Minimum Wage Laws Can’t Repeal the Laws of Economics

Scott Drylie • Michael Brown

On April 1, 2024 California bill AB 1228 went into effect, raising the minimum wage to $20 an hour for fast food restaurant workers. The media pundits largely celebrated the bill’s boldness. Economists and industry insiders largely complained it would raise prices, lower employment, and maybe even radically diminish a convenient and beloved fixture in American society.

A new study from the Institute for Research on Labor and Employment at UC Berkeley has attempted to empirically resolve the debate. The researchers — Michael Reich and his graduate research assistant Denis Sosinskiy — conclude that fast food prices in California have barely risen beyond other states and that employment has not taken a hit. In other words, the legislation (which has created the highest minimum wage in the country) has done no damage.

The media has widely covered these results, treated them as definitive, celebrated them, and in some cases declared them as a victory over deceptive business people and sophomoric economists (here, here, here, and here).

But did the researchers actually demonstrate that this minimum wage did no damage? Do we actually live in a world where input prices don’t matter? How we understand the world and how we should govern society may depend on the answers.

Their Statistical Model 

The common objective of such minimum wage studies is to find a causal relationship between the induced change in labor costs and any observed change in economic variables such as prices of goods sold, employment, and other employment factors.

A common statistical tool to do so is difference-in-difference (“dif-in-dif”). This tool seeks to isolate economic effects happening in one locality from effects happening elsewhere. When done well, it begins to filter out the noise and eliminate alternative explanations for observed effects. When done well, it can make a plausible case for a causal relationship.

Unfortunately, the dif-in-dif is a bit of ruse in this paper — and the authors know it. What we have here is a case study of wrapping progressive political advocacy in the illusion of empirical science.

Claims of Price Change

The authors clearly have a knack for collecting and organizing data, which is no small feat and deserves recognition. They gathered an impressive amount of price data on fast food items (burgers, fries, and combo meals).

The data show that food prices on these select items rose on average 3.7 percent more in California than in other states. The authors interpret this rise as slight and conclude the following: employers’ monopsonistic profit must have, as intended, taken a hit; employees must have, as intended, gained without customers being harmed.

All good, no bad; intentions in perfect communion with ends. The governor’s office has responded, calling it a “Win, Win, Win.”

Shortcomings on Price Change

This statistical finding, however, should convince no discerning reader. It turns out the authors did something peculiar. They gathered price data for only a four-week period of these most curious California times — two weeks prior to policy implementation and two weeks after.

Observing such a short window of time defies common sense — and is a misapplication of the powerful statistical tool, like aiming the Hubble Telescope at your neighbor’s porch light. Some, maybe most, of what will be interesting is going to happen outside of the parameters set.

It is credible to believe that employers might incrementally ease in price increases (even in advance of the policy) so as to avoid triggering negative sentiment. It is credible to think that employers might, for a considerable period of time, fight desperately against the need to raise prices — first modifying promotions, shrinking menus, slowing cleaning tempos, reducing training, engaging in prayer and pagan sacrifice.

Such a short window also defies common economic principles. “Mainstream” economics — especially interventionist stuff — speaks of price “stickiness.” Things take time. “Mainline” economics — typically non-interventionist — speaks of there being no instantaneous “discovery” of new market prices. Again, things take time. No matter which sort of economic denizen one is, a four-week period should seem inadequate to the task.

A proper interpretation is that to have captured any additional price growth at all during such a brief period would be amazing!

Employment Change

They also measure changes in employment, which is the more important matter here. For this they use data from the BLS Current Establishment Survey (CES). They conclude that there has been no adverse effect on employment, and possibly even a positive effect. Employment might have increased!

Again, unfortunately, this conclusion should satisfy nobody prepped to expect a compelling dif-in-dif result. Aside from again choosing an arguably insufficient time frame, they do something shocking: they abandon dif-in-dif just when things are getting interesting! They simply eyeball a trend line. Worse, their eyeballs need a new prescription.

They claim California and the rest of the country show parallel trends pre-policy (which is essential for any dif-in-dif), and then continue to show parallel trends post-policy. But their own figure shows a wildly different reality. Destinies deviated!

It is clear to our eyes that the rest of the country experienced a flourishing of employment relative to California as early as the start of 2024. The rest of the country then experienced an even greater upward tick post-policy. Don’t take our word for it. You can eyeball it for yourself! 

It is no wonder that the authors abandoned dif-in-dif here. It would have cleanly exposed a comparative net loss in California even though the employment slope was positive. It would have done its job! It would have shown that you can’t have your burger and eat it too. A proper interpretation, then, is that there was real damage to California. It just happened to be in the form of a sacrifice of opportunity and of potential for Californians.

Conclusion

The Institute for Research on Labor and Employment, which supported this study, states that it produces “world-class research” which “promotes better understanding…with hard evidence.” It says of this particular study (written by one of its chairs) that it was a “careful analysis.”

Despite the impressive data collection, this paper is neither world-class nor careful, but rather the theatrics of science which Frederick Hayek called “scientism.” Moreover, nothing in it aligns with the aspirational moral character of science.

The authors summarily demean opposition as “dubious,” “ignorant,” and “anecdotal.” They give a reductionist and selective account of prior empirical studies to support their own views. They pretend economists would broadly support the minimum wage when, in fact, survey after survey after survey reveals that suspicion or disapproval are more common. They create false frames to downplay the 3.7 percent additional price growth which occurred in the blink of an eye. (Are we to forget that widespread 3.7 percent price growth is called a crisis?) Finally, they inappropriately boast of “best” data and “best” methods and then of “causality” over and over (ten times, to be exact!).

What is troubling is that this paper has proven so marketable to a media who has bought into it with blind enthusiasm. This kind of paper draws legions of students like Sosinskiy into it who believe there is glory in the punkish attempt to annihilate common sense principles of economics. We must do better, recognize the familiar tendency within our discipline, and call it out: the sword and scepter of statistics often leads a fool’s army.

In the end, this study is not the nutritious Sunday dinner it has been presented as, but instead just a Happy Meal placed on a China plate. It is a product for the eternal child inside of us who wishes we could defy gravity, see through walls, and enjoy positively sloped demand curves for labor.

Disclaimer: The views and opinions expressed in this paper are those of the authors and do not reflect the official policy or position of the US Air Force, the Department of Defense, or the US government.

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