I have a go-to discussion strategy, for when I teach undergraduate political economy. It is a way of shocking students out of their dogmatic slumbers. I ask three questions; here are the first two:
1. What percentage of workers in the US work at the minimum wage?
2. If you have a job in the US, at the minimum wage, where does that put you in the world income distribution?
I get answers to the first question ranging from 20 percent to 40 percent (the correct answer is fewer than 2 percent); the answers to the second question are usually around 20 percent (the correct answer is above 85 percent).
Then I let the kids think about those two facts for a minute. It quickly gets real, real quiet in the auditorium. All through high school the kids have earnestly been told that poverty should be defined in relative terms, and that the US system is cruel to the poor. The fact that a minimum wage job puts you in the top fifth of the world income distribution — that’s “wealthy,” by any sensible relative standard, folks — and that 98 percent of Americans make more than the minimum wage, creates enormous cognitive dissonance for the younglings. (If you want to check another source, here’s the Washington Post calculator; I’m assuming a minimum wage of $9/hour, as a national average).
To tell the truth, I often try to take this kind of approach when some of my Duke colleagues whine about capitalism. When I say that the market system provides well for US citizens in absolute terms, I am condescendingly told that poverty should be defined in relative terms. Okay, let’s play: if a minimum wage job in the US means “poor” to you, then you are claiming that it’s better to be poor in the US than to be middle class in most of the world. That’s a plausible argument since so many people want to move to the US. But then the person who wants to argue for “relative wealth” measures faces a problem of logic: if you really want to compare rich and poor, you have to compare the US to the other systems in the world. And by any plausible measure, everyone in the US is rich. Everyone who has a job, even at minimum wage, is in the top 15 percent of the world income distribution.
If our system is so unfair and “exploitative,” then why are tens of thousands of people every year willing to risk their health, even their lives, to try to get here? It’s because even poor people are rich, by comparative standards. The US is a marvel, but our friends on the left have to deny that, because admitting it would mean that their imaginary utopias are not actually better than the system we already have.
Robert Nozick famously gave a plausible explanation for why intellectuals are simply incapable of accepting capitalism. Intellectuals, after all, were always the little smart kids who never got dates, but whom the teachers always singled out for A grades and patted on the head. What kind of crackpot system could allow losers like car dealers and stockbrokers, people who didn’t read Wordsworth at all, to make more money than the intellectuals who got MAs in creative writing?
But far from being a bug in the system, that ability for everyone who works and creates value to be rich, at least by world standards and often even by US standards, is a feature, one that intellectuals willfully ignore. In a market system, being wealthy makes you powerful, and that drives intellectuals crazy. Since capitalism rewards everyone who creates value, everyone can be powerful, in the sense that everyone gets enough access to resources that they are among the wealthiest people in the world. I get power over goods and services, and you do, too.
But that brings me to my third shocking question, the one that really surprises students, because for some reason they have never thought about the consequences of putting a high price “floor” on wages. It’s really just an application of Thomas Sowell’s “And then what?” question, but it works every time.
3. What is gentrification?
We “all know” — the students certainly know — that gentrification is bad, rich people taking housing from poor people. Except that the cause of gentrification is usually the high prices forced on housing markets by “NIMBY” pressures. Housing policy is a chance for rich people to be racist, feeling good about keeping poor folks out of their wealthy housing enclaves by calling restrictions on zoning “neighborhood defense.” Those same rich liberals get to redeem themselves by decrying gentrification — which, remember, was caused by them in the first place! — and keeping wealthy people out of poor neighborhoods. If you combine these two policies (NIMBY keeps the poor out of wealthy neighborhoods, and “anti-gentrification” indignation keeps the wealthy out of poor neighborhoods), you get segregation and inequality on a grand scale, with consequent housing shortages that shoot costs of rental apartments right through the roof.
In other words, gentrification is a second-best response to wrong-headed regulation, but you won’t see that unless you ask, “And then what?”
Minimum wages cause a similar kind of distortion, but you won’t see it unless you say, “And then what?” This distortion is something I have called “job gentrification” since 2004, when I wrote this post for KPC. Later, Russ Roberts and I did an Econtalk about it. If you force much higher wages — and a “living wage” of $15/hour for an entry-level job in fast food is much higher — then you will “gentrify” jobs. Where $7.25/hour can work for someone with no experience, if we double wages up to $15/hour then a different class of worker will “move in.” People with no experience and at most a high school diploma will be facing experienced college graduates who now want that $15/hour job. Just as wealthy people gentrify a neighborhood, more experienced people gentrify the jobs that poor people once depended on.
Once you understand the answers to my three questions, it’s hard to favor minimum wages. Most people make more than the minimum wage, wages in the US are already in the top fifth of the world income distribution, and if you raise the minimum wage high enough to make a big difference, gentrification will create more inequality and more poverty than we have now.