There is a new paper in American Economic Journal: Applied Economics by David H. Autor, Alan Manning, and Christopher L. Smith, here is the abstract:
We reassess the effect of minimum wages on US earnings inequality using additional decades of data and an IV strategy that addresses potential biases in prior work. We find that the minimum wage reduces inequality in the lower tail of the wage distribution, though by substantially less than previous estimates, suggesting that rising lower tail inequality after 1980 primarily reflects underlying wage structure changes rather than an unmasking of latent inequality. These wage effects extend to percentiles where the minimum is nominally nonbinding, implying spillovers. We are unable to reject that these spillovers are due to reporting artifacts, however.
Here are earlier, ungated versions of the paper. Overall my read of this is that many people are leaping in too quickly and making unsupported claims about how the minimum wage is connected to income inequality.
A minimum wage will certainly reduce wage inequality, since it is truncating the wage. Even if assuming the worst-case scenario of “Ec 101” where every sub-minimum worker gets fired, wage inequality will be reduced and average wage increased. A more interesting question is whether income inequality is reduced insofar as some people lose their jobs, but his question does not seem to be addressed in the paper.
Some employers hate workers so much they will fire their workers instead of paying a new higher minimum wage and turn away customers spending more thanks to their higher income thanks to the higher minimum wage??
I find it interesting that reduced gas prices and reduced employment and thus reduced incomes is expected to increase consumer spending and thus gdp, but higher incomes for people spending every penny of income is assumed to reduce gdp leading to reduced employment.
Clearly in the past three decades, workers have been turned into black holes sucking money from the economy and consumers with pockets of money are created by magic from nothing based on supply and profits creating wealth – the wealth effect.
I’m still stuck in the 60s and the Adam Smith model of economies: workers spend what they earn making the stuff workers buy – consumers are workers and workers are the consumers.
Obviously wage income can be time shifted by savings and borrowing. I grew up when you were supposed to save wages and borrow only to buy productive assets like cars and houses using future wages. But since 1980, spending future wages for consumption seems to increasingly be the way to offset lower and lower wages, and then people wonder why no one is buying productive assets.
I don’t think anyone seriously thinks employers hate their employees. That’s a straw man.
Employers are faced with a simple choice: keep Bob on at $15/hour, replace Bob with a machine, or let Bob go, make do without Bob’s contribution, and run a slightly smaller business. I doubt any employers are doing some sophisticated projection about how much extra business will come in should many people start earning more. I’m quite sure the employer just looks at Bob, how much value he’s adding now, and makes a decision based on the facts at hand.
You and I make similar decisions all the time about what to spend on. Do I wash the dishes by hand myself, buy a dishwasher, or hire Merry Maids to come in and wash the dishes for me. This is no different.
I am always bothered by arguments that claim that replacing labor with machines lowers wages or causes unempoyment instead of reducing working hours and improving the standard of living like it use to.
Yeah, doesn’t make sense to me either. Isn’t a good thing if higher wages stimulate technological progress? I thought it was pretty accepted in economics that new technologies could be disruptive, but that in the longest run people would find other areas of work.
That is silly. If employers hate their workers, they can fire them now.
There is momentum where employers will be reluctant to fire people, but if you raise the cost they have to pay, there is a pressure to buy less of that labor. Also, when people start new businesses, if low end labor costs more, they will be incentivized to find models that require less of it. More machines, less labor intensive workflows, etc.
We choose, for whatever reason, to have a minimum wage, but then not to index it to inflation.
The second weirdness is that whenever inflation shrinks the minimum by some degree, we start over, arguing from political-economic position.
“Another such issue is raising the minimum wage. 72% of voters nationally support increasing the minimum wage to at least $10 an hour, with only 15% believing that it’s fine where it is and 9% wanting to eliminate the minimum wage altogether. Even among Republicans there’s 57% support for an increase to at least $10 an hour.”
Public Policy Polling (link) finds much higher support for $10 than I expected. Perhaps that is the Behavioral impact of the $15 campaign.
Whatever we choose, I’d like to see it indexed and forgotten.
Of course it should be indexed.
And of course it should be zero as consistent with both liberty AND concern for the poor.
Zero, grown at CPI, is the only moral and/or utilitarian position.
In fact, if the socialist poor-hating populist demagogues want to be very generous they can grow the zero at CPI+5, that would be inconsistent but ok, as you know, still the appropriate zero…
When you are arguing the 9% position, perhaps you should not call 72% of Americans socialists .. then again perhaps from your perspective they are.
FWIW, I don’t care.
By that I mean that I support a safety net, and don’t care if it is done by direct transfer, minimum wage, or as we have it now some combination of the two.
It is fine that Walmart employees are on public assistance. That is a hybrid system.
49% of Americans want to reduce immigration.
34% want to keep it steady, but not increase.
do you agree that these 83% have the best position?
How about that 49% which is quite close to a majority?
There’s a reason the Constitution is about limiting majoritarian power.
The ancient Greeks could vote citizens into exile via ostracisation. Athens apparently did it with some wisdom, Syracuse ended up voting rich people into exile every time. Both abandoned the practice.
I recognize the right of a tribe or nation to be selective about new members. I don’t think there is one correct answer. When I’ve said it is “arbitrary” though, I do get push-back from people who think there is a correct answer.
(My own opinion is that levels are about right, but we could do better with work visas. Essentially work visas should be used to document the undocumented, dividing sheep from goats, deporting the goats.)
My point is more of a pushback against “if 72% of Americans are for it, it must be right, and it can’t be socialist or an attack on liberty.”
Slavery is consistent with libertarian belief?
Or do libertarians believe that everyone in an economy are 100% rational and never fall victim to the Paradox of Thrift and thus individually trigger the downward decline in total factor utilization by seeking to accumulate goods or money for fear of future hardship, thus creating hardship which spreads because their thrift causes hardship elsewhere leading to more thrift and hardship spreading?
Paying low wages forces others to be thrifty by limiting their consumption, reducing demand triggering the fear that leads to more thrift.
Maybe libertarians believe slow gdp growth is a virtue because puritan simplicity focuses ones life on worshipping god?
Or simply that the ultimate libertarian lifestyle is hunter-gatherer? Zero wages, no government, no fiat money.
Switzerland has no legislated minimum wage. I’m not aware of any slavery there.
They go on welfare instead of working for slave wages.
Switzerland has very low unemployment. Lower than neighbor France, which has one of the highest minimum wages and also high unemployment.
Libertarians believe that the individuals involved are best able to make decisions about whether to spend or invest their assets. The world is way too complex for you or I to tell whether Joe and Bob agreeing to a deal is in the global best interest of humanity. Even if we could, as long as Joe and Bob agree to the deal, who are you and I to tell them to stop?
I have no idea whether we could get in a Paradox of Thrift. I suspect there are way too many people with needs and desires for the entire economy to grind to a halt. The only large scale thing I can think of which would cause that is sustained deflation and even that I suspect would be self-curing. But I’m not an economist so I couldn’t explain an exact mechanism.
Of course, you support a massive increase in EITC, right?
Min wage is a bad way to go. EITC makes much more sense but does not “hit” the corporations hard enough so is a secondary issue for the Left.
Well one estimate has it that employers capture about 27 cents of each EITC dollar which is not optimal. http://www.nber.org/papers/w14966.
I guess the right can’t do anything without somehow making sure rich people get more money.
I will pay attention to your claims about the EITC when I see Republicans, libertarians pushing for legislation to increase the EITC. Meanwhile, it is just a useless claim that you think will get you off the hook.
Indeed, minimum wage is anti-business, not anti-poverty. The EITC (or a negative income tax of some kind) is obviously superior, but either supporters on the minimum wage have not done even their basic due diligence on the subject, or they don’t really care about the poor and just want to punish businesses or appeal to populist belief.
Spencer, there have been numerous GOP plans to increase the EITC.
“Second, Rubio and other conservative reformers have also expressed interest in expanding the earned-income tax credit for lower-income families, so that’s an additional wrinkle, I would think, in their flatter, simpler tax code.”
That’s from the WaPo.
Efcdons, the estimate for the minwage is 40% goes to non-poor workers. Teenagers, college students and such.
@Urstoff: When it was instituted, minimum wage was anti-low-skilled-laborer. It was explicitly designed to protect skilled (mostly union) labor from cheap, unskilled labor migrating north.
I find it ironic that it’s touted as such a great benefit to low-skilled workers when it was intended to be (and is) the exact opposite.
Urstoff – “supporters on the minimum wage have not done even their basic due diligence on the subject, or they don’t really care about the poor and just want to punish businesses or appeal to populist belief.”
I think you have done an exceedingly poor job of representing the views/arguments on the other side of the debate.
“We choose, for whatever reason, to have a minimum wage, but then not to index it to inflation.”
Two reasons it is not indexed:
1. An indexed minimum wage would lose its usefulness as a political football.
2. The disemployment effects would be permanent, rather than being gradually inflated away.
Yeah, it was intentionally done like that by those who don’t support it, I believe.
Nope. Democrats held complete power for about 2 years.
Did they index it for inflation?
Of course not!
They want to be able to return to this issue every few years and call the GOP meanies and show how compassionate they are with other people’s money.
The GOP establishment has been caught out by its base doing too much “Failure Theater” or keeping issues alive for the “next election.”
The Democrats do this, too, but are wiser in that they deliver something to their base so the base is more complacent.
I know this sounds like a partisan screed, but really it makes sense. A politician looks best when they are delivering something. Indexed to inflation? How can I claim credit for that?
No
By both supporters and opponents — Democrats don’t want the minimum wage increases to be on autopilot, they want to get credit over and over again.
No evidence for that.
“No evidence for that.”
Obviously Democrats can’t *say* admit they don’t want to index — they have to claim that they do. But the fact that Democrats have never done it during those periods when they controlled the presidency and both houses of Congress suggests otherwise.
Presumably a lot of Democrat supporters would support indexing the minimum wage, but as an entity the Democrat Party is only slightly less business friendly than the Republicans.
It seems the positive and negative effects are both inflated away, returning the political football to a new first down.
The analogy fails because its a clear winner for the supporters. Only monsters oppose an increase in the minimum wage. Its a no-brainer winner for its proponents.
The GOP should index it for inflation, but even then, it wouldn’t stop it being used as a football, so why even do that?
“Only monsters oppose an increase…”
I can’t tell if you’re being serious or sarcastic.
I’ve got two teenage kids with very few skills. They might be employable at $7/hour but it’s a lot harder to justify hiring them at $15. They’d much rather earn $7 and get experience than lounge around the house and earn $0. This makes us monsters?
Pete – some jurisdictions have different minimum wages for youth and adults. I’m surprised that this sort of idea basically doesn’t exist in the debate about minimum wages in America.
Back during the Carter years when indexing was included in a bill increasing the minimum wage, rural and southern Democrats opposed indexing in order to maximize their leverage with northern Democrats on things like farm subsidies.
I’m not convinced that Democrats in general would prefer to keep it as an issue when it would be to their political advantage to demagogue the issue as they do when Republicans have voted to limit increases in S.S. (which is indexed).
We choose, for whatever reason, to have a minimum wage, but then not to index it to inflation.
IMHO indexing minimum wage to inflation would be a bad idea because in a case of a real price shock of an important commodity (oil for example) becomes sharply more scarce you want real wages to fall.
Very legitimate macro argument, but one might argue that if oil shoots to $120 a barrel then the people who “need” additional wages the most are those on the bottom of the ladder.
I was under the assumption as an Economics major that companies would be way more selective of new employees because of the increase of wages. This could lead to better service at a McDonald’s.
You do not see your wages as an indication of the value your employer places on your service?
If you are not valued, but a burden no matter what you do, why should you care about the quality of your service when no matter your effort it is not valued.
If there were value there, they’d be doing it already.
It could be value-destroying to do it, but it’s a likely outcome if wages are exogenously increased dramatically. It’s like with people complaining about airline service: it used to be better in some ways, but all we care about when buying a plane ticket is the price, so service used to be inefficiently good.
Not necessarily.
The most profitable outcome might be crappy service at cheap wages, but the next most profitable might be decent service at high wages. If the first outcome is outlawed you might as well go to the second one, instead of the worst option of crappy service at high wages.
Because turn over is fairly high at McDonalds you should see an impact there quicker than in most places.
That assumes that employers who pay minimum wage are perfectly informed about the response of the workers. Surely there are cases where they are penny rich, dollar poor. Walmart, for example, pays slightly above the minimum wage in order to attract better workers. Why don’t others do this?
The McDonald’s that remain open might do that.
Or they might know their customers only care about price, and automate.
Look at how much the dollar menu mattered.
Also, as a large chain of restaurants, do you want to compete on service, really? I’m not so sure that’s easily done.
Did you know that the relative performance of the S&P Restaurant industry has a positive correlation with real wages and changes in the minimum wage does not appear to have any impact on the relative performance of restaurant stocks.
I appears that the demand impact of higher incomes from higher minimum wages is greater than the negative impact on margins.
At our middlebrow bar in Oakland (min $12.25), we installed a self-order kiosk and bought some little devices that vibrate when your order’s ready. We have a cook and a bartender.
And we fired all the floor staff who, to your point, are now eating Yum! Brands drek instead of nicer places, presumably. Good for the S&P I guess.
“S&P Restaurant industry has a positive correlation with real wages”
People eat out more as they make more money.
Wow. Amazing.
Doesn’t say where they eat or what they order or why.
McD is struggling because of the dollar menu and poor service, that might be related to staff, but I doubt it.
They may be losing to fast casual where “no tipping” = 15% discount and better food.
Yes, ‘efficiency wages’. Some companies use the strategy of paying above market rate for a better, more productive class of employee. But there’s no guarantee that customers will value the improved service by as much as it costs (and price-sensitive McDonald’s customers are probably the right target market for exceptional-but-more-costly customer service). And note that it doesn’t work if everybody does it (obviously *everybody* can’t be paying above market rates). If the minimum wage is $15/hr, then paying somebody $15/hr no longer gets you a better-than-average worker (unless, of course, you assume that the $15 minimum increases unemployment enough that workers become grateful for any job at all — in which case, uh oh).
It has nothing to do with being grateful, when unemployment is higher you are selecting from the better part of the quality curve. When U3 is 5% and you are paying minimum wage you need to start looking at those “marginally attached to the labor force”. Good luck with those workers, you’re going to need it.
“It has nothing to do with being grateful, when unemployment is higher you are selecting from the better part of the quality curve.”
It’s not only that — the exact same employees will be more diligent when they’re being paid above market wages or when unemployment is high enough that they can’t be assured of finding another job.
Maybe you should also tie this into the new paper by David Neumark at the San Francisco Fed.
http://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/
In it he seems to accept the estimate of a 0.1 employment elasticity which is much lower than he has previously argued for.
Remember, Neumark is a very strong opponent of the minimum wage.
In the paper he also implies that the minimum wage leads to stronger capital spending and less employment.
He things this is a very bad thing, but I would strongly disagree because giving labor more capital is the primary way we increase productivity and raise our standard of living. But he seems to be opposed to raising our standard of living. Why anyone would do that is beyond me.
Let’s take your argument a little farther. If we have a minimum wage of $40/hour, then capital per worker will be much higher and so will productivity. The number of workers will be far less. Output will plummet and hence standard of living will plummet too.
This doesn’t prove that a minimum wage is bad, conceivably the increase in investment could lead to higher output (though there are strong reasons to doubt it). It just shows that “giving labor more capital” is not necessarily a way to raise the standard of living.
Can’t you come up with any thing better than that stupid old argument about massive minimum wage increases.
Yes, even liberals realize that you can raise the minimum wage too much.
Yes there are other ways to raise productivity, but historically the increase in the capital/labor ratio has been the dominant one.
What are your strong reasons for doubting it. After all, it is the opponents of the minimum wage who argue that increasing the capital/labor ratio is a bad thing.
Spencer, you’re assuming that the capital/labor ration isn’t optimal already. You’re assuming that we already have plenty on employment and we need more capital. But we actually have a problem with employment and labor force participation. If the return on capital was so great, firms wouldn’t keep so much cash.
In other words, you think you know better, you should run the economy, allocate resources the way that you think is optimal.
“Yes, even liberals realize that you can raise the minimum wage too much.”
But they keep telling me it has zero effect.
So, it does have an effect. Where does that start?
How much is “safe?”
Is this like paying your fair share, where the “fair” part is never defined?
I don’t think very many people are adamant in arguing that the effect is zero (although quite a few empirical studies suggest that it is in some circumstances). Rather, that costs (if any) of higher minimum wages exceed benefits.
What’s fair? Some argue that it is the market clearing wage, even if that is $1 an hour and employers are filthy rich. One could make an economic argument that “fair” depends on the contribution of capital and labour to the output, in which case “fair” might be quite a lot higher than the market clearing wage.
I rather object to an intrusion into the labour market which will result in fewer of my less skilled brethren earning a living, even if it does boost my income a little.
Your worker brethren have rich parents who fund their consumption of what you produce keeping you fully employed and thus able to consume more than you need to survive?
Or do you depend on government giving them the money needed to survive by paying to consume what you produce?
If your brethren got their wages cut by 10% to boost employer profits and thus they cut consuming what you produce by 10%, you would rejoice when your wages were cut by 10% due to reduced sales, and then by another 10% to boost profits?
My remark was a reply to “… the minimum wage leads to stronger capital spending and less employment. He things this is a very bad thing, but I would strongly disagree because giving labor more capital is the primary way we increase productivity and raise our standard of living. But he seems to be opposed to raising our standard of living. Why anyone would do that is beyond me.”
I held it axiomatic that the reference to “our standard of living” was an evasion of who ‘us’ might be and how ‘we’ might get richer. I doubt the wisdom of interfering in the price of labour in a way that increases unemployment, even if it does make those retaining employment richer. (If it does.) A polity that deliberately brings about a large, permanently unemployed lumpenproletariat is asking for trouble, and is being cruel to those made unemployed. Perhaps the commenter was being sarcastic, in which case I agree with his sarcasm.
The evidence that moderate increases in minimum wages have these disemployment effects is scarce, often contradicted by other studies.
I think there will be important disemployment effects in some contexts and limited or even positive (more people enter the labour force) effects in other contexts.
But they’re not really earning a living…
because they’ll never, ever climb off that first rung and that’s why ladders shouldn’t have first rungs.
It`s hard to climb off the first rung when paying rent, etc., takes so many working hours that there is no time to invest in newer/better skills or to look for better work.
Sorry, that should be a minus 0.1 elasticity.
Frankly, I don’t see how minimum wage does anything to income inequality either way. (It might have 40 years with less inequality but now it is decimal point stuff.
Do you think the economies in Asia and Africa are superior in performance thanks to less of the interferences of government in such matters as minimum wages?
The low value people, 90%, have low income and thus consume little, and that’s ideal for creating a robust economy in the modern world?
And China is moving to a worse economy by government forcing too much consumption growth by dragging people off the farms where they earn little and force them into much higher wage jobs building capital assets for China that the private sector farmers would build on their own because they place higher priority on fixing the roof. But most disturbing, China has increased income inequality because farmers earn only slightly more but their kids dragged off the farm earn ten times as much and spend ten times as much.
Just an anecdote about China and the minimum wage: I was there on business for about a month and ate at the same restaurant almost every night. The minimum wage went up by a large percent during that time, and I remarked that while the servers now made more, my beer was still just as slow to arrive.
Maybe they were able to use their newfound “wealth” to participate in wealthier social circles and later find better jobs?
Your point is well taken though.
“Frankly, I don’t see how minimum wage does anything to income inequality either way” [snip]
Then you should quit your job and take another at the US minimum wage.
Please report back here in twelve months about your experience.
That’s a total non-sequitur. Please respond to what he actually wrote.
I think his point is that (a) so few people make minimum wage and (b) the change is so little compared to what the 1% earn that this won’t change any inequality metrics (i.e. the GINI coefficient) by more than a tiny fraction. So if that’s what one is concerned about, raising the minimum wage is not an effective way to address it.
Raising the minimum wage _might_ help those who get a raise out of the deal. Maybe. Assuming the employers don’t compensate in other ways, such as reducing break time, trimming fringe benefits, or instituting a “no tip” policy.
It won’t help the vast majority who already make more than the new minimum. It doesn’t help the unemployed who couldn’t already find a job at the old minimum.
It hurts people who have their hours trimmed (maybe to zero), or could have found a job but now can’t.
Given that the minimum wage is nothing more than a political stunt at this point, decried by Dems as being way too low whenever they need to distract people from things like an open border and 10% effective unemployment….
I doubt that indexing it to inflation and forgetting all about it would be helpful to their interests.
Would they “forget about it” if it were indexed?
I think they’d just argue for more increases above inflation.
I want to see a few states enact $15+ per hour minimum wage so we can watch what happens. Laboratory of the states is a wonderful thing.
Since lots of Western states have ballot proposition mechanism for getting around legislatures we might get $15 min wage somewhere larger than a city. This will be fun to watch.
“I’ve got to get me a Polish.”
That’s what the Irish bed and breakfast owner, who had been cleaning the rooms of her bed and breakfast, said to our tour guide during the height of the Irish boom. She, of course, was not talking about the sausage, but rather the influx of Polish workers who would do domestic work at low wages.
She did get her Polish. She substituted her effort, as a manager and owner, for the effort of a Polish.
But, when the Irish economy went bad, she fired her Polish, and resumed cleaning her own B&B.
The story is this: For small business, if minimum wages increase, will managers who run their own business see an effective wage decline for their own effort. Or, if times are good, does hiring the Polish (low wage worker) an effective time off benefit to the manager/owner. Or, if minimum wages increase will the owner manager have to put in more hours.
At a higher wage, you’ll have a few things happen: 1) people who are unable to negotiate for their “fair” share of gains will gain purely at the expense of employers, who may have to delay plans on their second vacation home, 2) people who are looking for work will have to ensure that they can earn the higher wage, and thus invest in human capital and/or give more effort, 3) people who hold jobs will be work harder, so as to ensure that they don’t lose their jobs, 4) companies will invest more money in capital, thereby improving technological progress.
While a few jobs might be lost in the short run, it basically seems to be that both workers and employers will try harder, invest more in human and physical capital, and in the (unproven) case that there is somewhat more unemployment, people will work harder in order to keep their positions and avoid unemployment.
While it’s obviously stupid to try to compare $15 and hour to $50 an hour, or what have you, it sure seems to me like minimum wages a) improve technological progress and b) ensure that workers in poorly paid industries which struggle to unionize will get a better deal.
Also, more money in the pocket is good for demand. When corporate America is sitting on larger stacks of cash than ever, it sure seems that the problem is not too little profits, but rather, too little demand for them to bother investing.
“Also, more money in the pocket is good for demand.”
Demand has already been satisfied to the tune of almost $900 billion in credit card debt, over $8 trillion in mortgage debt, over $1 trillion in auto financing and over $1 trillion in student loans. A substantial amount of any mandated increase in wages is going to have to go toward those obligations. An increase in minimum wage is just as much a increase in returns to lenders as it is a spur to demand. It’s good for the banks.