A Grumble About Mainstream Economists, the Minimum Wage and the Fed’s Unemployment Target

A Benjamin Cole post

We all know the minimum wage is bad.

Whenever a national, state or local government raises the minimum wage, there is a justified Niagara of negative commentary from mainstream economists, who correctly (if histrionically) point out that employment must be reduced to accomplish the goal of a higher and artificial minimum wage.

Yet there is also wide and general assent among macroeconomists that the U.S. Federal Reserve Board cannot let the unemployment rate sink too low.  We are informed the current official unemployment rate of 5% is treacherous territory, and dangerously pushing our inflationary luck. The Phillips Curve and all that, leading to Sodom, Gomorrah and Zimbabwe.

So we have this: The Fed as a matter of explicit policy must ensure that at least one in twenty Americans who want to work is instead jobless and job-hunting, and the minimum wage should be scuttled ASAP.

Really, is this supposed to be an appealing pair of policies for anybody who is an employee (the vast majority of Americans, that is)?

As long as the Fed is targeting 5% unemployment, then having no minimum wage laws would result in continuously falling wages. Every time lower wages resulted in something approaching full employment, the Fed would have to step in and undercut the economy back towards 5% reported unemployment. (Is this happening anyway?)

Class Bias

Sad to say, the craft of macroeconomics in academia and punditry remains steeped in class bias, not liberal bias. At any moment, macroeconomists are thundering against the minimum wage, and the Fed is accused of feckless money-printing.

Yet rarely (if ever) do macroeconomists rant against property zoning (including housing and retail stipulations), or the ubiquitous criminalization of push-cart vending.

Deregulating property and push-cart vending would open up millions of low-barrier-to-entry business opportunities of the type average people could fulfill—ordinary retailing, Push a cart and sell clothes, small electronic goods, food, handicrafts, CDs, and so on. Whatever consumers and the market wants.

Such widespread business opportunities would tighten up labor markets, of course. (Is that a perceived cardinal sin?)

To be sure, unzoning property and decriminalizing street-vending are not everyday topics in the mainstream macroeconomics profession.  In fact, research in these areas is scant at best, and commentary nil.

But bashing the minimum wage is of evergreen, compelling interest. Get out the megaphones.

PS MM´s are right: The Fed should not target unemployment, or inflation.  The Fed should target nominal GDP growth, and a healthy dollop of it every year. Government, in general, should tax and regulate as lightly as possible.

But “lightly as possible” also means the most minimal regulations possible on property use and push-cart vending.

Preparing spirits for another “postponement”!

First, the unemployment goalpost was at the 6.5% mark, then at 6%, falling to 5.5% before being revised to 5%.

With that, the “fatidic” date moved from mid-2014 to early 2015 to June 2015, to September 2015. But that will probably be changed again:

Next week, Federal Reserve officials publish new quarterly forecasts, and all eyes are going to be on where they set the job market’s Goldilocks rate.

That’s the estimated unemployment level officials figure is neither too high nor so low that it starts to drive wages and prices higher. To quote Goldilocks, it’s “just right.”

Fed officials in March estimated this “natural rate” of unemployment at 5 percent to 5.2 percent. Unemployment stood at 5.5 percent in May. A new paper by Fed board staff shakes up this view by suggesting the number could be as low as 4.3 percent.

Moving Goalpost

It´s long past the time the Fed changed its “tune-up”!