The minimum wage and the Great Recession

by on January 4, 2016 at 10:40 am in Current Affairs, Data Source, Economics, Law | Permalink

I believe Card and Krueger will and should win Nobel Prizes, but their work is also not the last word on the minimum wage, especially during weak labor markets.  Here is the most recent study, by Jeffrey Clemens:

I analyze recent federal minimum wage increases using the Current Population Survey. The relevant minimum wage increases were differentially binding across states, generating natural comparison groups. I first estimate a standard difference-in-differences model on samples restricted to relatively low-skilled individuals, as described by their ages and education levels. I also employ a triple-difference framework that utilizes continuous variation in the minimum wage’s bite across skill groups. In both frameworks, estimates are robust to adopting a range of alternative strategies, including matching on the size of states’ housing declines, to account for variation in the Great Recession’s severity across states. My baseline estimate is that this period’s full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group’s employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.

Do any of you see an ungated version?  In any case I hope this receives the media attention it deserves.  Will it?

1 David K January 4, 2016 at 11:02 am
2 JWatts January 4, 2016 at 11:15 am

Thanks!

3 jim jones January 4, 2016 at 5:00 pm

Surely Tyler is an employee of the U.S. federal government and therefore entitled to a free download?

4 KevinH January 4, 2016 at 11:12 pm

is “0.49 percentage point decline in employment across the full population ages 16 to 64.” supposed to be big? Even the 5.6 percentage points for 16-30 with less than a highschool ed seems less than most minimum wage increases. Since we are dealing with what is supposed to be a form of broad wealth transfer, shouldn’t the discussion pivot around % unemployment gain for % wage increase?

5 Swami January 5, 2016 at 10:44 am

As a person who spent a career actually hiring people, can I ask all you economists a general question?

You are aware that most minimum wage earners work by the hour right? And that when the minimum wage rises it has ZERO direct impact on numbers of workers and thus unemployment, right? What businesses do is NOT reduce the number of workers, we reduce the number of hours per worker. This leverages the reduced bargaining power of the workers (as predicted by the theory) and gives us fewer hours AND a more flexible work force (in general we prefer more workers competing for each hour). If any economist is tracking unemployment, rather than hours worked they are making a laughing stock of the profession.

But reducing hours per worker isn’t all we do. We also can reduce benefits, change the caliber of worker (advantaging the skilled vs unskilled), increase job demands, reduce OJT, raise prices, reduce costs elsewhere in the business, reduce long term investment and slowly investigate ways to replace workers with automation.

Let me be crystal clear. I would be absolutely amazed if small changes in minimum wage had clear measurable impacts on short term unemployment. Anyone who assumes it would is reducing the complexity of business to fit a silly model.

The theory is correct that increases in minimum wage are extremely unlikely to improve the lives of the lowest skilled workers. Indeed I would strongly expect the long term effects of larger increases to be quite cancerous for them.

If economists have oversimplified this situation to a higher min wage reduces employment, then the reason for disarray on the topic is that you have absolutely failed to frame the issue properly. Shame on the profession.

6 stan January 5, 2016 at 4:46 pm

No surprise. Motivated thinking does that. Lefty economists (a majority in the academy) want to produce studies which support lefty politics. Framing the issue properly would hurt lefty politics.

7 Jeffrey Deutsch January 6, 2016 at 8:04 pm

Interesting points, Swami.

We understand that cutting wages (whether per hour or per week/month.year) is generally considered worse than cutting workers themselves. The latter at least allows the employer to choose just which workers to let go, whereas the former stimulates the best workers to leave first and reduces morale among the rest.

What do you think?

8 Swami January 7, 2016 at 10:15 am

It depends. I have repeatedly faced issues where we needed to reduce expenses or hours. You are right that sometimes it is best to choose the ones we let go, especially when there are clear skill differences.

With lower skilled workers and artificial increases in supply and artificial barriers reducing demand, the optimal strategy is often to leverage the supply/demand power imbalance and keep a larger workforce with fewer hours worked per worker. Do note that the manager effectively selects for worker quality with deciding who gets the shift. Worse workers may not be let go completely, but they get less work and are more likely to be used in times of heavy demand.

9 Jeffrey Deutsch January 7, 2016 at 7:10 pm

Thanks, Swami.

Why would employers not want to leverage their power by instead laying off people? Are they possibly, like people who have A-list friends and B-list friends, keeping A-list workers on for reasonably shifts and holding the B-listers back as reserves for crunch times? (Especially given how many retail and other firms use “flexible scheduling” these days, so workers never know when they are or aren’t working more than a day or two out, if that.)

10 buford January 4, 2016 at 11:06 am

He uses US _states_ as his units of analysis in his “natural comparison groups”, and you think this is clever? Entities like New York and Wyoming, California and North Dakota?
Good golly gosh, you economists sure are funny- you do love some baroque methodologies in the service of conservative ideology. Cargo-cult science & genuflection.

11 Brian Donohue January 4, 2016 at 11:11 am

Yeah, putting a floor on a price doesn’t inhibit demand, say the non-cargo-culters.

12 Gochujang January 4, 2016 at 11:21 am

500 million workers have been added to the global economy in the last 20 years, with wages around $1.

Most of the time Americans treat free trade and the impact of a workforce larger than the US as a whole as a separate issue. They ignore THAT price floor.

I am sure these authors think they’ve normalized that impact, but I doubt that they really have. There are many more gears turning. Even in this short timeframe, all else did not remain the same.

Long term we will have to decide if we can prop wages, in the face of free trade, or if we should chuck it all and re-embrace welfare.

13 Brian Donohue January 4, 2016 at 12:23 pm

I don’t think you understand what a price floor is.

And I have no idea what you mean be “re-embrace welfare”.

http://www.fns.usda.gov/sites/default/files/pd/SNAPsummary.pdf

14 Harun January 4, 2016 at 12:48 pm

But free trade has been around for a while. So I think you could still compare regions and be okay.

Its like car racing…do we need to worry about the speed of the earth hurtling through space? No, because international trade has been strong for decades now.

I think you’re point would be more important during inflection points when factories are being shuttered.

If anything, rising costs in China have now had a lot of companies on-shoring.

15 Floccina January 4, 2016 at 2:39 pm

But as real wages in China rise faster than in the more developed countries that problem you mentioned will go away.

16 Gochujang January 4, 2016 at 5:31 pm

I don’t know why post recession job growth would be limited that way, nor as I say, uniform across states.

Every venture faces a here or there decision.

I suppose you could argue that a California minimum wage at $9 rather than $7 influences people like Apple actually choosing $2 in China, but I think that would bending reality to fit the narrative.

Apple is choosing $2 in order to have $2 wages.

17 Gochujang January 4, 2016 at 5:39 pm

Note that Apple further succeeds, ships more new products, and adds manufacturing in China.

This is not just an 80’s story.

18 buford January 4, 2016 at 11:24 am

Particular sources of cargo-cult comedy gold are:
Figure 1, showing the “unbound state” (every high employment state except Texas), and “bound” state” (every low employment rural state) groups; that these very not-comparable group employment profiles correspond very strongly to “where Democrats dominate” and “”where Republicans dominate” escapes discussion except “Republican-leaning states were much more likely to be bound by the recent increases in the federal minimum.” For some reason, the authors do not cite Kipling’s “Just So Stories” on this point.
Footnote 5 (“All series are weighted by state population so as to reflect the weighting implicit in our individual-
level regression analysis”- well, _that_ will certainly adequately control for all differences among labor markets in NY, California, and other “unbound” states, and North Dakota, Tennessee, etc in the “bound” states.
A conclusion the authors could adequately support based on the data they present, but which escapes them, is that republican policies are disastrous for working people.

19 Cliff January 4, 2016 at 11:57 am

The fact that you think that conclusion could be “adequately supported” vitiates anything else you have to say.

20 buford January 4, 2016 at 12:07 pm

Shorn of all the smoke and mirrors, the paper shows that workers in Republican-dominated states (the “bound” group) fared much worse than those in Democratic-dominated states (the “unbound” group) during the greatest recession of the post-war era- have you actually read the paper?

21 Cliff January 4, 2016 at 6:15 pm

I certainly think you would have to have some evidence of Republican policies and then some connection between those policies and some economic effect to adequately support the conclusion you believe.

22 JWatts January 4, 2016 at 11:19 am

“He uses US _states_ as his units of analysis in his “natural comparison groups”, and you think this is clever? ”

Since, states often set their own minimum wages at different level, this seems pretty logical.

“Entities like New York and Wyoming, California and North Dakota?”

Minimum wages: New York-$8.75, Wyoming-$7.25, California-$9.00

23 Gochujang January 4, 2016 at 11:22 am

How do you account separate vulnerability to outsourcing?

24 JWatts January 4, 2016 at 11:29 am

“How do you account separate vulnerability to outsourcing?”

That’s an appropriate criticism and might be significant, but it hardly means the paper is an example of “Cargo-cult science & genuflection.” Valid critiques are useful, however ideological rants are generally worthless.

25 Cooper January 4, 2016 at 12:06 pm

How many jobs paying $6.75/hour are subject to outsourcing?

These aren’t manufacturing jobs typically. They’re maids, retail clerks, fry cooks, etc.

26 Harun January 4, 2016 at 12:50 pm

and while some manufacturers need low wage labor, those mostly have moved back in the 80’s and 90’s if not 70’s.

27 Gochujang January 4, 2016 at 5:36 pm

The low training, locally tied, jobs aren’t that good. They are more visible that that huge number though, the 500 million jobs created, many of which do stock our stores, reduce onshore labor demand, contribute to missing inflation.

28 AIG January 4, 2016 at 1:03 pm

Huh? What should the unit of analysis be, if not states? Changes in minimum wages are at the state level.

29 adam January 4, 2016 at 5:01 pm

The famous Krueger-Card study also used states as the units of analysis (in that case only two of them). Since states are the ones that usually set minimum wages, it’s pretty obvious why you’d use that as the unit. The only other option is cities, but most cities can’t or don’t set their own minimums separate from the state minimums.

30 besttrousers January 5, 2016 at 9:02 am

“The famous Krueger-Card study also used states as the units of analysis – See more at: http://marginalrevolution.com/marginalrevolution/2016/01/the-minimum-wage-and-the-great-recession.html#comments

Nope. Stores are the unit of analysis. It ses the border discontinuity as a source of variation.

31 jamman January 5, 2016 at 7:07 pm

Since Wage rates are set at the state level, of course he would

32 prior_test January 4, 2016 at 11:10 am

‘will and should win Nobel Prizes’

In literature or the Nobel peace prize? Pretty hard to imagine them winning in medicine, physics, or chemistry.

33 JWatts January 4, 2016 at 11:20 am

http://dilbert.com/strip/2015-04-02

Well, I guess we know which character prior_test is in the Dilbert comic strip.

34 TMC January 4, 2016 at 11:53 am

I almost agree with prior here (not his actual point, but..)

Card and Krueger are talented economists, but there should be points taken off any Nobel bid for their work on the effects of minimum wages. Their poorly done study has done more damage to low wage earners than most economists can do in a lifetime.

35 Swami January 4, 2016 at 1:21 pm

Merely a few million cracked eggs in the greater omelette of progressive ideology!

36 msgkings January 4, 2016 at 2:39 pm

You forgot the Nobel for economics, obviously that’s the one they’d win.

37 required January 4, 2016 at 11:21 am

We know that less than 30% of the individual ages 16-30 have less than high school diploma and 5.6% of 30% is 1.68% of the individual ages 16-30. So this affects the bottom one percent of the age range, or about half a million people.

38 JWatts January 4, 2016 at 11:32 am

Ergo, a pretty significant group of people population wise. However, by the nature of the issue, they’ll tend to be poor, young and disproportionately minorities. So, politically they are an insignificant group.

39 required January 4, 2016 at 11:49 am

So, if taken to the extreme, it is okay to kill one person to improve the lives of 640 other people?

Politically, kill is too strong of an action, but forced into poverty is okay by politicians since it is 1 vs 640 or there about.

40 Cliff January 4, 2016 at 11:58 am

How did you come up with 640?

41 JWatts January 4, 2016 at 12:04 pm

My personal belief is that the Federal minimum wage does more harm than good. The income levels are too disparate across the US to make it useful. If it’s high enough to be effective in New York, it’s going to be devastating to low skilled workers in Mississippi.

I’d much prefer to see the EITC raised. If US Federal taxes were raised across the board by 0.5% to every tax bracket it would provide enough money to double the amount provided by the EITC.

42 AIG January 4, 2016 at 1:01 pm

Apparently you don’t realize that the costs of a minimum wage increase aren’t simply the decrease in employment.

43 ohwilleke January 4, 2016 at 3:09 pm

If the average wages paid to people 16-30 with less than a high school diploma increases by enough to offset the 5.6% drop in employment (roughly 50-60 cents), thus significantly increasing the aggregate wages paid to people in this demographic, is this a good thing or a bad one?

Another approach that would have macroeconomic effects would be to increase the size of the Army and allowing people in this demographic (who are mostly rejected by the Army today) to enlist into units with relatively low priority missions, decreasing the size of this part of the civilian workforce, providing training and discipline and income support and long term eligibility for benefit, and perhaps making this part of the Army available to missions like responding to overflowing levees during floods. It would also improve our ability to provide a credible threat of military force in our diplomacy even if it is never used.

44 rayward January 4, 2016 at 11:33 am

Here is the link to David Neumark’s summary of the research regarding the minimum wage and unemployment. http://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/ I got the link from Mark Thoma’s blog. Thoma: “David Neumark is a credible researcher and I will let him make the case that an an increase in the minimum wage may not be benign”.

45 Jan January 4, 2016 at 11:44 am

Time for a massive increase in EITC….right, conservatives?

46 required January 4, 2016 at 11:58 am

Min Wage – take from upper middle class (only low wage workers and low salary workers get rises, but owners get loses in the short run) and give in to the working class, with about half a million of unskilled labor getting kicked out of their job. Getting rid of the bottom one percent. Cut the social mobility between upper middle and upper class.

EITC – take from the lower middle class and give it to the working class improving the employment rate but cut away the social mobility between lower middle and upper middle class.

47 Cliff January 4, 2016 at 11:59 am

How does EITC take away from lower middle class?

48 Cooper January 4, 2016 at 12:05 pm

EITC, like all federal programs, comes from the top 10% who pay 2/3 of all federal income taxes and will pay virtually all of the new tax hikes over the next twenty years.

49 Ethan Bernard January 4, 2016 at 12:37 pm

Such an outrage! The top 10% makes almost half the income, and owns 3/4 of the wealth.

50 adam January 4, 2016 at 5:03 pm

When Willie Sutton said that he robbed banks because that’s where the money is, he wasn’t trying to make a moral point.

51 Cliff January 4, 2016 at 6:22 pm

But the 10% is not where the money is, as Europe well knows.

52 required January 7, 2016 at 5:46 pm

The lower middle class has a household income from 75 percentile to 95 percentile; the upper middle class has a household income from 95 percentile to 99 percentile. The upper class consist of the one percent or the 100 percentile.
In statistics, we use natural number so percentile range from 1 percentile to 100 percentile, but idiots start from 0 percentile and go to 99 percentile.

See income range under JWatts’ comment.

53 JWatts January 4, 2016 at 12:07 pm

“EITC – take from the lower middle class and give it to the working class improving the employment rate but cut away the social mobility between lower middle and upper middle class.”

To enlarge Cliff’s question, how does it take from the lower middle class, more than any other group and how does it reduce social mobility?

54 required January 7, 2016 at 5:32 pm

GDP per worker is $110,000, compared to GDPPC of $40,000, is a better metric of the average or mean worker. Given that the correlation of spousal income of 0.7 (source?) would put an average household of $187,000 or there about. So lower middle class is from $90,000 to $190,000 and upper middle class is from $190,000 (mean and 95 percentile nationally) to $280,000 (95 percentile NYC).

There’s a huge difference between mean and median reference.
With median reference, $50,000 as median income, so $45,000 to $85,000 is lower middle and $85,000 to $170,000 is upper middle for households.

55 JWatts January 4, 2016 at 12:12 pm

“Time for a massive increase in EITC….right, conservatives?”

That’s a pretty poor attempt at trolling.

Jeb Bush – “Bush recently introduced a tax plan that included a proposal to expand the EITC.”

Chris Christie – “But in June 2015, he supported a measure to the EITC and even negotiated with the legislature to further expand the credit to its highest level since he took office.”

Ted Cruz – “Sen. Cruz introduced a tax plan to reduce income and business taxes but keep the CTC and expand the EITC.”

John Kasich – “Kasich announced his tax reform plan, which included a measure to increase the EITC by 10 percent.”

56 Jan January 4, 2016 at 1:11 pm

Not trolling and well aware that is what’s been said by a number of “conservatives.” Is it real? Let’s see if either of the R majorities in Congress are willing to make it happen. Do commentors here support it?

57 JWatts January 4, 2016 at 5:21 pm

Your first post implies that Conservatives are against raising the EITC. When I posted contradictory evidence you moved the goal posts. Now your attempting to imply that Conservatives who say they are for raising the EITC are lying. Yes, you are trolling.

58 Jan January 4, 2016 at 6:42 pm

I implied it because they are lying about it. They aren’t doing shit about. The proof is in the pudding.

59 Jan January 4, 2016 at 6:43 pm

EITC is their typical response when they want to pretend they give a damn about low-wage earners and the unemployed.

60 JWatts January 4, 2016 at 11:14 pm

“I implied it because they are lying about it. They aren’t doing shit about. The proof is in the pudding. ”

That remark bears little resemblance to the facts. The EITC was proposed and originally passed by the Republican Ford Administration 1975), expanded by the Republican Reagan Administration (1986), expanded again by the Republican Bush Sr Administration (1990), expanded again by the Democratic Clinton administration with Republican support. In addition a further expansion of the Child Tax Credit was part of the Republican Congressional “Contract with America” in 1994 and passed by Democratic President Clinton in 1995. The EITC was expanded again under Bush Jr in 2001 and then under Obama in 2009.

So, a Republican President created it and every President since has expanded it.

https://en.wikipedia.org/wiki/Earned_income_tax_credit

https://en.wikipedia.org/wiki/Contract_with_America

61 Jan January 6, 2016 at 7:29 am

A Republican president, or a Democratic Congress?

62 Jan January 4, 2016 at 1:18 pm
63 Ricardo January 4, 2016 at 9:18 pm

Nice editing job. Here is the full text of the source on Chris Christie (http://www.taxcreditsforworkingfamilies.org/the-2016-presidential-race-where-the-candidates-stand-on-tax-credits/) you appear to be quoting with a couple of other candidates thrown in:

“Gov. Christie has had a love-hate relationship with tax credits. In 2010, he signed legislation to reduce New Jersey’s EITC and then vetoed the restoration of the credit in 2011, 2012, and 2013. But in June 2015, he supported a measure to the EITC and even negotiated with the legislature to further expand the credit to its highest level since he took office. He has not announced his federal tax policy platform.”

“Fiorina hasn’t announced her plans for the EITC and CTC.”

“Paul’s campaign website confirms that the senator would pursue a flat tax system if elected president. His plan, “EZ Tax,” would tax all Americans at 17% and eliminate most deductions and tax credits. Although the website does not specify what effect the plan would have on the EITC and CTC, in 2012, Paul proposed a budget that would strip the EITC and CTC of refundability, while his 2013 budget proposal axed the credits altogether.”

“Rubio is an outspoken critic of the tax code and previously favored expanding the EITC to childless workers. Recently, he and Sen. Lee (R-Utah) announced a tax plan that would comprehensively alter the tax code by eliminating the EITC and expanding the CTC.”

“Donald Trump released his tax plan, which aims to “provide tax relief for middle class Americans” but makes no mention of tax credits for working families.”

64 Urstoff January 4, 2016 at 12:17 pm

Clearly conservatives could have objections to the EITC, but, at least for the left, talking about the EITC rather than the minimum wage is at least intellectually credible.

65 Jan January 4, 2016 at 1:15 pm

I don’t necessarily agree with the methodology and all the findings of this paper, but any reasonable person can see that there is a point at which continuing to raise the minimum wage has diminishing returns and then harmful effects.

The question is whether those who say they believe low income earners and the involuntarily unemployed need help (but NOT an increase in minimum wage) are willing to implement a policy that most agree would help accomplish that.

66 Urstoff January 4, 2016 at 2:11 pm

Indeed, which is why support for the minimum wage comes from a place of ignorance or from a place more concerned with anti-corporatism than with helping the poor. The former probably covers the vast majority of cases; people think it’s obvious that the minimum wage helps, so they put no effort into looking into the empirical literature, which is muddled at best. Of course, this type of politically-motivated incuriosity is itself a dangerous attitude.

67 besttrousers January 5, 2016 at 9:05 am

That doesn’t explain why top empirical labor economists (eg Acemoglu, Autor, Card, Goldin, Katz, Krueger) supprt increasing the MW.

68 Nathan W January 5, 2016 at 3:54 am

The case is not closed. Plenty of studies also find that the disemployment effect is negligible or even contrary to expected.

69 Bob from Ohio January 4, 2016 at 12:39 pm

Very conservative to increase a program with a 25% fraud rate.

“The IRS has estimated that between 21% and 25% of this cost ($11.6 to $13.6 billion) is due to EITC payments that were issued improperly to recipients who did not qualify for the EITC benefit that they received.”

Its just welfare anyway.

“However, because the pre-tax income determines eligibility for most state and federal benefits, the EITC rarely changes a taxpayer’s eligibility for state or federal aid benefits.”

Receive benefits and pay no taxes on wages. Very conservative.

70 Jan January 4, 2016 at 1:20 pm

Not sure why so many conservatives call it a commonsense incentive to work, if “it’s just welfare anyway.”

But to your first point, I’d assume you think the IRS should be given more resources to enforce the law and stamp out fraud in EITC? IRS funding gets huge bang for the public dollar in recouped taxpayer money–well demonstrated. What do ya think?

71 Bob from Ohio January 4, 2016 at 1:48 pm

Conservatives pander on the issue because it is slightly less “welfare smelling” and they do not want to be considered “heartless”.

My solution to the first point is to end the program. No free money, no fraud, no need to hire more bureaucrats.

72 Jan January 4, 2016 at 6:48 pm

Assuming income tax cannot be abolished, are you against the idea of progressive taxation in any form? Or any kind of tax breaks?

73 ohwilleke January 4, 2016 at 3:12 pm

Calling inaccurate EITC applications fraud fails to recognize the difficulty involved in having the least bureaucratically able people in society fill out some of the most complicated tax forms used by wage and salary employees. Programs that serve large numbers of functionally illiterate people need to be much less complicated if we want any degree of accuracy in voluntarily determining the correct numbers. An EITC form is pretty much similar in degree of difficulty to a depreciation schedule.

74 Alan January 4, 2016 at 3:03 pm

Libertarian vote for yes here.

75 Dan Weber January 4, 2016 at 6:50 pm

I’d vote for my taxes to go up to fund an increased EITC. Discouraging low-skill employees from being in the workforce doesn’t benefit anyone.

76 Cowboydroid January 5, 2016 at 1:24 am

Nobody votes for a tax increase on themselves. We can safely assume you’re lying.

Encouraging low-skill employees to participate in the workforce is best accomplished through market wages, not some confused government metric for awarding vague “bonuses” derived from taxes paid by others.

77 Nathan W January 5, 2016 at 3:57 am

What about all of those billionaires who support parties who do not lower taxes on the rich? Are they lying too?

78 Cowboydroid January 7, 2016 at 1:11 am

Yes, because everyone and their dog knows that those billionaires are not actually going to pay a higher tax rate. They will employ professionals whose entire jobs are to look for ways to reduce the tax burden.

79 Mo January 4, 2016 at 12:37 pm

What gets me about this study is there have been tons of studies on minimum wage and unemployment rates and none of them have shown increases to unemployment that are within a country mile of this magnitude. If this was the true impact, wouldn’t any one of the other countless unemployment studies picked them up?

80 whateverfor January 4, 2016 at 12:55 pm

Were those studies all on adults? Minimum wage hikes affect teenagers much more than working adults for obvious reasons. Let’s see, if 80% of Americans graduate high school and we assume that the age distribution is constant from 16-30, about half the group of 16-30 year olds without degrees are teenagers still in high school. So the results seem reasonable on their face, even though 16-30 is a pretty useless grouping.

81 Mo January 4, 2016 at 2:17 pm

Yes, quite a few of them look solely at teen employment. Neumark and Wascher, Card, Katz, and Krueger, and Wellington all looked at the impact on teen employment. The thing that makes this seem way out of whack is that the bearish case for the minimum wage was that a 10% increase reduces employment by 1-3%. This study is showing an impact of about 5x those levels.

82 JWatts January 4, 2016 at 5:15 pm

“that a 10% increase reduces employment by 1-3%”

The linked paper says: “Between July 23, 2007, and July 24, 2009, the federal minimum wage rose from $5.15
to $7.25 per hour. … reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points.”

Both statements can be true, they don’t inherently contradict each other.

83 mulp January 4, 2016 at 6:02 pm

The minimum wage for starter workers, most teens, but not just teens, was not raised to $7.25:
“A minimum wage of $4.25 per hour applies to young workers under the age of 20 during their first 90 consecutive calendar days of employment with an employer, as long as their work does not displace other workers. After 90 consecutive days of employment or the employee reaches 20 years of age, whichever comes first, the employee must receive a minimum wage of $7.25 per hour effective July 24, 2009.” DOL

So, why aren’t teens the first to get hired? $3, 40% less in labor costs should create really high demand for teen workers with no bad habits from previous jobs.

Just got to create the incentives for parents providing car service for their kids earning about $10 for every round trip to from work to spend the $10 in car cost plus free driver labor. At $4.25 an hour, no kid is going to be able to afford to buy a car and insure it, and taking them to get a drivers license means higher insurance premiums on the family car.

84 Mo January 5, 2016 at 2:11 pm

5.6 percentage points represented about 35-40% drop in the percent employed.

85 Jay January 4, 2016 at 1:00 pm

Can you point us to some rather than just declare that there are “tons” with similar methodology and scope?

86 Mo January 4, 2016 at 2:18 pm
87 Cowboydroid January 5, 2016 at 1:26 am

You’re assuming all those others studies have a significant amount of diversity. Perhaps they were all attempts at taking very similar measurements and were not sufficiently differentiated in methodology.

88 Harun January 4, 2016 at 12:54 pm

People criticizing the use of widely disparate states to do to this should consider what that implies.

It strongly implies that there should be no federal minimum wage, and that if there are minimum wages they should be by state or even city.

Just because national level politicians want to use this issue to gain support doesn’t mean its really a good idea at the federal level.

89 Denis Drew January 4, 2016 at 2:32 pm

FUN TIME:

I’ve been thinking that minimum wage advocates should launch a national challenge to minimum wage opposition researchers (e.g., Richard Neumark) — daring them to admit that minimum wage hikes very well may (actually) cost job losses in the middle income range.

As I theorize, some money spent on (diverted to) higher prices for low income produced products would have been spent on middle income produced products — had not the minimum wage risen. This is based on the assumption that people in different income ranges tend to spend somewhat disproportionately for products produced by employees in their own income range.

Allow me to cite: from a 1/ll/14, NYT article “The Vicious Circle of Income Inequality” by Professor Robert H. Frank of Cornell:
“… higher incomes of top earners have been shifting consumer demand in favor of goods whose value stems from the talents of other top earners. … as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.”
http://www.nytimes.com/2014/01/12/business/the-vicious-circle-of-income-inequality.html?src=me&_r=0

The fun is: if we can get minimum wage “opo researchers” to admit that min wage increases very possibly mean money and jobs are lost to middle income earners, they are forced to admit min wage increase must help low income earners overall. Our position is unassailable (in public debate credibility) because it admits (is based upon!) admitted job loses caused by higher min wage.

What a hell for “opos”?! :-0

90 mulp January 4, 2016 at 5:17 pm

I suggest that you do the research by getting everyone you know, especially those who cheer Trump, to go to their boss and say “I’m paid to much just like Trump says, so cut my pay to boost gdp growth!”

91 spencer January 4, 2016 at 4:17 pm

Even the Neumark study recently published recently by the San Francisco Fed estimates that the minimum wage has a much, much smaller impact on low wage employment.

Neumark is probably the most widely respected strong opponent of the minimum wage.

Interesting, Marginal Revolution has not linked to the recent Neumark paper. Anyone know why?

92 Dan in Euroland January 4, 2016 at 5:02 pm

This most recent study uses a new approach and finds a significant result. Perhaps the paper is wrong, all TC is doing is passing it along. If you are so concerned with TC’s article selection perhaps start your own blog or provide your email to TC so that he can confirm what he should post with you first.

Don’t like the study, then debunk it (which is what makes comments interesting.) Saying that the OP should have posted something else is just silly.

93 Cowboydroid January 5, 2016 at 1:31 am

A small change in the minimum wage will have a small impact. A large change will have a large impact. A new federally mandated minimum wage of $30/hr would have an enormous impact on the economy. It is difficult to measure directly just how much employment today is caused by today’s minimum wage, but we know its effect is decreased over the years as the currency is debased and it remains the same.

94 spencer January 4, 2016 at 4:20 pm

P.S. There is a very strong tendency for minimum wage increases to be voted in late in the cycle,
so most increases actually coincide with weak labor markets.

95 mulp January 4, 2016 at 5:15 pm

With a low minimum wage, welfare for older workers with kids pays more than offered jobs, so the jobs go to single younger workers especially teens. But gdp growth is nonexistent or slow because incomes are stagnant or declining as middle class jobs are replaced by lower wage jobs.

After all, paying workers is punished by the lack of high tax deductions for paying workers – if the business marginal tax rate is 20%, cutting labor costs means an 80% increase in progits, so even if revenue falls by 50% of the cut labor costs, the firing of workers results in 30% of those saved labor costs flowing to profits net of lost revenue.

Of course, welfare costs increase, but with the tax cuts, government must borrow, and that promotes printing money, or the conversion of profits into debt to fund consumption spending to support the high profits from cutting labor costs which cuts consumer spending.

Raising the minimum wages, reduces welfare costs by making work more rewarding than welfare leading to increased consumer spending, often funded out of necessity by debt, generating high rents extracted from these low wage workers, squeezing their consumption spending, thus holding down gdp growth. Charging 25-35-100% interest on debt to low income workers means their income does not go to anything that pays labor costs in the US, so higher wages does not increase gdp to keep the jobs open for teens and other single workers who then are forced to live off parents, etc, and low marginal costs.

Basically, economists have embedded in every aspect of business and economic policy the Paradox of thrift leading to the active promotion of low growth policies, but based on the promise that high profits and higher wealth from every greater thrift will lead to high growth because everyone else will suddenly spend money they do not have like crazy.

96 Chip January 4, 2016 at 5:36 pm

Increasing labor costs in the teeth of a storm of automation is like planting a flag in quicksand.

97 Nathan W January 5, 2016 at 4:00 am

Labour will be worth more when combined with machines/robots, hence higher wages can be afforded.

That’s what happened in the 60s, anyways, right? Everyone thought the jobs would all disappear, but then there was more and better employment than ever?

98 Sam January 4, 2016 at 6:26 pm

The usual narrative in economics is that a minimum wage imposition is a price floor. And like all price floors, it increases quantity (of labor) supplied and decreases quantity demanded, creating unemployment (countless assumptions are hand waved away in the standard presentation). This is what is taught in Econ 101 as if it’s an immutable economic law (check the Mankiw textbook for instance). This narrative is based on basic and useful economic theory, but not on empirical evidence. The Card and Krueger paper on the impact of minimum wage changes on unemployment in New Jersey is a corrective to this simple narrative. Tyler is misleading here by implying that it is the CK paper that is the standard narrative in economics.

99 Cowboydroid January 5, 2016 at 1:36 am

There is most certainly empirical evidence that putting a price floor on the cost of labor results in an oversupply and thus an underutilization, aka unemployment.

The laws of economics are not subject to dismissal. We live in a world of tradeoffs, not infinite wealth.

100 Nathan W January 5, 2016 at 4:03 am

Isn’t it good for businesses to have a pool of labour available who are currently looking for work? Moreover, when there is unemployment and people can’t just get a job the next day, they are more careful to work hard and keep the job they have.

101 Cowboydroid January 7, 2016 at 1:16 am

It benefits hiring managers to have a pool of talent with which they can be selective. And that’s what minimum wages accomplish, by inflating the labor supply at a price point and thus offering hiring managers a greater selection. This does not benefit those who are left unhired as a result of not meeting the higher qualifications.

Sure, when someone is lucky enough to get a job in a market with high unemployment, they generally do what they can to keep that job. That benefits them only, not those who didn’t get the job.

102 Jeffrey Deutsch January 7, 2016 at 6:30 pm

If we’re going to discuss welfare effects…what about everyone’s interest, as consumers (and also for some people, as downstream producers), in better workers?

Even those who have to search longer for jobs and/or settle for worse ones (in terms of pay, working conditions, field, location or what have you) thanks to wage floors*

[*] Formal minimum wages are one way to accomplish this. As Edward Banfield pointed out in The Unheavenly City, sometimes many workers themselves hold informal minimum wages, higher than the formal ones.

(I don’t use the term “reservation wages” because that implies individual utility maximization, whereas the informal minimum wages Banfield spoke of are more like social norms that bind at least as tightly as laws, even if enforced differently.)

Finally, employers may use above-market-clearing efficiency wages themselves precisely for reasons described by Carl Shapiro and Joseph Stiglitz in their 1984 American Economic Review piece: “Equilibrium Unemployment as a Worker Discipline Device.”

103 Jeffrey Deutsch January 7, 2016 at 6:44 pm

If we’re going to discuss welfare effects…what about everyone’s interest, as consumers (and also for some people, as downstream producers), in better workers?

Even those who have to search longer for jobs and/or settle for worse ones (in terms of pay, working conditions, field, location or what have you) thanks to wage floors* may prefer this regime to one in which they have to deal with lousy service and worse product quality. Keep in mind that bad service or defective products can mean anything up to and including life-altering injuries and death.

Not to mention over the last few decades we (at least in the U.S.) have started to oversee employment decisions big-time. If your worker (managerial or rank-and-file) is accused of sexually harassing someone, discriminating against minorities, skimming a customer’s credit card and then forging a new one, threatening or committing workplace violence, etc., expect to be questioned at length, in public or at least in publicly accessible form, and quite possibly under oath, with lawyers’ fees mounting and the possibility of a public trial and a ruinous judgment against your employer and even against you personally. Under those circumstances, of course you’re going to be even more concerned about the quality of everyone you entrust with the company’s good name and future.

Not to mention of course the citizenry at large benefits from presumably less sexual harassment, discrimination, credit card fraud, violence at work, etc.

[*] Formal minimum wages are one way to accomplish this. As Edward Banfield pointed out in The Unheavenly City, sometimes many workers themselves hold informal minimum wages, higher than the formal ones.

(I don’t use the term “reservation wages” because that implies individual utility maximization, whereas the informal minimum wages Banfield spoke of are more like social norms that bind at least as tightly as laws, even if enforced differently.)

Finally, employers may use above-market-clearing efficiency wages themselves precisely for reasons described by Carl Shapiro and Joseph Stiglitz in their 1984 American Economic Review piece: “Equilibrium Unemployment as a Worker Discipline Device.”

PS: I’m sorry — I wish there was an edit and/or delete feature here.

104 Cowboydroid January 5, 2016 at 1:37 am

In addition, the law of supply and demand is taught in introductory courses because it is the foundation of economics. If a budding economist hopes to have a decent career, he better understand the fundamentals. The fundamentals do not disappear upon further inspection or study.

105 Sam January 5, 2016 at 6:01 am

My point is that just because something is taught as a ‘fundamental economic law’ does not mean it holds everywhere and every time. This is social science, not the physical sciences. There are countless scenarios where a price floor would increase quantity supplied and reduce quantity demanded. But the basic set-up and presentation of a minimum wage effect based on that theory goes over many assumptions which do not stay still in the real world. There are differences in industries, institutions, labor quality, etc. that the simple version of the theory glosses over when wielded in policy discussions. It is not to say that the theory is wrong or useless. It is a useful theory when people are clear about the implicit assumptions that are not usually stressed when individuals wield the theory to oppose minimum wage increases.

106 Cowboydroid January 7, 2016 at 1:29 am

That’s kind of why it’s referred to as a law – because it holds everywhere and every time. The laws of supply and demand do not ever disappear. This is social science, but that doesn’t mean we can simply dismiss economic law when it is inconvenient to our argument.

The logic of price theory applies to wages just as much in theory as it does in practice. If the evidence you claim to discover conflicts with the theory, then you need to examine your methodology and interpretation. If a scientist in the physical sciences discovers during an experiment that the law of gravity was violated, he does not first claim that the law of gravity sometimes does not apply, for whatever reason. He rigorously examines his methodology and interpretations for errors. He only resorts to cautiously dismissing the law of gravity after all other alternatives have been thoroughly exhausted. And of course, he does not ever approach an experiment with the assumption that the law of gravity will not apply.

The purpose of theory is to provide an accurate understanding of how the world operates, and to allow for accurate representations of the past and accurate predictions of the future. If the theory doesn’t hold in the real world, then there really is no purpose in it. A theory which only holds some times but not others is really quite useless.

107 besttrousers January 5, 2016 at 9:08 am

“The fundamentals do not disappear upon further inspection or study.”

No one is claiming they do. However, if there are search frictions in the labor market(which is true) you’d expect that individual firms would be facing a non-vertical labor supply curve. Hence, they would have bargaining power and be able to push wages below MPL.

If you took Econ 101 you should recall learning about how a monopoly will set prices too high – in which case a price ceiling would increase the market’s efficiency. This is the converse.

108 Cowboydroid January 7, 2016 at 1:18 am

So you’re assuming a monopsony. Do you have any evidence of monopsony power in the labor market?

109 stan January 5, 2016 at 10:00 pm

The C and K paper is used and abused and stretched way beyond any realistic application.

110 Benjamin Cole January 4, 2016 at 7:39 pm

Shouldn’t push-cart vending be universally legalized?

111 Jon January 4, 2016 at 8:18 pm

I wonder is Tyler could explain his criteria for determining which papers should get a lot attention. Is it that they have dramatic results? That they support his viewpoints? Both?

Does Tyler assess and endorse the quality and robustness of the methodology and its interpretation before making recommendations?

112 Jon January 4, 2016 at 8:20 pm

I’ve seen too many studies with eye-popping results and “shout it from the roof tops” recommendations here, only to find that the methodology is suspect or does not really support the implications being made.

113 michael hussey January 4, 2016 at 10:29 pm

Income is strongly correlated with IQ/intelligence — and there is good reason to think there is a causal link.

Are there any studies that look at the effects of a minimum wage on people of varying IQs? There’s good reason to think the benefits and/or costs of a min. wage hike might not be equally distributed across the measured population.

114 Cowboydroid January 5, 2016 at 1:43 am

There is a loose correlation. There is the obvious causal link that the product of an intelligent person’s labor will likely be more valuable to others than the product of an unintelligent person’s labor. However, this does not always hold. Many intelligent people have no motivation to be especially productive (janitors with PhDs), and many unintelligent people just happen to be extremely productive at some particular activity that others value greatly (many professional athletes).

There’s probably not much to learn from the effects on varying IQs. It takes a lot more than an IQ to productively participate in the economy.

115 michael hussey January 5, 2016 at 11:42 am

The correlation between IQ and income is by no means loose. Obviously, there are exceptions at the individual/micro level. But the macro correlations are obvious and very real.

116 Jeffrey Deutsch January 6, 2016 at 8:32 pm

Would it be fair to say that now, the economic consensus around the minimum wage is that there is no economic consensus around the minimum wage?

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