Reich Vs. Reality

On February 22, 1995, the congressional Joint Economic Committee held hearings on the minimum wage. What follows first is the version in Robert Reich's book, Locked in the Cabinet. Then come the words that were actually spoken. (Italics are in the original.)

The Republican attack machine is gearing up, and I'm one of the targets. A "paranoid" is someone who thinks right-wing politicians are after him and who isn't known as a combative liberal cabinet member.

Today's hearing of the Joint Economic Committee: cameras, reporters, packed audience, a parade of witnesses claiming that raising the minimum wage will cause widespread loss of jobs. I begin to make the contrary case, when the Republican House chairman, James Saxton, a fleshy-faced former real-estate broker from New Jersey, interrupts:

"Where did you learn economics, Mr. Secretary?" He sits up straight and his eyes gleam. He's finally launched on the TV performance he's been waiting for. "Can you explain to those of us who are not versed in this new economic law how it is that an employer will hire more workers when the government forces him to pay more for them?"

"In fact, Congressman, there's evidence that when New Jersey raised its minimum wage, more jobs were created, because people entered the labor force who otherwise wouldn't have bothered ... "

"Evidence! Evidence!" Saxton jumps up and down in his chair like a schoolboy too eager to answer his teacher's question, and points to a large chart that's been placed on an easel, facing the cameras. "Look at this! This is what you're trying to prove! It can't be proven, because it's wrong!"

Along the bottom of the chart, starting on the left, are the numbers $4.25, $5.25, $6.25, and so on, continuing to $20.25. Along the side of the chart, starting from the bottom, are the numbers 10 million, 20 million, 30 million, and so on, up to 300 million. A bright red line rises from bottom left to upper right. Across the top of the chart, in bold letters: THE REICH CURVE. (To reality-check the chart, click here.)

Saxton looks toward the TV cameras. "I have a very difficult time understanding how an accepted law of economics doesn't apply! This man actually believes that the higher you raise the cost of labor, the more jobs you'll create! So why not raise the minimum wage to twenty dollars an hour? Look at all the new jobs that'll be created! Three hundred million! Why stop there? Why not raise it to a hundred dollars an hour? We'd find jobs for everyone in the world! Think of it! What a deal! " (To reality-check this supposed diatribe, click here.)

The audience applauds. Saxton can't hide his delight.

There was a time not long ago when congressional hearings were designed to elicit information for members in order to help them draft legislation. Now they're attack ads.

That was Reich. Here's reality. Reich has already delivered his lengthy prepared testimony, and Saxton—who did not interrupt, and who was decorous throughout—is asking his first question. The transcript picks up from the one quotation that both Reich and reality have in common:

Jim Saxton: Can you explain to those of us who are not versed in this what, to me, is a new concept of a law that is a law sometimes but not all the time, how this precisely works, and take me through an example at the level of job opportunities, at the firm level, and explain how an employer has the ability to hire more workers when government forces them to pay more for that commodity, in this case, labor?

Robert Reich: Mr. Chairman, let me repeat what I said before lest it be misunderstood, and I want to make sure that I was understood clearly. Obviously there is a price at which if the minimum wage were increased the cost of labor would be too much and therefore you would suffer job loss. As I said in my example ...

(His longish answer continues.)

Saxton: I apologize, but I just have a very difficult time understanding how a generally accepted law of economics, or principle of economics, applies on some occasions and doesn't on others. Let me go back.

Reich: Mr. Chairman, I was about to answer your question.

Saxton: Well, I know you were going to give me an answer. I have no doubt about that. Even when you compared a few minutes ago a one-cent increase in the minimum wage to a $10 increase in the minimum wage, even a one-cent increase in the minimum wage would certainly have some minimal, microscopic perhaps, effect, and if a law is a law and if it works, it works most of the time or all the time.

Let me hearken back to an old-fashioned economic theory, but most economists I have talked to believe that the market sets wage rates on the basis of what a worker can produce. I have somebody who lives in the Philadelphia area who recently brought that very clearly to my attention in describing his scheme for providing incentives for people to work and earn more, and minimum-wage workers, through productive activity, in a very short period of time can actually earn as much in this scheme as $11.50 an hour, but employers will not pay an individual $5.15 an hour if what he produces is only worth $4.50. That is a pretty—that is so clear to me in terms of what I understand and what I have learned about economics and how it really works that I have a very difficult time accepting the proposition that a 21 percent increase in the minimum wage will have—I was going to say no effect but, in your words, a positive effect on job growth.

Reich: Well, if you would let me respond to your question, Mr. Chairman, I would love to try to explain. There are two issues here. One has to do with a firm and what happens inside the firm. The other has to do with the labor market as a whole. Let me first of all look at the firm ...

(His answer continues.)

Saxton: Okay.

Reich: Why is that?

Saxton: Can't employers figure that out for themselves? Can't they choose to raise, as my friend in Philadelphia does, Ed Satell—can't they choose to make those adjustments in their minimum wage rather than to have the federal government mandate a minimum wage which Mr. Krueger says is not meaningful in New Jersey because it doesn't hurt the employment picture? As a matter of fact, I think the reason it didn't hurt the employment picture in New Jersey is because those firms that you studied, the McDonald's and the Burger Chefs, were already paying $7.25 an hour.

Alan Krueger (Labor Department chief economist): Excuse me, if I may answer that ...

(Krueger discusses a chart with Saxton. Saxton recesses the committee. Later, Saxton and Reich have a few brief exchanges, none resembling the account in Reich's book.)