Minimum wage and EITC

by on February 24, 2007 at 8:21 am in Economics | Permalink

David Neumark, this time with William Wascher, continues his reign of enlightenment:

We study the effects of minimum wages and the EITC in the post-welfare reform era.  For the minimum wage, the evidence points to disemployment effects that are concentrated among young minority men.  For young women, there is little evidence that minimum wages reduce employment, with the exception of high school dropouts.  In contrast, evidence strongly suggests that the EITC boosts employment of young women (although not teenagers).  We also explore how minimum wages and the EITC interact, and the evidence reveals policy effects that vary substantially across different groups.  For example, higher minimum wages appear to reduce earnings of minority men, and more so when the EITC is high.  In contrast, our results indicate that the EITC boosts employment and earnings for minority women, and coupling the EITC with a higher minimum wage appears to enhance this positive effect.  Thus, whether or not the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable depends in part on whose incomes policymakers are trying to increase.

Here is the paper, here are non-gated versions.  In short, the standard liberal recipe of boosting the minimum wage and the earned income tax credit is probably good for women, bad for men.  The interesting question is what kind of model could rationalize this result…

1 spencer February 24, 2007 at 9:59 am

I have problems understanding that if the minimum wage has a big impact on one group and essentially no impact on another very similar group why the issue is the minimum wage.
Shouldn’t the issue be on what causes the difference in the impact on the two groups?

2 happyjuggler0 February 24, 2007 at 2:03 pm

Price floors tend to drive out lower quality goods, giving an edge to those goods that have a higher perception of quality amongst consumers. This can be a self imposed price floor. For example, how many millionaires do you think shop at WalMart? Probably only the ones doing research on the company for their portfolio, or perhaps those on a road trip who suddenly need something and the nearest store that might plausibly supply it is a WalMart.

Same holds true for employment. Put a price floor on labor, and employers naturally refuse to hire those who don’t have the skills to produce $X of output to compensate for the $X of wage input.

What tends to get overlooked however are those who might have such skills but due to lack of track record they can’t demonstrate they have such skills.

Who are the ones last hired when there is insufficient information on any particular individual? The answer is the ones who fall into groups perceived to be less reliable, or in other words, stereotypes and prejudices dominate.

Be honest, all other things being equal, who would you prefer to hire to take care of your child, a man or a woman? The answer “of course” is a woman. Why? Stereotype. In the absence of enough information we fall back on generalizations, however faulty they may be. Why would a woman be preferred to take care of your child? We trust women to be more nurturing and caring toawrds children than men, while we might lean on men when the child needs to be disciplined. But for nannying what is required is the former, and we’ll leave the discipling to the parents for any wrongdoings committed during the parents absence.

There is also the issue of trust in general. All other things being equal, who do we trust more not to deliberately cause us harm via theft or some other means? Women. Why? Well just look at prison populations, they are dominated by men. I suppose it could be that women are more likely to get away witha crime due to superior skills, but a more plausible hypothesis would be that more men are in prison simply because more men commit crimes.

Now, going back to employment from a hiring manager’s perspective at a minimum wage job, in the absence of a resume and references, who would you be more likely to hire for a customer service job, all other things equal, a man or a woman? The answer is the woman. This is due to both the fact that they are more likely to be trustworthy, and also because of presumed superior communication and empathy skills towards customers.

Therefore, the last hired under a price floor for labor are men in general. Also it ought not to surprise anyone that those with lesser nonemployment credentials such as a high school diploma are more likely to get that first job than a dropout. When one also considers that our urban K-12 school system is pathetic, and that minorities are disproportionately located in urban areas, then it also ought not to be a shock that minorities are more highly represented amongst those who have the most trouble getting hired under a price floor for labor.

The net effect is that, unintentionally (or not!), that the minimum wage laws are now one of the most, if not the most, anti-black (and also anti-Hispanic) institutions in the US. The other major anti-black institution of course is outright racism and prejudice, and the minimum wage is complementary towards those biases, making such individuals under possible discrimination to be viewed as more risky than someone with a lighter skin tone.

End the minimum wage, and one also ends the inability of higher perceived risks to bargain for an entry level job which would enable them to show they are worthy of a higher paying job.

3 happyjuggler0 February 24, 2007 at 2:17 pm

mik,

If the minimum wage is increased, then the attractiveness of employing workers “under the table” increases. Who are the most likely to be paid under the table? Illegal immigrants. Therefore with higher demand from illegal immigrants we’d also likely see over time a higher supply of then than would otherwise have been the case.

Is that what you want?

4 Bill February 24, 2007 at 7:16 pm

happjuggler –

I would add that another large anti-black and anti-already-here-mexican institution is heavy illegal (and legal) immigration.

5 Peter Schaeffer February 24, 2007 at 7:58 pm

It is a measure of the absurdity of the economics profession that the minimum wage and the EITC are discussed in great detail without even the “I† word being mentioned. The paper is 35 pages long. The words “immigration†, “immigrants†, “illegal†, “alien†, etc. don’t appear once.

We have 12 million illegals aliens (20 million by some estimates) with 8 million illegally employed. However, their impact on the labor market isn’t even worth of mentioning. We have an even larger number of legal immigrants, a great many unskilled. However, they don’t rise to visible status either.

For a more sober look at what is really at stake here check out Mickey Kaus: Karl Rove has made the gaffe of the year. A few quotes

“According to a congressman’s wife who attended a Republican women’s luncheon yesterday, Karl Rove explained the rationale behind the president’s amnesty/open-borders proposal this way: “I don’t want my 17-year-old son to have to pick tomatoes or make beds in Las Vegas.”†

“Rove’s comment illustrates how the Bush-McCain-Giuliani-Hagel-Martinez-Brownback-Huckabee approach to immigration strikes at the very heart of self-government. It is precisely Rove’s son (and my own, and those of the rest of us in the educated elite) who should work picking tomatoes or making beds, or washing restaurant dishes, or mowing lawns, especially when they’re young, to help them develop some of the personal and civic virtues needed for self-government.†

“Karl Rove is not alone in his expression of this trend. We have heard its like many times. It is rather horrifying to see this brazen appeal to class interests; and the horror is only magnified by the denigration of some category of honest work. A rather provocative way to state the problem is that the Republican Party, under its current leadership, is advancing a plutocratic theory of politics: an aristocracy of wealth. But even this does not capture the full ugliness of the thing, for in a true plutocracy, no form of wealth is derided. That a man made his fortune by, let us, “picking tomatoes† or “making beds,† does not bar him from entry into power. But here it is indicated that some occupations are dishonorable by nature, and that even success at them is contemptible.†

“This sort of arrogance and elitsim, I submit, positively permeates the immigration enthusiast position among political strategists. There are those who are immigration enthusiasts out of a misplaced idealism, an overconfidence in a culture that has lost its nerve, compounded by a complacency with the sedition in the street and treachery in the administration of our laws. But the idealists have a strong and influential ally in the calculators and sophisters, who do not share their admirable idealism. For this latter faction, I do not hesitate to use words like “betrayal,† “treachery,† and even “treason.† They have betrayed the ideals of their party; and the effect of their machinations is to subvert the ideals which are integral to the American political tradition.†

Read it all. Then ask yourself, do we need to spend our time talking about the EITC or immigration reform?

6 Sandy P February 24, 2007 at 8:34 pm

According to IBD last week, dems want to combine EITC, childcare credit and 1 other thing into a lump tax deduction for up to $120K/y.

7 Peter Schaeffer February 24, 2007 at 11:57 pm

radek,

Some believe think that mass immigration affects wages. Other folks hold to a geocentric solar system.

Some folks find vicious social inegalitarianism offensive. Others revel in it.

Take your choice.

8 Paul Zrimsek February 25, 2007 at 6:47 am

Some folks find threadjacking offensive. Others revel in it.

9 mik February 25, 2007 at 3:13 pm

“Some folks find threadjacking offensive. Others revel in it.”

Have no args? Dispite your obvious brilliance?

10 Peter Schaeffer February 25, 2007 at 3:48 pm

mik,

With some noteworthy exceptions such as raghav, the Open Borders crowd rarely has anything substantive to say other than “immigration benefits immigrants” and “we want cheap servants” (paraphrased more subtlety unless you are Karl Rove).

11 Daublin February 26, 2007 at 4:17 pm

That’s cute, Peter. To boil it the rest of the way down, it benefits them, and it benefits us.

Gee, maybe we ought to do it.

12 Ian February 26, 2007 at 5:25 pm

I think raising the minimum wage would reduce the demand for lower paying jobs. Its like anything in economics, when you have a small demand, the price tends to increase. It increases to help out with income but immigration might be affected by this, but who knows.

13 Peter Schaeffer February 26, 2007 at 6:27 pm

Daublin,

It doesn’t benefit “us”, it profits a narrow exploitive elite. The rest of the American people get the shaft. Mass immigration drives down wages and makes housing crushingly unaffordable (I call it “Killing The American Dream†). The public school system collapses (check out California) and gridlock becomes the norm. Crime rises and overburdened hospitals close. Taxes rise (check out the NAS numbers on the immigrant tax burden in California) and every public amenity becomes scarcer.

Nice deal if you can afford servants. A terrible transaction for the rest of us. It has long been evident that each unskilled immigrant is a losing proposition for the United States as a whole (how could importing poverty be anything else?). The hypothetical income transfers from increased inequality (lower wages for poor) are more than offset by the negative externalities (save $1 at McDonalds, pay $20,000 for private education because the local public schools are defunct).

Why would the US tolerate unskilled immigration if it makes us poorer? Take a look at Coming US challenge: a less literate workforce for an article on the subject. Checkout the “Workforce Literacy in 2030† graphic for a shock. Then ask yourself, why don’t we have a fence along our Southern border already.

14 Peter Schaeffer February 26, 2007 at 7:06 pm

radek,

I commented on the P/O paper some time ago.

I haven’t read the entire paper yet. However, in a few seconds I found a material empirical error that undermines their entire thesis. P/O are still claiming that 90% of US workers are high school graduates. Were it only so. In fact, only about 70% of US young people graduate from high school. See Jay Greene at http://www.manhattan-institute.org/html/ewp_03.htm for a detailed review of the data. Note that the black and Hispanic graduation rates are in the low 50s. The graduation rate peaked back in the late 1960s at around 77% and has since fallen to 72% (in 2001) (see http://nces.ed.gov/programs/digest/d03/tables/dt102.asp). See http://www.wsipp.wa.gov/rptfiles/05-03-2201.pdf for a chart of this data.

Of course, the truth is much, much worse. Sadly, in much of the US you can get a high school “diploma† without having learned much of anything. Roughly 26% of 12th graders are “below basic† in reading and 35% are “below basic† in math. A realistic high school graduation rate for the US would be somewhere below 50%. How far below isn’t clear. Using the same methodology, black and Hispanic high school graduation rates are around 25%, a tragic state of affairs. See http://nces.ed.gov/nationsreportcard/nde/criteria.asp for the raw data.

This rather large factual error calls into question the entire P/O thesis. P/O claim that almost all American workers are not competing with low-skill immigrants. Were it only so. In fact, low-skill immigrants are competing with most Americans across the board. Not just in jobs, but in housing (immigration has given California the most affordable housing in the US†¦ Sure it has), education, mobility, etc.

Of course, the elite plutocracy benefits†¦ Along with the racial special interest groups†¦

Of course, the real world data demolishes even the minimal claims of P/O. The normally very pro-Open Borders Los Angeles Times, published an article of late that trashes any claims as to how low-skill immigration is “helping† the US. The article makes it rather clear that mass immigration is turning the US into a third world slum. Don’t believe me? Check out what the immigrants have to say:

†Her sister Alejandra was the first to leave. In Los Angeles, she and her husband were barely able to make ends meet. As in Mexico, ‘there was little work and it’s poorly paid,’ she said.†

†Eight years ago, she and her family moved to Kentucky, where a friend said there was more work and were fewer Mexican immigrants bidding down the wages for unskilled jobs.’

“‘What we weren’t able to do in many years in California,’ Alejandra said, ‘we’ve done quickly here. We’re in a state where there’s nothing but Americans. The police control the streets. It’s clean, no gangs. California now resembles Mexico—everyone thinks like in Mexico. California’s broken.'”

From http://www.latimes.com/news/local/la-me-quadruplets28jul28,0,931508.story?coll=la-home-headlines

Now please tell me why we should allow Open Borders to “break† all of America they mass immigration has wrecked California.

15 radek February 26, 2007 at 7:35 pm

However, in a few seconds I found a material empirical error that undermines their entire thesis. P/O are still claiming that 90% of US workers are high school graduates.

Peter, Peter, if you had just stopped for a second and … thought about things then…… well, it probably wouldn’t have helped anyway

Here’s what the authors say:

Third, all other groups of U.S.-born workers (with at least an high school degree) who accounted for 90% of the U.S.-born labor force in 2004, gained from immigration.

Please note the following words and phrases: “U.S.-born” (that means that they were born in the US) and “labor force” (that means they are in the labor force)

Contrast this with
only about 70% of US young people graduate from high school

Where the words “US-born” and “labor force” do not appear, but “young people” does. And hey, maybe labor force particpation is correlated with whether one graduates from high school or not? Maybe with labor force particpation as well? Wouldn’t that be something.

This Census report
http://www.census.gov/prod/2004pubs/p20-550.pdf
states that 85%+ of people over 25 have completed high school. It also notes that usually the younger cohorts have higher educational attainment. Factor in labor force effects and you have your 90%.

As for the rest of your rant. First we were talking about wages. We can start talking about other effects of immigration once you concede the point on wages, otherwise this is a waste of time. Sigh. Second the words “anecdote” and “crap that sells newspapers” come to mind.

Seriously, I’m done for today.

16 Peter Schaeffer February 28, 2007 at 12:08 am

radek,

There are many germane points here. However, an obvious empirical point is too examine states/cities with high levels of immigrants to test whether immigrants are complementary and yield wage gains.

What then do we find? Natives are fleeing high immigration areas in droves. If immigrants were really such a blessing they should be attracting an influx of natives. Exactly the opposite is true. Note that unskilled immigrants are heavily employed in services, precisely the sorts of economic activities that must be consumed locally and should be attracting native.

The second test is living standards. California was once known for its high standard of living. Now it is renown for its poverty. Check out the state GDP per-capita numbers adjusted by the local cost of living. California ranks near the bottom. So much for higher wages from immigration.

However, there is a deeper flaw in the P/O paper, that should be obvious. It assumes its conclusions. By this I mean that in the P/O framework immigration can never reduce the wages of native Americans no matter what the distribution of immigrant skills. Say for example, immigrants have skills exactly matching the native population. The P/O framework will still find no adverse impacts from infinite immigration.

Of course, this isn’t true. Indeed, your own website (a comment) contains a statement that (inadvertently) makes this point all too well. I quote

“I always tell opponents of free immigration the same thing… people are a resource. You wouldn’t complain if we had more capital or more land, so why complain when we have more labor?†

Clearly not an Econ 101 graduate. Increasing the supply of capital and land while holding labor constant, increases returns to labor. Guess what? The reverse is true as well. Increasing the supply of labor while holding land and capital constant reduces returns to labor. P/O assume capital can be linearly scaled. Since 2000, this is a poor assumption. However, land can never be. So increasing the supply of labor, reduces labor returns. This is an empirical as well as theoretical point. Check out Cost of Living Index–Selected Metropolitan Areas: Fourth Quarter 2005 for some real world data on the impact of mass immigration on prices. Compare California and Tennessee. Any wonder that illegals are fleeing California?

17 Trieu Truong March 15, 2007 at 11:58 pm

It occurs to me that “rationalize” in this case means “explain.” Hm. I don’t have a theory for that.

IANAE.

18 herefast123 October 27, 2008 at 6:18 am
19 herefast123 October 28, 2008 at 5:28 am
20 herefast123 October 30, 2008 at 9:15 am
21 Jar Mobile February 9, 2010 at 12:56 pm

thank you very much for this article

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