledge, but not for logic. Two plus two will always equal four no matter if you’re in China, Zimbabwe or Saturn. On top of this, empiricism has to tackle the issue of time. With empiricism, what’s observable now may not be observable later. This is why empiricism requires testing again and again to the point where we don’t really know what can be said as true anymore. Say you test that A will cause B on Wednesday, will A cause B on Thursday? Knowledge that is a priori withstands time like two plus two will always be four. Empiricism then suffers from location and time issues, which we shall see when looking at the minimum wage.
The first issue with using empiricism when dealing with the minimum wage is the complexity of the economy. Suppose a state institutes a higher minimum wage but while this is happening, and new inventions and technologies are entering the market. The result is higher employment. An empirical analysis cannot tell us if the minimum wage was responsible for the higher employment or other economic factors. Anyone who’s taken a statistics class knows that a correlation doesn’t equal a causation, therefore logic is required. If you look at employment data when a minimum wage is implemented during a time of economic prosperity, you’re going to get different numbers during a time of economic troubles. On top of the issue of the time in which the policy was implemented, location is also a problem. A large city with lots of economic activity flowing through it may report higher employment even after a minimum wage is implemented, as opposed to a rural neighborhood. The location of where the policy is implemented definitely effects the employment regardless of the minimum wage policy enactment. The two issues I laid out above show why we have a garbage heap of studies reaching different conclusions about the minimum wage. Someone on the left may show a study where a minimum wage increase ‘led’ to higher employment, while someone on the right might show a study where a minimum wage increase ‘led’ to lower employment. They’re both wrong in their methodology therefore the conclusions need more substance and this substance can be found within a prioristic knowledge.
A logical approach of the minimum wage lets us know that a minimum wage increase cannot be the cause of higher employment, and instead directly hampers employment. When there is an artificial price on a good or service above the market value, less people will spend money for it. If a central planner institutes a minimum price of $50 for all ice cream cones, it’s only logical that what follows is a reduction in the purchase of ice cream cones. The same goes for any other good or service, including labor. If we got rid of the minimum wage what logically follows is an increase in employment, since workers and employers can voluntarily reach an agreement for a wage that isn’t restricted by government. Workers are willing to be flexible in order to find work, and employers are willing to be flexible in order to hire more workers to beat out their competitors. This increase in employment due to an elimination of the minimum wage would cause an increase in production as well, since the increased labor would boost productivity. An increase in productivity means lower prices to compete, however, a competing company also wants to hire more workers to beat out their competition since there is no longer any minimum wage which restricts them from hiring more people.
Regardless, an elimination of the minimum wage results in more employment, higher productivity, and lower prices. Keeping the minimum wage there, or artificially increasing the price even more, causes a company to be unable to afford more workers meaning less job offerings, lower employment, less productivity, and higher prices as a result of lower productivity.
Although I have only showed the significance of Austrian methodology for the minimum wage, I encourage everyone to try to apply a logical analysis to other aspects of the economy and not just use empiricism, in which two sides of the debate just spew studies. Just remember that for every study that shows that the minimum wage leads to more employment, there is another study showing the opposite. To find out who’s right, employ logic and Austrian methodology.