Minimum wage and magical thinking: no one can defy the law of demand.

• Author: Bailey, Ronald

If all other factors remain equal, the higher the price of a good, the fewer people will demand it. That's the law of demand, a fundamental idea in economics. And yet there is no shortage of politicians, pundits, policy wonks, and members of the public who insist that raising the price of labor will not have the effect of reducing the demand for workers. In his 2014 State of the Union address, for example, President Barack Obama called on Congress to raise the national minimum wage from $7.25 to $10.10 an hour. He argued that increasing the minimum wage would "grow the economy for everyone" by giving "businesses customers with more spending money."

A January 2015 working paper by two economists, Robert Pollin and Jeannette Wicks-Lim of the Political Economy Research Institute at the University of Massachusetts Amherst, claims that raising the minimum wage of fast food workers to $15 per hour over a four-year transition period would not necessarily result in "shedding jobs." The two acknowledge that "raising the price of anything will reduce demand for that thing, all else equal." But they believe they've found a way to "relax" the all-else-being-equal part, at least as far as the wages of fast food workers go. Pollin and Wicks-Lim argue that "the fast-food industry could fully absorb these wage bill increases through a combination of turnover reductions; trend increases in sales growth; and modest annual price increases over the four-year period." They further claim that a $15-per-hour minimum wage would not result in lower profits or the reallocation of funds away from other operations, such as marketing. Amazing.

Pollin and Wicks-Lim calculate that doubling the minimum wage for 2.5 million fast food workers would cost the industry an additional $33 billion annually. They further calculate that reduced turnover will lower costs by $5.2 billion annually and that three years of sales growth at 2.5 percent per year combined with price hikes at 3 percent per year will yield $30 billion in extra revenues.

Let's consider turnover first. Pollin and Wicks-Lim claim that an increased minimum wage will make employees less likely to leave their jobs, saving fast food companies money that can now go to pay higher wages. New York Times columnist Paul Krugman convincingly refuted this argument in his review of Pollin's 1998 book The Living Wage. Krugman wrote: "The obvious economist's reply is, if paying higher wages is such a good idea, why aren't...