Results for “minimum wage” 316 found
Minimum wages and rents
This topic remains underdiscussed in the minimum wage debates, here are some recent results from Atsushi Yamagishi:
I analyze the effect of minimum wage hikes on housing rents using exogenous variation in minimum wages across local labor markets in Japan. I estimate that in low-quality rental housing market, a 10% minimum wage increase induces a 2.5%–4.5% increase in rents. Minimum wage hikes benefit workers in light of a spatial equilibrium model showing that changes in housing market rents work as a sufficient statistic for measuring utility changes arising from changes in minimum wages. The increase in housing rents also implies an unintended benefit for homeowners.
Atsushi Yamagishi is from Princeton economics, but that is not his job market paper, here is the whole portfolio, which looks quite interesting.
Effects of the Minimum Wage on the Nonprofit Sector
Too much of this literature emphasizes restaurants, here is another relevant sector:
The nonprofit sector’s ability to absorb increases in labor costs differs from the private sector in a number of ways. We analyze how nonprofits are affected by changes in the minimum wage utilizing data from the Bureau of Labor Statistics and the Internal Revenue Service, linked to state minimum wages. We examine changes in reported employment and volunteering, as well as other financial statements such as revenues and expenses. The results from both datasets show a negative impact on employment for states with large statutory minimum wage increases. We observe some evidence for a reduction in the number of nonprofit establishments, fundraising expenses, and revenues from contributions.
That is from a recent NBER paper by Jonathan Meer and Hedieh Tajali. The swing of recent research results really is back in the direction of what traditional neoclassical economics would predict.
Do higher minimum wages reduce poverty?
Advocates of minimum wage increases have long touted their potential to reduce poverty. This study assesses this claim. Using data spanning nearly four decades from the March Current Population Survey, and a dynamic difference-in-differences approach, we find that a 10 percent increase in the minimum wage is associated with a (statistically insignificant) 0.17 percent increase in the probability of longer-run poverty among all persons. With 95% confidence, we can rule out long-run poverty elasticities with respect to the minimum wage of less than -0.129, which includes central poverty elasticities reported by Dube (2019). Prior evidence suggesting large poverty-reducing effects of the minimum wage are (i) highly sensitive to researcher’s choice of macroeconomic controls, and (ii) driven by specifications that limit counterfactuals to geographically proximate states (“close controls”), which poorly match treatment states’ pre-treatment poverty trends. Moreover, an examination of the post-Great Recession era — which saw frequent, large increases in state minimum wages — failed to uncover poverty-reducing effects of the minimum wage across a wide set of specifications. Finally, we find that less than 10 percent of workers who would be affected by a newly proposed $15 federal minimum wage live in poor families.
That is from a new NBER working paper by Richard V. Burkhauser, Drew McNichols, and Joseph J. Sabia. Should one believe these new results over the old results, or just be skeptical of the whole line of research entirely?
Jason Abaluck on the minimum wage
Here is his critique of Bryan Caplan, noting that “Bryan” in Jason’s dialogue is of course not the actual Bryan. (It is Jason’s somewhat imaginary view of how he thinks a dialogue actually ought to proceed, with satirical elements interjected, to show that Bryan’s account is too simple.) It is a better analysis than what Bryan offered, but I am not altogether happy with it and I think it shows the same defects as Bryan’s treatment, albeit at a higher level of detail.
A few broad points:
1. Public choice considerations should be paramount! To be clear, this could in principle favor minimum wages over alternative interventions, but if public choice considerations are not first and foremost this is more of a dialogue for a 12-year-old than a 13-year-old.
The reality is that America has one political party — currently in control of the Federal government — that is very much beholden to organized labor, an interest group that has a strong desire for a minimum wage that is too high. Often they don’t get their way, but that is precisely because of the curmudgeons and their objections. I fear a world in which minimum wage hike advocates really take over policy discourse, as they would end up serving the interests of organized labor, not economic optimization.
The true choice is between a minimum wage that is too low and a minimum wage that is too high. I prefer the former. An optimized minimum wage does not usually appear on the menu at all, and that should be one of the first points we teach.
As a side note, if you read anyone criticizing the “Econ 101” approach to minimum wage hikes, run the other way. If only Econ 101 could spend more time on such public choice considerations.
2. Any policy decision is also a decision by governments to communicate particular economic lessons to the citizenry. Which are the lessons carried by deployment of a minimum wage hike?
a. Price controls work.
b. A world of high wages, high prices, and doing stuff to “create jobs” is how to boost prosperity. Therefore protectionism can make sense too, and we need to stuff the Davis-Bacon Act into every government bill we can, as has been done with the new climate projects. Those are also forms of minimum wages. And it is OK if infrastructure costs a lot to build, because that means high wages too.
Those lessons may not be what you intend, but those are what you will end up getting and indeed we have ended up getting them. You do not get to teach voters the scope and limits of labor market monopsony models. Instead, you get bad economic reasoning writ large.
2b. As a general observation, if an analysis does not cover #1 and #2 in some fashion, I don’t view it as very sophisticated. It almost has to be misleading.
3. It should be stressed there is good evidence that we have alternative policies — namely investing in infants — that have pretty clear benefits for both distribution and efficiency. In contrast, the efficiency benefits of minimum wages are murky. So minimum wages probably are a dominated policy option, once we start comparing alternative methods of redistribution, as the thread suggests we do. You could add the deregulation of hearing aids to that list, and literally thousands of other deregulatory options as well, noting many of them may involve some upfront costs and thus pursuing them does fall into the realm of analyzing trade-offs.
In the dialogue you also will read: “But as a starting point, we should note that redistribution *always* has a shadow cost, so we want to compare the minimum wage to other policies like a negative income tax that redistribute at some efficiency cost.” I would stress that many redistributions have a shadow benefit, not cost. And once you recognize that, minimum wage hikes, like many other “progressive” policies, suddenly look a lot worse in relative terms. Why not focus your energies on those areas where distribution and efficiency move together? Are we supposed to think that such areas are so few and far between? If so, the pro-minimum wage hike view is truly a bleak and negative-sum one and let us all describe it as such.
4. How about some words on the interaction between the minimum wage and (still-welcomed) illegal immigration?
5. More narrowly, I would pick a few nits on the descriptive analytics. For instance in this discussion “Someone has to pay for wage increases for inframarginal workers. The gain to min wage workers comes from capital holders, non min-wage workers and consumers who indirectly pay for wage increases.” Might not some of the gains come from those who end up unemployed? Maybe not a priori, but I worry when this is overlooked altogether. There do seem to be some negative employment effects, even if you think they are overrated. The discussion then follows: “Those groups will have higher income-today than non-wage workers.” That doesn’t follow either. Some of the distributional consequences from minimum wage hikes can be very bad for poorer teenagers, for instance.
The end remarks on feminism are I think simply a misrepresentation of Bryan’s actual views, and an example of the kind of thing that is not well expressed on Twitter (you can blame the same on Bryan too, to be clear, all the more so).
In general, when I am being served a more “sophisticated” take on minimum wage laws, I end up being disappointed every single time.
David Neumark and Peter Shirley on the minimum wage literature
The effects on employment, of course:
Our key conclusions are as follows: (i) there is a clear preponderance of negative estimates in the literature; (ii) this evidence is stronger for teens and young adults and the less educated; (iii) the evidence from studies of directly affected workers points even more strongly to negative employment effects; and (iv) the evidence from studies of low-wage industries is less one-sided.
Here is the full paper, of course Twitter will try to tell you otherwise.
The Minimum Wage, Rent Control, and Vacancies or Who Searches?
In an interesting new paper Federal Reserve economists Marianna Kudlyak, Murat Tasci and Didem Tüzemen look at what happens to job vacancy postings when the minimum wage increases.
The vacancy data in our analysis come from the job openings data from the Conference Board as a part of its Help Wanted OnLine (HWOL) data series. HWOL provides monthly data on vacancies at detailed geographical (state, metropolitan statistical area, and county) and occupational (six-digit SOC and eight-digit O*Net) levels starting from May 2005. HWOL covers around 16,000 online job boards.
…Our identification strategy exploits the idea that different occupations can be differently impacted by minimum wage hikes due to differential mass of occupation-specific wage distributions concentrated around the prevailing minimum wage. We formalize this idea by analyzing wage distributions by occupation at the state level using micro data from the Current Population Survey (CPS). We identify occupations with large shares of employed workers at or near the state-level effective minimum wage and we refer to these occupations as “at-risk occupations.” We then estimate vacancy growth in at-risk occupations relative to vacancy growth in other occupations around the time when minimum wage increase takes place in the state, and relative to growth in vacancies in at-risk occupations at the national level.
…We find a statistically significant and economically sizeable negative effect of the minimum wage increase on vacancies. Specifically, a 10 percent increase in the level of the effective minimum wage reduces the stock of vacancies in at-risk occupations by 2.4 percent and reduces the flow of vacancies in at-risk occupations by about 2.2 percent.
…We find that firms cut vacancies up to three quarters in advance of the actual minimum wage increase. This finding is consistent with the firms’ desire to cut employment and vacancies being a forward-looking tool to achieve it. This finding is also consistent with a typical announcement effect of a policy change. Formally testing for the parallel trends assumption in our triple-difference identification, we find that at-risk and not-at-risk occupations do not have statistically significant differences in their vacancy trends prior to the typical announcement period. But the negative effect persists even four quarters after the minimum wage increase. The cumulative negative effect of a 10 percent increase in the minimum wage on total vacancies is as large as 4.5 percent a year later.
…We find that vacancies in occupations that typically employ workers with lower educational attainment (high school or less) are affected more negatively than vacancies in other occupations. The negative effect on vacancy posting is exacerbated in counties with higher poverty rates, which highlights another trade-off that policymakers might want to take into account.
This reminded me of a similar paper on rent controls (ungated) by Are Oust that Tyler and I mention in the forthcoming edition of Modern Principles of Economics.
Are Oust studied rent controls in Oslo, Norway and found that during the rent control era it was common for landlords to require their tenants to be of a certain gender, age, occupation and even religion (which would be illegal in the United States). Landlords would also find ways to charge extra by asking renters for extra services such as baby-sitting, garden work or snow-clearing. When rent control was eliminated, however, the number of apartments increased and landlords no longer advertised these kinds of requirements. Perhaps most telling, in the rent-control era it was common for renters to advertise “Apartment Wanted” but when rent controls were lifted it became much more common for landlords to advertise “Apartments for Rent!”
In other words, in a free market firms search for employees and landlords search for renters but under the minimum wage and rent control, workers must search for jobs and renters must search for apartments to a much greater extent.
Do higher minimum wages induce more job search?
In some models job search is just about the posted wage, but I suspect that is the easiest kind of search to do. In reality, search covers multiple dimensions, for instance wage but also working conditions, such as the comfort of your job post, how much of a jerk the boss is, and so on.
If the minimum wage is hiked, the higher nominal wage will indeed induce more search, because the pecuniary gain from a good match is higher.
That said, a higher minimum wage will to some extent induce employers to lower the non-pecuniary quality of the job. At the very least, there will be more uncertainty about the non-pecuniary aspects of the job. Imagine a new job seeker: “I’ve read Gordon Tullock — now I’m wondering if they are going to turn down the air conditioner in the back room where I will be working.”
That uncertainty in fact raises the costs of job search and makes the results of that search less certain. In this regard, you can think of a higher minimum wage as a tax on job search.
If you think job search is mainly about the posted wage, you won’t be very worried about this affect. Alternatively, if you think job search is mainly about finding a good match along the non-pecuniary dimensions, you might be very worried about it indeed. And it will make it harder for minimum wage hikes to boost employment by inducing more labor search.
For this post, I am indebted to a conversation with the excellent Matthew Lilley.
Danish minimum wage data (it ain’t monopsony)
This paper estimates the long-run impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18 and using monthly payroll records for the Danish population. We show theoretically how the discontinuity in the minimum wage may be exploited to estimate the casual effect of a change in the minimum wage of youth on their employment. On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.
Here is the paper by Claus Thustrup Kreiner, Daniel Reck, and Peer Ebbesen Skov. For Mississippi it might be worse.
I’ll suggest a general methodological approach here. I think that for Mississippi the chances for this kind of outcome are at least 0.8. Maybe for many of the richer states it would be 0.4? Based on those probabilities, I don’t want to do it, even if you think it is “more likely” that in most areas a higher minimum wage won’t destroy many jobs. What probabilities would be offered by those who defend a minimum wage hike?
Via Bob B.
What does the minimum wage literature really tell us?
Let me turn over the microphone to David Neumark and Peter Shirley:
The disagreement among studies of the employment effects of minimum wages in the United States is well known. What is less well known, and more puzzling, is the absence of agreement on what the research literature says – that is, how economists even summarize the body of evidence on the employment effects of minimum wages. Summaries range from “it is now well-established that higher minimum wages do not reduce employment,” to “the evidence is very mixed with effects centered on zero so there is no basis for a strong conclusion one way or the other,” to “most evidence points to adverse employment effects.” We explore the question of what conclusions can be drawn from the literature, focusing on the evidence using subnational minimum wage variation within the United States that has dominated the research landscape since the early 1990s. To accomplish this, we assembled the entire set of published studies in this literature and identified the core estimates that support the conclusions from each study, in most cases relying on responses from the researchers who wrote these papers.
Our key conclusions are: (i) there is a clear preponderance of negative estimates in the literature; (ii) this evidence is stronger for teens and young adults as well as the less-educated; (iii) the evidence from studies of directly-affected workers points even more strongly to negative employment effects; and (iv) the evidence from studies of low-wage industries is less one-sided.
Here is the full NBER paper.
RCTs and the minimum wage
The paper I want to highlight in this post is “Price Floors and Employer Preferences” by John Horton. In this piece he conducts a randomized control trial on an online labor market, randomly assigning 4 different minimum wage levels ($0, $2, $3, and $4) to 160,000 job postings. This experimental design conveys several advantages over conventional empirical work. First, selection effects and biases based on the economic performance of the firms and the states/countries they are in are automatically controlled for by random assignment. Second, the online platform collects detailed measures on the pre-experiment attributes of all workers, the productivity of workers on the job, and the number of hours worked overall. These data are extremely important to analyzing the effects of the minimum wage but are not measured in the most popular empirical works on the topic. Finally, the computerized nature of the data leaves almost no room for measurement error.
…There are four main results: “(1) the wages of hired workers increases, (2) at a sufficiently high minimum wage, the probability of hiring goes down, (3) hours-worked decreases at much lower levels of the minimum wage, and (4) the size of the reductions in hours-worked can be parsimoniously explained in part by the substantial substitution of higher productivity workers for lower productivity workers.”
The significant reductions in hours worked come from two sources according to Horton’s analysis. First, firms are economizing on now more expensive labor; the labor demand curve slopes downward. Second, the substitution of higher productivity workers meant that jobs were completed faster, so the total hours worked went down. Both of these responses to the minimum wage hurt low productivity workers…
Interestingly, these results are consistent with finding little to no dis-employment effect in an observational study that only measures wages and headcounts (which is what the vast majority of the most popular studies do). This is because almost all of the effects of the minimum wage came from substitution of higher productivity for lower productivity ones, which wouldn’t show up in headcounts, and reduction in hours worked, which is not measured in most conventional data sets.
Here is the full short piece by Maxwell Tabarrok. File under “RCT gold standard for me but not for thee!”
The South Korean minimum wage hike
A controversial study on the effect of a radical rise in the legal minimum wage level came out Tuesday, pitting employers against employees in the midst of negotiations for the next year’s wage standard.
Researchers at the Korea Economic Research Institute analyzed in the study the impact of the 16.4 percent increase in the 2018 wage level on low-income workers to find that many low-paying jobs were erased, while those who were employed enjoyed higher pay. The institute is affiliated with the country’s top business lobby, the Federation of Korean Industries.
The minimum wage is updated on an annual basis, and the rate currently stands at 8,590 won ($7.10) per hour. In 2018, the rate rose 16.4 percent from 6,470 won a year earlier to 7,530 won, the steepest increase in 17 years.
The KERI report said the employment rate in 2018 for workers directed affected by the hike — those who were getting paid less than the 2018 legal wage in 2017 — was as much as 4.6 percentage points lower than other income groups.
Some 15.1 percent of this group were jobless in 2018.
The study calculated that between 27.4 percent and 30.5 percent of the unemployment cases were due to the higher wage level, which prompted employers to cut jobs.
Here is the article. I cannot find this study, it may well only be in Korean (addendum: here is the link in Korean), and I note it is connected to a business lobby. Still, I will take this opportunity to ask: what else do we know about the recent and radical South Korean wage hike?
Here are some general remarks at Wikipedia. And here is a relevant paper about minimum wage hikes in Hungary: small disemployment effects after four years, and most of the burden carried by consumers, which implies the monopsony model does not apply — in that model prices should fall!
And do read Brian Albrecht on the minimum wage.
Federal minimum wage of $15?
It’s a slam-dunk case that doubling the federal minimum wage — it’s been $7.25 since 2009 — would lead to significant declines in employment opportunities for workers with few skills or little experience. According to data from the Bureau of Labor Statistics for 2019 (before the pandemic), in 47 states, at least one-quarter of all workers earn less than $15 per hour. In 20 states, half of all workers earn less than $18 per hour, and in 30 states, the median hourly wage is less than $19.
These statistics show that $15 is a very high wage floor. For employers to keep all their workers would require raising the wages of a huge share of the national workforce. But the number of workers affected would be so large that this wouldn’t happen. Instead, the number of jobs in the low-wage workforce would shrink.
The nonpartisan Congressional Budget Office confirms this basic intuition, estimating that joblessness would increase by 1.3 million if the national hourly wage floor were hiked to $15 [TC: and that is pre-pandemic]. The CBO also concluded that this policy would reduce business income, raise consumer prices and reduce gross domestic product.
That is from Michael Strain at Bloomberg. I would add this. No matter what you think about the recent literature on the minimum wage, all economic theories imply that minimum wages should be decided at the state and local level, given the economic heterogeneity of the United States. That is the message that you as an economist should be carrying forward.
Do you think Puerto Rico should be a state? Should they have a $15 minimum wage too? Come on. Yes, it is easy enough to make an exception for them, and by the way the median manufacturing wage in Mississippi is below $15 as well. Rinse and repeat.
I am sorry to speak in such terms, but the reality is that an allied cabal of activists and left-wing economists have combined on social media to insist on a particular approach to minimum wage economics and to bully those who disagree.
Ask yourself a simple question: were any of them calling for a temporary two-year cut in the minimum wage for restaurants and small businesses during a devastating pandemic? If not, are they really carrying forward the banner of science?
Minimum wage laws during a pandemic
From Michael Strain at Bloomberg:
In July 2019, the nonpartisan Congressional Budget Office estimated that a $15 minimum wage would eliminate 1.3 million jobs. The CBO also forecast that such an increase would reduce business income, raise consumer prices, and slow the economy.
The U.S. economy will be very weak throughout 2021. The nation will need more business income, not less; more jobs, not fewer; and faster, not slower, economic growth. A $15 minimum wage would move the economy in the wrong direction across all these fronts.
I fully agree, and in fact would go further. On Twitter I wrote in response to Noah:
Surely in a pandemic these businesspeople are right and the accumulated non-pandemic research literature doesn’t apply so much, right? Pretty much all models imply we should cut the minimum wage, if only temporarily, for small business at the very least.
Put in whatever exotic assumptions you wish, a basic model will spit out a lower optimal minimum wage for 2020-21, again for small business at the very least. This is the advice that leading Democratic economists should be offering to Biden.
Minimum wage hikes are a much worse idea now
For one thing, the marginal product of labor is much lower, at least for a good while. But there is a deeper problem. Under the status quo ex ante, minimum hike proponents argued that the highest wages would be taken out of, say, the economic rents of restaurants.
But now those rents are largely gone! Especially for the small restaurants. The result will be that, if the minimum wage is raised, more laborers are laid off. At the very least there should be no minimum wage, or a much lower minimum wage, for small businesses.
A further effect is that higher contagion risk (extending into the future too, now that pandemics are salient) may encourage more employers to automate, including in kitchens, theme parks, etc. A higher elasticity of automation also militates against a minimum wage increase, because capital-for-labor substitution is now more likely, again indicating larger negative employment effects.
In essence, most of the previous empirical literature on this topic has to be significantly downgraded in relevance. Whatever you thought of them to begin with, the pieces by Dube and the like just don’t apply any more.
Most likely, we should lower current minimum wages. And that is all the more true, the more you have been worrying about coronavirus risk and Trump’s poor performance in response.
These are all very simple points, I am tempted to say they are “not even Econ 101.”
And note that in the very early stages of a lock down you might want a much higher minimum wage, precisely to keep people away from work, if somehow you cannot keep the customers away. The much higher minimum wage would force the employer to decide which are the truly important workers, and send the other into non-infectious activities, as Brian Slesinsky suggested to me.
This is all related to my earlier post The Meaning of Death, from an economist’s point of view.
Are intuitions about occupational licensing and minimum wages consistent?
The other day I asked whether our intuitions about minimum wages and also occupational licensing might be consistent. In particular, if we think occupational licensing is very bad for employment and prices and welfare, is that consistent with monopsony/low elasticity of demand for labor models?
That is a tough problem, here is one approach:
If you think minimum wage hikes are fine, typically you believe something like:
“A 20 percent hike in the required wage will not much damage employment, if at all.”
What then would you say to this?:
“A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”
It seems you should believe the second proposition as well.
Now, consider occupational licensing. Typically it is not absolute (“only 300 goldsmiths in Florence!”), but rather it imposes a surcharge on entrants. They have to pass a test, or undergo training, or receive a degree of some kind. They must incur training costs to get the license, and you can think of those training costs as a tax on the employment relationship. But if those costs are incurred, a worker passes through the permeable membrane of the licensing restriction into the active labor force pool of that sector.
Of course we all know that a tax can be borne by either side of the market, depending on elasticities.
Now, if you believe minimum wage hikes don’t much harm employment, you believe the demand for labor is relatively inelastic. And if you believe the demand for labor is inelastic, the burden of the training costs for licensing fall on the employer, not the worker. Taxes fall on the inelastic side of the market.
Now, you’ve already assented to: “A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”
So the occupational licensing should not much damage employment either. The employer simply picks up the tab, albeit grudgingly.
(The effect on consumer prices will depend on market structure, for instance you can have a local monopsonist shipping into in a largely competitive broader market — tricky stuff!).
The occupational licensing will not help workers as the minimum wage hike would, because there is (probably) greater rent exhaustion in the licensing case. The workers get higher wages, but they are paid the higher wages precisely to compensate them for and pull them through those arduous training programs.
So the licensing and the minimum wage hike are not equivalent, for that reason alone. But still, the licensing will not really harm the interests of the workers, again the burden being born by the employer, or possibly the consumers in the retail market to some extent.
So if you are finding occupational licensing results that damage overall worker welfare, you must not accept the premises of the low price elasticity demand for labor model!
Another way to put the point is that the occupational licensing papers are testing some of the common presumptions of minimum wage models, and flunking them.
First addendum: It is not an adequate reply to this post to reiterate, with multiple citations, that minimum wage hikes do not lower employment. Even assuming that is true, other simple models will generate that result, without clashing with the occupational licensing studies. For instance, the employer might respond to the minimum wage hike by lowering the quality of some features of the job. In essence you are then suggesting the demand for labor may be elastic, but the real wage hasn’t changed much in the first place, and then it is easy enough in the occupational licensing setting for the burden of licensing to fall on the class of workers as a whole.
Second addendum: There is a longer history of minimum wage assumptions not really being consistent with other economic views.
Have you ever heard someone argue for wage subsidies and minimum wage hikes? No go! The demand for labor is either elastic or it is not.
Have you ever heard someone argue for minimum wage hikes and inelastic labor demand, yet claim that immigrants do not lower wages? Well, the latter claim about immigration implies elastic labor demand.
Have you ever heard someone argue that “sticky wages” reduce employment in hard times but government-imposed sticky minimum wages do not? Uh-oh.
It would seem we can now add to that list. Maybe we will see a new view come along:
“Labor demand is elastic when licensing restrictions are imposed, but labor demand is inelastic when minimum wages are imposed.”
Third addendum: Of course there are numerous other ways this analysis could run. What is striking to me is that people don’t seem to undertake it at all.