Is the main effect of the minimum wage on job growth?

by on August 5, 2013 at 12:15 pm in Economics, Law | Permalink

In their new paper, Jonathan Meer and Jeremy West report:

The voluminous literature on minimum wages offers little consensus on the extent to which a wage floor impacts employment. For both theoretical and econometric reasons, we argue that the effect of the minimum wage should be more apparent in new employment growth than in employment levels. In addition, we conduct a simulation showing that the common practice of including state-specific time trends will attenuate the measured effects of the minimum wage on employment if the true effect is in fact on the rate of job growth. Using a long state-year panel on the population of private-sector employers in the United States, we find that the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments.

In a slightly different terminology, the effect of the minimum wage may well be attenuated in the short run, but over longer time horizons there is a “great reset” against low-skilled labor.

Lauer August 5, 2013 at 12:50 pm

So you disagree with the entire federal government, state governments, and most academic economics departments … in their overwhelming position that moderate increases in mandatory minimum wages do NOT cause any adverse employment outcomes for low-wage workers ??

How can there still be disagreements on such a basic economics principle as prices in labor markets ?

You are correct, of course. But the minimum-wage enthusiasts are deaf to such reasoning.

Dan in Euroland August 5, 2013 at 1:26 pm

You misunderstand what those economists are saying. If all small changes in minimum wages have no disemployment effect that implies a horizontal labor demand curve. But nobody thinks that. So at some level even small changes will have to become binding.

For a primer on the minimum wage read the OP in these three posts:

http://www.econjobrumors.com/topic/minimum-wage-advocates-misunderstand-their-own-theory-and-evidence-part-1

http://www.econjobrumors.com/topic/minimum-wage-advocates-misunderstand-their-own-theory-and-evidence-part-2

http://www.econjobrumors.com/topic/minimum-wage-advocates-misunderstand-their-own-theory-and-evidence-part-3

Andrew' August 5, 2013 at 1:40 pm

You had me at: “So you disagree with the entire federal government, state governments, and most academic economics departments”

Of course!

prior probability August 5, 2013 at 12:51 pm

Meer & West must really be bored … do we really need another paper showing an inverse relation between the price of labor and it demand?

Cliff August 5, 2013 at 1:15 pm

Apparently we do, given the recent survey of academic economists showing the majority does not believe a moderate increase in minimum wage will have a significant effect on employment.

George Doehner August 5, 2013 at 1:24 pm

A “moderate” dose of poison does not have have a significant effect on health. Of course, defining “moderate,” “poison,” “significant,” and “health” is where the profit lies. Debating whether the state *should* have its thumb on the scale is not much of a money maker.

Frederic Mari August 6, 2013 at 7:25 am

What George Doehner said. You need to define ‘moderate’ and ‘significant’.

I think no one in his right mind contest that there is a disemployment effect coming from rising the minimum wage.

BUT there is a secondary effect: That of rising disposable income by a segment of the work-force who usually consume most/all of its income (not by choice as much as by necessity).

The real question is whether the secondary effect trumps the first; absolute and relative levels of labour costs as much as the general macro environment might all play a part in whether the cookie crumbles…

Mike August 5, 2013 at 1:19 pm

I guess we’ll have to get used to ordering fast food via smartphone apps?

George Doehner August 5, 2013 at 1:29 pm

I’ve often wondered why they have not gone to kiosks. Small chains have gone this route with great success. You step through a series of screens to place your order. There’s no need for a cashier. A smartphone app would be even better. Then the food is charged to your phone bill or credit card on file. Sit down restaurants could employ the same technology with one waitress taking all of the orders on a tablet.

There’s a reason for it. I just don’t know it.

Adrian Ratnapala August 5, 2013 at 1:47 pm

In Germany McDonald’s is moving to a system where you take a number and interact with a machine. As one of my German friends explained: “Our local McDonald’s is was the first in the world to use the new system. I don’t like it, it is very German”.

It doesn’t seem all that German to me; but maybe I would change my mind if I understood the system well enough to actually place an order.

Noah Yetter August 6, 2013 at 10:08 pm

When I was in college a McDonalds that was near campus did a trial of order kiosks. They seemed phenomenally inefficient to me.

The first problem is that it’s difficult to express all of the ordering possibilities, especially edge cases like substitutions and “hold the onions”, in a user interface that random people can understand without training. Point-of-sale systems have a similar problem but employee training solves most of it, and verbally communicated overrides solve the rest.

The second problem is that you still need at least one employee behind the kiosks to answer questions and help customers that are having difficulty. This is not much less than the 2 cashiers that would normally be working in a traditional configuration.

Brett August 5, 2013 at 3:38 pm

There’s that, but I think it’s more likely we’d move towards what I saw in the Tokyo Area: Kiosks and Order Tickets.

1. You go to the kiosk machine, and enter in your order.
2. It takes the payment, which in the US would be cash and cards (virtually no food places take checks anymore)
3. It prints out a ticket with your change, which you take to the counter for them to get your meal. In the US, the ticket order would likely be relayed to the kitchen electronically, so you would just use your ticket to pick up your order.

The end result is that you don’t really need dedicated cashiers anymore. You have the cooks, and the on-duty manager to handle problems with the machines.

Dan Weber August 5, 2013 at 4:41 pm

1. Why change what works?

2. McDonald’s likes their position as being a first job for so many people. They brag about it on their website. They may have a strategy that every ex-McDonald’s employee is a future loyal customer. (Whether such a strategy would work is questionable to me, but it’s not nuts to think they think it.)

Michael D. Abramoff August 5, 2013 at 8:22 pm

Their strategy worked for this professor of ophthalmology.

OT, it was interesting to see again while travelling this summer how independent the quality of the food at McDonald’s is of employee quality. In Poland, both downtown but also outside big cities, McDonald’s have leather seats, fresh flowers on every solid walnut top table, and primarily attractive young businesspeople as clientele. Same in Ukraine. But the quality of the McWrap and Mocha Frappe are exactly the same as in Omaha, NE.

Frederic Mari August 6, 2013 at 7:31 am

Funny as I have a different pov.

I don’t like McDo all that much. I like their fries and, in the couple of London McDos I used to patronize, I liked the chicken. So I’d usually take a chicken burger and fries.

But, when I was in Marseille, in two McDos, I took chicken and almost had to spit it out. It was vile.

Agreed with McDo in Kiyv (Ukraine). They’re still seen as affordable exotism by the local youth…

Dwight August 5, 2013 at 6:13 pm

I guess you’re being facetious, but have you ever really watched a fast food worker? The “cashier” is also busy expediting food to and fro, cleaning up, pitching new products, speeding customers along, etc. At present there is no technology that can do those things. The work may be unskilled, but it still requires a human.

In the future, sure, we may live in a world where restaurants resemble giant automated vending machines or are staffed by waiterbots, but the capital cost will be tremendous. So in the short term it’s hard to imagine how the food industry would replace its retail/waitstaff personnel, minimum wage changes or no.

Malcom Digest August 5, 2013 at 7:21 pm

I can’t wait until the technologists have invented the general purpose machine, aka humans.

Garrett M. Petersen August 5, 2013 at 1:38 pm

It’s interesting to think about the effect of the minimum wage in the very-long run on technology. We’ve had minimum wage laws for a long time now, and one wonders what labour-saving technologies would not have been viable in a world where people were allowed to buy low-skilled labour at a competitive price. I doubt the self-checkout machine I see at grocery stores would have been invented at all in such a world, nor self-serve gas stations. Maybe instead of laundromats there would be businesses that send a kid to your door to pick up your laundry, wash it at a central location, and then return it to you. The researchers who focus exclusively on the minimum wage’s effect on McDonalds’ payroll lack imagination.

GiT August 5, 2013 at 1:54 pm
Dan Weber August 5, 2013 at 4:47 pm

What I don’t get about those startups is that we have had laundry services for decades, maybe centuries.

I get how Uber and AirBnB are significant changes from the old model. But this is an old and unchanged industry and I don’t see why the new-comers are special.

Noah Yetter August 6, 2013 at 10:11 pm

They’re online, and marketing themselves towards people that live their lives online.

Rich Berger August 5, 2013 at 1:40 pm

Ironman, wherefore art thou, Ironman?

JonF August 5, 2013 at 2:00 pm

The minimum wage will have no effect if it is set below the natural minimum wage (the cost of providing labor– i.e., the basic subsistence cost of living). That’s pretty much the case now.

Cliff August 5, 2013 at 3:17 pm

Most people who work minimum wage jobs are supported by their parents or some other source of income like pension/social security.

Anthony August 5, 2013 at 3:27 pm

That’s not true, and never really has been true. There are always people who have some source of subsistence, but would like more, and are therefore willing to work for less than the cost of basic subsistence. Those people can be priced out of the labor market by a minimum wage that’s below subsistence.

Quite often, these people are called “teenagers”.

There are also differing standards for “subsistence”. An immigrant from a poor part of a poorer country will have a lower “subsistence” level than a new entrant in to the labor market who grew up in the wealthier country.

One can see both these things at work by looking at fast-food restaurants today versus 30 years ago, as the labor force has shifted from primarily native-born teenagers to primarily young adult (20s to 30s) immigrants.

However, the minimum wage will have very little effect if it is set below the alternative of relying on welfare.

derek August 5, 2013 at 3:43 pm

If you are saying that there are very few workers getting paid the minimum wage I would agree with you. I consider this to be an exercise in moral preening.

Spencer August 5, 2013 at 3:46 pm

I still find it impossible to understand why otherwise intelligent people oppose firms implementing technological improvements to improve our standards of living..

But .everyone of you seem to think keeping people barefoot and pregnant is the preferred policy.

Cliff August 5, 2013 at 11:28 pm

Huh?

Tim August 5, 2013 at 3:48 pm

I love how much they’re missing the point. Yeah, we all know that raising minimum wages leads to lower employment. But at some point lowering minimum wages also leads to lower employment due to lack of discretionary income. There is some level of employment where an employee is so dependent on assistance that their employment is of little economic value. Unless the goal of employment is just to give everyone a job.

Ultimately the problem is that minimum wage through legislation is too blunt and slow. What we need is a minimum wage that is pegged to local unemployment (and other factors such as transportation costs) and that can raise and lower based upon providing the bare minimum worker who provides positive economic growth.

But it’s easier for economists to say our current blunt instrument is no good, than to refine it to be a well-crafted precise tool.

Cliff August 5, 2013 at 11:32 pm

Oh, just like at some point lowering the price of health care leads to lower health care consumption? (Or, lowering the price of food, or ipads, etc. etc.)

If you think lowering the minimum wage ever lowers employment, you’ve gone off the deep end.

Noah Yetter August 6, 2013 at 10:17 pm

Yes because when the rules of doing business change rapidly and unpredictably that creates the best environment for growth and job creation.

A minimum wage that was set excessively high would be far less destructive than one that changed every few months.

Bill August 5, 2013 at 4:45 pm

We like to set a low minimum wage so us taxpayers can pay with Earned Income Tax Credit those who then earn less than the poverty level.

Cliff August 5, 2013 at 11:29 pm

Yes, EITC is an appropriate policy for handling the “living wage” problem, minimum wage is not.

Garrett M. Petersen August 6, 2013 at 1:15 am

It’s the bootleggers and baptists story again. The baptists are the do-gooders who want to help poor people, the bootleggers are the labour unions who want their competition priced out of the market. If there were only baptists, we would have EITC and not minimum wage.

Andrew' August 6, 2013 at 5:05 am

Thankfully, since we have a minimum wage, there is no such thing as the EITC.

Murray Smith August 6, 2013 at 6:19 am

The research cited is interesting and potentially significant. It is plausible that the impact of higher minimum wage rates is to curtail employment expansion instead of layoffs. The research could be extended with multiyear panel data on employment in enterprises which takes account of firm entry and exit rates. The impacts of higher minimum wages could be manifest through higher exit rates of enterprises and lower entry rates. Part of the downward spiral of some inner cities in the US, — Detroit comes to mind — was the decline in retail establishments and restaurants. Certainly several factors are involved but higher minimum wages could accelerate urban or suburban decline compounding the downward spiral .

Ashok Rao August 6, 2013 at 7:03 am

This paper has deeper macroeconomic implications; on the premise that the Keynesian sticky price maneuver has the same disemployment mechanism of minimum wage.

Our unemployment – in numbers – is highly elevated from the pre-recession trough. The population adjusted job creation rate, however, is back to the pre-recession peak. Historically, this has tracked the output gap, which suggests that demand-shortfall is lower than we expect.

http://ashokarao.com/2013/08/06/has-the-labor-market-adjusted-a-keynesian-price-floor-and-employment-dynamics/

Nathan W August 6, 2013 at 9:33 am

One of the most poorly taught and unsuitably simplified use of models to explain issues surrounding an economic debate to people studying at the introductory level, imo.

mulp August 6, 2013 at 11:15 am

What is wrong with the financial advisor analysis that they did for McD’s to show that it was possible to live well working for under $10 an hour at McDs?

http://www.theatlantic.com/business/archive/2013/07/mcdonalds-literally-cannot-imagine-how-its-workers-would-survive-on-the-minimum-wage/277845/

Why don’t economists understand that the low wages being offered today are reducing the supply of labor in the market?

Why don’t economists believe labor supply responds to the price offered for labor?

The minimum wage is lower than during the 70s which were previously the decade with the worse economy and job opportunity, but in the 70s, the number of young adults entering the labor market was surging, while the number of new entrants to the labor market is quite low.

If you believe a higher price will increase supply, then clearly a lower price will reduce the supply. The lower prices offered for labor is clearly reducing the supply among those who can be dependent on others, like their parents. Or by having young children, private and public charity.

If public transit is not available where you can afford to live to where you can get a job, then you need a car, but unless you get a free car, you can’t get a car without a job, so you can’t get a job because you don’t have a car.

Buying an old junker is not really an option because unlike the 60s, a junker is not 7 years old; today a junker is 15 years old, so getting parts for a 10-12 year old car is no longer cheap or sufficient to maintain a junker today. The junkers are older today and thus the parts harder to find because the automakers design the car to last at least a decade with high odds because they offered decade long warranties to fight the poor quality reputations they were assumed to have. But auto regulation only requires parts be supplied for vehicles less than a decade old, a decade being really old in 1970, but today is the average life. And the bad economy meant fewer new cars so the average age of cars is at record highs for the US, driving up the price of old cars. Junkers are no longer excess used cars that have minor problems that cost more than a newer used car, but cars that are actually junk.

The IRS prices driving a reliable car or personal truck at 55 cents per mile, so to drive 10 miles to work has a cost of $11 per shift, and if you must work 10 shifts to get 40 hours at a fast food store (several mornings, several evenings, and and several full days spanning mid-day as you are scheduled on demand and not kept around for a couple of slow hours when you won’t keep busy. By scheduling you 4 hours from 5am to 9am, then 4pm to 8pm, you are working 4 hour shifts and kept busy. But for the 4 hours you earn $40, with commuting costs for a reliable car as a business expense of $11, a net of $29 per shift, and $290 for 40 hours work.

You can argue that an unreliable car would only cost 25 cents per mile and you would only miss a shift once or twice a month, but with the store scheduling workers with no slack – just in time workers – your car makes you an unreliable worker, and why would any employer keep an unreliable employee even if caused by a car that is determined by the low wage. Better to hire a 20 year old with parents who can afford to give him a good car.

An individual looks at the market, and makes the logical conclusion that he can’t afford to be a laborer, just like a businessman decides he can’t stay in business because customers won’t pay a price higher than his costs.

And we know wages are too low to demand the current supply of labor by the declining pool of labor in the market.

ZZZZZZZZZ August 8, 2013 at 7:15 am

Let’s go back to slavery (instead of near-slavery)… employment will surely rise :P

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