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The Systematic Errors In Thomas Piketty's New Book

April 22, 2014

By Diana Furchtgott-Roth

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 increasing the minimum wage?

The political biases of Capital are nowhere more obvious than in Piketty's errors in his account of minimum wage levels in the United States. 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 U.S. 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 history of changes in the minimum wage 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.

What Piketty fails to admit is that raising the minimum wage prevents people with skills lower than the minimum from getting jobs. With the wage hike, some of those who might have been employed at $4.00 an hour, or $5.00 an hour, or $6.00 an hour are either unemployed or out of the labor force. Or, they might be working in the black market.

In any case, 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. But this increased equality would not take into account the higher numbers of unemployed. Piketty's measures of earnings equality just count people with jobs, not those without them.

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, according to Labor Department data released last month. 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.

University of California (Irvine) professor David Neumark, in a paper forthcoming in the Industrial and Labor Relations Review, as well as in prior work, writes that evidence linking unemployment to increases in the minimum wage comes from teenagers and other low-skill groups, without regard to industry.

To justify wage increases, Piketty cites minimum wage studies published in 1994 and 2000 by University of California professor David Card and Princeton University professor Alan Krueger. These studies compared minimum wage increases and employment in New Jersey with Pennsylvania, which had no increases, and concluded that the wage hikes had no effect, or a small positive effect, on employment.

The studies had a number of problems. Card and Krueger did not include information on the portion of employment at minimum wage. No information was given on whether the minimum law was binding, and to what extent, for this sample. They examined fast-food restaurants, but many other minimum-wage employment opportunities in the service industry, particularly the hospitality industry, were also likely affected.

The studies did not include information by county, such as income, unemployment, teen unemployment, labor force, and labor force participation rates. The regression statistics explained little variance, and practically none of the coefficients were significant. Although Card and Krueger inferred that minimum-wage policy makes no difference, a more likely interpretation is that their equation excludes important variables.

Last month 500 economists, including Nobel laureates Vernon Smith, Eugene Fama, Robert Lucas, and Edward Prescott, wrote a letter opposing increases in the federal minimum wage: "According to CBO, raising the federal minimum wage to $10.10 per hour would cost the economy 500,000 jobs by 2016. Many of these jobs are held by entry-level workers with limited experience or vocational skills, the very employees meant to be helped."

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 Organisation for Economic Cooperation and Development 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.

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.

Original Source: http://www.realclearmarkets.com/articles/2014/04/22/the_systematic_errors_in_thomas_pikettys_new_book_101016.html

 

 
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