Courtesy of Norcal Fight For 15, with over 700 likes and 8,000 shares. One notable share was The Other 98%, which has over 2 million subscribers. This meme uses the 1950 minimum wage increase under Truman, and the decrease in unemployment rate over the next couple years, to suggest that increasing the minimum wage doesn’t have the effect of decreasing employment. In doing so, it leaves out some crucial context that misleads the viewer into making an incorrect assumption.
A Quick Overview of Economics
A common thread in academics is correlation doesn’t equal causation. If you notice that every time you wore red the past week it rained, it would be improper to equate your fashion choices with causing the rain. The same is certainly true in economics. We can’t pick one data point and assume an effect was caused by it. The economy is extraordinarily complex, with countless factors involved. Data is important, but it must be taken in context, and mated with a logical economic theory that justifies a conclusion.
As far as this meme goes, let’s look at some of the other factors going on in the economy at the time.
The Korean War
The Korean War began in June 1950, the same year as the minimum wage hike (which was in late January). Over 5.7 million service members were involved in the war effort, a significant amount considering most were in their prime working years. Just as with World War II, it’s not surprising that the unemployment rate drops during a large war, although that’s not exactly the kind of job growth to get excited over. Even here, correlation doesn’t necessarily equal causation, but look at the unemployment chart below. Examine the unemployment trend after 1950, and take a wild guess at when the Korean War ended.
The answer is July of 1953, right where the rate starts to spike again! In that month, the unemployment rate was at 2.6%. Six months later that rate had doubled, and a year later it was back at 6%, roughly the same as before the war started (source: FRED). Putting our economist hats on, this does not prove that the war caused the unemployment to drop, but most would agree it’s a more convincing correlation that jives with a logical economic rationale.
Due to the expansion of the money supply for funding World War II, the postwar period saw significant inflation rates. Between 1945 and 1950, the value of the dollar dropped about 34%. The previous minimum wage increase to $.40/hr was in 1945. Using an inflation calculator, $.40 in 1945 equaled $.54 by 1950. This means the seemingly dramatic increase from $.40 to $.75/hr wasn’t as much as it appears. Instead of an 87% increase, it was only a 38% increase in real terms, far from “nearly doubling”.
It Applied to Fewer Workers
Originally, the Fair Labor Standards Act of 1938, which instituted the minimum wage, did not apply to many of the workers it does today. For example, all agricultural workers were exempt until the 60’s, as were state and local government employees, and many retail, gas station and restaurant workers. This meant a much smaller portion of workers were affected, which lessened any effects raising the minimum wage might have on unemployment.
Postwar Economic Environment
It’s important to remember some other economic factors during the time of this meme. Most of the developed world was still rebuilding from WWII, meaning the US was the prime manufacturer for most of the world’s goods. From automobiles, to air conditioners, to toasters, the US had the factories, capital, and competitive edge to make them. While the minimum wage would still have an effect, it’s not the same economic environment as today, where the global market is more competitive. China and the rest of Asia were still mostly agrarian societies in the 50’s, and couldn’t yet take advantage of their lower labor costs in an industrial economy.
This meme makes factual claims, but does so in a vacuum. It leaves out crucial context that would likely make most people change their minds about their assertion. Furthermore, one could point to other instances where a significant increase in the minimum wage did result in killing jobs, like in America Samoa, where it decimated the economy.
The economic reality is that minimum wage is just one factor in many that can influence an economy. Economic theory does not tell us increasing the minimum wage will result in a higher unemployment rate, as there are other factors in play that could be more significant (like a war). Economic theory does tell us that, all things being equal, raising prices decreases demand, and labor is no different.