Results for “"minimum wage"”
275 found

Do higher minimum wages induce more job search?

In some models job search is just about the posted wage, but I suspect that is the easiest kind of search to do.  In reality, search covers multiple dimensions, for instance wage but also working conditions, such as the comfort of your job post, how much of a jerk the boss is, and so on.

If the minimum wage is hiked, the higher nominal wage will indeed induce more search, because the pecuniary gain from a good match is higher.

That said, a higher minimum wage will to some extent induce employers to lower the non-pecuniary quality of the job.  At the very least, there will be more uncertainty about the non-pecuniary aspects of the job.  Imagine a new job seeker: “I’ve read Gordon Tullock — now I’m wondering if they are going to turn down the air conditioner in the back room where I will be working.”

That uncertainty in fact raises the costs of job search and makes the results of that search less certain.  In this regard, you can think of a higher minimum wage as a tax on job search.

If you think job search is mainly about the posted wage, you won’t be very worried about this affect.  Alternatively, if you think job search is mainly about finding a good match along the non-pecuniary dimensions, you might be very worried about it indeed.  And it will make it harder for minimum wage hikes to boost employment by inducing more labor search.

For this post, I am indebted to a conversation with the excellent Matthew Lilley.

Danish minimum wage data (it ain’t monopsony)

This paper estimates the long-run impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18 and using monthly payroll records for the Danish population. We show theoretically how the discontinuity in the minimum wage may be exploited to estimate the casual effect of a change in the minimum wage of youth on their employment. On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.

Here is the paper by Claus Thustrup Kreiner, Daniel Reck, and Peer Ebbesen Skov.  For Mississippi it might be worse.

I’ll suggest a general methodological approach here.  I think that for Mississippi the chances for this kind of outcome are at least 0.8.  Maybe for many of the richer states it would be 0.4?  Based on those probabilities, I don’t want to do it, even if you think it is “more likely” that in most areas a higher minimum wage won’t destroy many jobs.  What probabilities would be offered by those who defend a minimum wage hike?

Via Bob B.

What does the minimum wage literature really tell us?

Let me turn over the microphone to David Neumark and Peter Shirley:

The disagreement among studies of the employment effects of minimum wages in the United States is well known. What is less well known, and more puzzling, is the absence of agreement on what the research literature says – that is, how economists even summarize the body of evidence on the employment effects of minimum wages. Summaries range from “it is now well-established that higher minimum wages do not reduce employment,” to “the evidence is very mixed with effects centered on zero so there is no basis for a strong conclusion one way or the other,” to “most evidence points to adverse employment effects.” We explore the question of what conclusions can be drawn from the literature, focusing on the evidence using subnational minimum wage variation within the United States that has dominated the research landscape since the early 1990s. To accomplish this, we assembled the entire set of published studies in this literature and identified the core estimates that support the conclusions from each study, in most cases relying on responses from the researchers who wrote these papers.

Our key conclusions are: (i) there is a clear preponderance of negative estimates in the literature; (ii) this evidence is stronger for teens and young adults as well as the less-educated; (iii) the evidence from studies of directly-affected workers points even more strongly to negative employment effects; and (iv) the evidence from studies of low-wage industries is less one-sided.

Here is the full NBER paper.

RCTs and the minimum wage

The paper I want to highlight in this post is “Price Floors and Employer Preferences” by John Horton. In this piece he conducts a randomized control trial on an online labor market, randomly assigning 4 different minimum wage levels ($0, $2, $3, and $4) to 160,000 job postings. This experimental design conveys several advantages over conventional empirical work. First, selection effects and biases based on the economic performance of the firms and the states/countries they are in are automatically controlled for by random assignment. Second, the online platform collects detailed measures on the pre-experiment attributes of all workers, the productivity of workers on the job, and the number of hours worked overall. These data are extremely important to analyzing the effects of the minimum wage but are not measured in the most popular empirical works on the topic. Finally, the computerized nature of the data leaves almost no room for measurement error.

…There are four main results: “(1) the wages of hired workers increases, (2) at a sufficiently high minimum wage, the probability of hiring goes down, (3) hours-worked decreases at much lower levels of the minimum wage, and (4) the size of the reductions in hours-worked can be parsimoniously explained in part by the substantial substitution of higher productivity workers for lower productivity workers.”

The significant reductions in hours worked come from two sources according to Horton’s analysis. First, firms are economizing on now more expensive labor; the labor demand curve slopes downward. Second, the substitution of higher productivity workers meant that jobs were completed faster, so the total hours worked went down. Both of these responses to the minimum wage hurt low productivity workers…

Interestingly, these results are consistent with finding little to no dis-employment effect in an observational study that only measures wages and headcounts (which is what the vast majority of the most popular studies do). This is because almost all of the effects of the minimum wage came from substitution of higher productivity for lower productivity ones, which wouldn’t show up in headcounts, and reduction in hours worked, which is not measured in most conventional data sets.

Here is the full short piece by Maxwell Tabarrok.  File under “RCT gold standard for me but not for thee!”

The South Korean minimum wage hike

A controversial study on the effect of a radical rise in the legal minimum wage level came out Tuesday, pitting employers against employees in the midst of negotiations for the next year’s wage standard.

Researchers at the Korea Economic Research Institute analyzed in the study the impact of the 16.4 percent increase in the 2018 wage level on low-income workers to find that many low-paying jobs were erased, while those who were employed enjoyed higher pay. The institute is affiliated with the country’s top business lobby, the Federation of Korean Industries.

The minimum wage is updated on an annual basis, and the rate currently stands at 8,590 won ($7.10) per hour. In 2018, the rate rose 16.4 percent from 6,470 won a year earlier to 7,530 won, the steepest increase in 17 years.

The KERI report said the employment rate in 2018 for workers directed affected by the hike — those who were getting paid less than the 2018 legal wage in 2017 — was as much as 4.6 percentage points lower than other income groups.

Some 15.1 percent of this group were jobless in 2018.

The study calculated that between 27.4 percent and 30.5 percent of the unemployment cases were due to the higher wage level, which prompted employers to cut jobs.

Here is the article.  I cannot find this study, it may well only be in Korean (addendum: here is the link in Korean), and I note it is connected to a business lobby.  Still, I will take this opportunity to ask: what else do we know about the recent and radical South Korean wage hike?

Here are some general remarks at Wikipedia.  And here is a relevant paper about minimum wage hikes in Hungary: small disemployment effects after four years, and most of the burden carried by consumers, which implies the monopsony model does not apply — in that model prices should fall!

And do read Brian Albrecht on the minimum wage.

Federal minimum wage of $15?

It’s a slam-dunk case that doubling the federal minimum wage — it’s been $7.25 since 2009 — would lead to significant declines in employment opportunities for workers with few skills or little experience. According to data from the Bureau of Labor Statistics for 2019 (before the pandemic), in 47 states, at least one-quarter of all workers earn less than $15 per hour. In 20 states, half of all workers earn less than $18 per hour, and in 30 states, the median hourly wage is less than $19.

These statistics show that $15 is a very high wage floor. For employers to keep all their workers would require raising the wages of a huge share of the national workforce. But the number of workers affected would be so large that this wouldn’t happen. Instead, the number of jobs in the low-wage workforce would shrink.

The nonpartisan Congressional Budget Office confirms this basic intuition, estimating that joblessness would increase by 1.3 million if the national hourly wage floor were hiked to $15 [TC: and that is pre-pandemic]. The CBO also concluded that this policy would reduce business income, raise consumer prices and reduce gross domestic product.

That is from Michael Strain at Bloomberg.  I would add this.  No matter what you think about the recent literature on the minimum wage, all economic theories imply that minimum wages should be decided at the state and local level, given the economic heterogeneity of the United States.  That is the message that you as an economist should be carrying forward.

Do you think Puerto Rico should be a state?  Should they have a $15 minimum wage too?  Come on.  Yes, it is easy enough to make an exception for them, and by the way the median manufacturing wage in Mississippi is below $15 as well.  Rinse and repeat.

I am sorry to speak in such terms, but the reality is that an allied cabal of activists and left-wing economists have combined on social media to insist on a particular approach to minimum wage economics and to bully those who disagree.

Ask yourself a simple question: were any of them calling for a temporary two-year cut in the minimum wage for restaurants and small businesses during a devastating pandemic?  If not, are they really carrying forward the banner of science?

Minimum wage laws during a pandemic

From Michael Strain at Bloomberg:

In July 2019, the nonpartisan Congressional Budget Office estimated that a $15 minimum wage would eliminate 1.3 million jobs. The CBO also forecast that such an increase would reduce business income, raise consumer prices, and slow the economy.

The U.S. economy will be very weak throughout 2021. The nation will need more business income, not less; more jobs, not fewer; and faster, not slower, economic growth. A $15 minimum wage would move the economy in the wrong direction across all these fronts.

I fully agree, and in fact would go further.  On Twitter I wrote in response to Noah:

Surely in a pandemic these businesspeople are right and the accumulated non-pandemic research literature doesn’t apply so much, right? Pretty much all models imply we should cut the minimum wage, if only temporarily, for small business at the very least.

Put in whatever exotic assumptions you wish, a basic model will spit out a lower optimal minimum wage for 2020-21, again for small business at the very least.  This is the advice that leading Democratic economists should be offering to Biden.

Minimum wage hikes are a much worse idea now

For one thing, the marginal product of labor is much lower, at least for a good while.  But there is a deeper problem.  Under the status quo ex ante, minimum hike proponents argued that the highest wages would be taken out of, say, the economic rents of restaurants.

But now those rents are largely gone!  Especially for the small restaurants.  The result will be that, if the minimum wage is raised, more laborers are laid off.  At the very least there should be no minimum wage, or a much lower minimum wage, for small businesses.

A further effect is that higher contagion risk (extending into the future too, now that pandemics are salient) may encourage more employers to automate, including in kitchens, theme parks, etc.  A higher elasticity of automation also militates against a minimum wage increase, because capital-for-labor substitution is now more likely, again indicating larger negative employment effects.

In essence, most of the previous empirical literature on this topic has to be significantly downgraded in relevance.  Whatever you thought of them to begin with, the pieces by Dube and the like just don’t apply any more.

Most likely, we should lower current minimum wages.  And that is all the more true, the more you have been worrying about coronavirus risk and Trump’s poor performance in response.

These are all very simple points, I am tempted to say they are “not even Econ 101.”

And note that in the very early stages of a lock down you might want a much higher minimum wage, precisely to keep people away from work, if somehow you cannot keep the customers away.  The much higher minimum wage would force the employer to decide which are the truly important workers, and send the other into non-infectious activities, as Brian Slesinsky suggested to me.

This is all related to my earlier post The Meaning of Death, from an economist’s point of view.

Are intuitions about occupational licensing and minimum wages consistent?

The other day I asked whether our intuitions about minimum wages and also occupational licensing might be consistent.  In particular, if we think occupational licensing is very bad for employment and prices and welfare, is that consistent with monopsony/low elasticity of demand for labor models?

That is a tough problem, here is one approach:

If you think minimum wage hikes are fine, typically you believe something like:

“A 20 percent hike in the required wage will not much damage employment, if at all.”

What then would you say to this?:

“A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”

It seems you should believe the second proposition as well.

Now, consider occupational licensing.  Typically it is not absolute (“only 300 goldsmiths in Florence!”), but rather it imposes a surcharge on entrants.  They have to pass a test, or undergo training, or receive a degree of some kind.  They must incur training costs to get the license, and you can think of those training costs as a tax on the employment relationship.  But if those costs are incurred, a worker passes through the permeable membrane of the licensing restriction into the active labor force pool of that sector.

Of course we all know that a tax can be borne by either side of the market, depending on elasticities.

Now, if you believe minimum wage hikes don’t much harm employment, you believe the demand for labor is relatively inelastic.  And if you believe the demand for labor is inelastic, the burden of the training costs for licensing fall on the employer, not the worker.  Taxes fall on the inelastic side of the market.

Now, you’ve already assented to: “A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”

So the occupational licensing should not much damage employment either.  The employer simply picks up the tab, albeit grudgingly.

(The effect on consumer prices will depend on market structure, for instance you can have a local monopsonist shipping into in a largely competitive broader market — tricky stuff!).

The occupational licensing will not help workers as the minimum wage hike would, because there is (probably) greater rent exhaustion in the licensing case.  The workers get higher wages, but they are paid the higher wages precisely to compensate them for and pull them through those arduous training programs.

So the licensing and the minimum wage hike are not equivalent, for that reason alone.  But still, the licensing will not really harm the interests of the workers, again the burden being born by the employer, or possibly the consumers in the retail market to some extent.

So if you are finding occupational licensing results that damage overall worker welfare, you must not accept the premises of the low price elasticity demand for labor model!

Another way to put the point is that the occupational licensing papers are testing some of the common presumptions of minimum wage models, and flunking them.

First addendum: It is not an adequate reply to this post to reiterate, with multiple citations, that minimum wage hikes do not lower employment.  Even assuming that is true, other simple models will generate that result, without clashing with the occupational licensing studies.  For instance, the employer might respond to the minimum wage hike by lowering the quality of some features of the job.  In essence you are then suggesting the demand for labor may be elastic, but the real wage hasn’t changed much in the first place, and then it is easy enough in the occupational licensing setting for the burden of licensing to fall on the class of workers as a whole.

Second addendum: There is a longer history of minimum wage assumptions not really being consistent with other economic views.

Have you ever heard someone argue for wage subsidies and minimum wage hikes?  No go!  The demand for labor is either elastic or it is not.

Have you ever heard someone argue for minimum wage hikes and inelastic labor demand, yet claim that immigrants do not lower wages?  Well, the latter claim about immigration implies elastic labor demand.

Have you ever heard someone argue that “sticky wages” reduce employment in hard times but government-imposed sticky minimum wages do not?  Uh-oh.

It would seem we can now add to that list.  Maybe we will see a new view come along:

“Labor demand is elastic when licensing restrictions are imposed, but labor demand is inelastic when minimum wages are imposed.”

Third addendum: Of course there are numerous other ways this analysis could run.  What is striking to me is that people don’t seem to undertake it at all.

The minimum wage and migration decisions

This paper investigates the local labor supply effects of changes to the minimum wage by examining the response of low-skilled immigrants’ location decisions. Canonical models emphasize the importance of labor mobility when evaluating the employment effects of the minimum wage; yet few studies address this outcome directly. Low-skilled immigrant populations shift toward labor markets with stagnant minimum wages, and this result is robust to a number of alternative interpretations. This mobility provides behavior-based evidence in favor of a non-trivial negative employment effect of the minimum wage. Further, it reduces the estimated demand elasticity using teens; employment losses among native teens are substantially larger in states that have historically attracted few immigrant residents.

That is from a 2014 paper by Brian C. Cadena, and here is Jorge Pérez Pérez:

I find that areas in which the minimum wage increases receive fewer low-wage commuters. A 10 percent increase in the minimum wage reduces the inflow of low-wage commuters by about 3 percent.

And here is one bit from a research paper by Terra McKinnish:

Low wage workers responded by commuting out of states that increased their minimum wage.

Via the excellent Jonathan Meer, you don’t hear about this evidence as much as you should.

Do minimum wage hikes get rid of bad restaurants?

We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. We find that the impact of the minimum wage depends on whether a restaurant was already close to the margin of exit. Restaurants with lower ratings are closer to the margin of exit on average, and are disproportionately driven out of business by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 10 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale). We expand the analysis to look at prices using data from delivery orders, and find that lower rated restaurants also increase prices in response to minimum wage increases. Our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.

That is from a new NBER working paper by Dara Lee Luca and Michael Luca.  Obviously this will not be good for jobs, yet part of me believes that creative destruction in the restaurant sector is undersupplied…

What Do We Learn from Amazon and the Minimum Wage?

Amazon’s widely touted increase in its minimum wage was accompanied by an ending of their monthly bonus plan, which often added 8% to a worker’s salary (16% during holiday season), and its stock share program which recently gave workers shares worth $3,725 at two years of employment. I’m reasonably confident that most workers will still benefit on net, simply because the labor market is tight, but it’s clear that the increase in the minimum wage was not as generous as it first appeared.

What lessons does this episode hold for minimum wage research? Amazon increased its wages voluntarily but suppose that the minimum wage had been increased by law. What would have happened? Clearly, Amazon would have, at the very least, eliminated their bonus plan and their stock share plan! In this situation, researchers examining employment data would discover that the increase in the minimum wage did not much lower employment. Such researchers might conclude that minimum wages don’t reduce employment much because the demand for labor is inelastic. The conclusion is correct but the reasoning is false. The correct conclusion and reasoning would be that the minimum wage didn’t reduce employment much because the minimum wage didn’t increase net wages much.

Amazon is a big and newsworthy employer so its actions have been closely monitored but in most cases we never know the myriad ways in which firms respond to a law. Even using administrative data it would be difficult to pick up changes in a stock share plan or a pension plan, as this compensation doesn’t show up in earnings until years after the work is completed. Even a simple employment contract is a complicated bargain with many margins. During the holiday season, for example, Amazon hires a CamperForce of workers who live in RVs and it pays their campsite fees–no big deal, but that is a form of compensation that is hard to find on a W-2. More generally, firms can respond to a minimum wage by changing compensation on non-wage margins, adjusting working conditions, reducing benefits, changing wage growth patterns, and adjusting the type of workers they hire, to give just a few examples–and notice that all of these changes are difficult to measure and none of them have a first-order effect on employment.

Do higher minimum wages induce more search?

Monopsony models generally imply they should, and that is part of the argument why minimum wage hikes might be good for workers, wages, and yes even employment.  But the data don’t seem to support the claim of more search behavior:

Labor market search-and-matching models posit supply-side responses to minimum wage increases that may lead to improved matches and lessen or even reverse negative employment effects. Yet there is no empirical evidence on this crucial assumption. Using event study analysis of recent minimum wage increases, we find that increases to minimum wage do not increase the likelihood of searching, but do lead to large yet very transitory spikes in search effort by individuals already looking for work. The results are not driven by changes in the composition of searchers.

That is from a new NBER Working Paper by Camilla Adams, Jonathan Meer, and Carly Will Sloan.

The Minimum Wage in an Online Job Market

John Horton has written a novel paper that uses an experiment and a policy change in an online job market to understand the effects of the minimum wage. The job market in question is something like the Upwork platform where firms can post jobs and workers from anywhere in the world can post offers to work at an hourly wage to do tasks such as computer programming, data entry, design and transcription. Typically workers are hired for a week or two.

Horton was able to implement a minimum wage by simply not allowing a worker to offer to work at less than the minimum wage for a randomly chosen set of jobs.

During the experimental period, firms posting an hourly job opening were immediately assigned to an experimental cell. The experiment consisted of four experimental cells: a control group with the platform status quo of no minimum wage, which received 75% of the sample (n = 121, 704), and three active treatment cells, which split the remaining 25% of the sample. A total of 159,656 job openings were assigned. Neither employers nor workers were told they were in an experiment. The active treatments had minimum wages of $2/hour in MW2 (n = 12, 442), $3/hour in MW3 (n = 12, 705), and $4/hour in MW4 (n = 12, 805).

Horton found that the minimum wage did reduce hiring, especially in low-wage job categories when the minimum wage was high relative to the median wage. The hiring reduction was measurable but, consistent with previous research, not large. All the work on the platform, however, is logged through the software so Horton also has very good data on hours worked and here the story is quite different. The minimum wage substantially reduced hours worked.

A higher minimum wage likely causes firms to scale back projects but that seems somewhat inconsistent with the small effect on hiring (fixed costs of hiring would suggest fewer hires and fewer hours but perhaps more hours per hire.) Horton finds another factor explains the reduction in hours worked. At a higher minimum wage, firms are careful to hire more productive workers. He finds that about half of the decline in hours can be explained by substitution towards higher productivity workers. Previous studies have found suggestive effects along these lines. For example, Giuliano 2013 found that the higher minimum wages could shift teenage employment to teenagers from more affluent regions who were likely more skilled and less likely to quit. Horton finds similar demographic effects as hiring shifts away from Bangladeshi workers and towards US workers but since his data on productivity is much cleaner than in previous studies there is less need to rely on demographic correlates of productivity.

In part (it seems) due to the experiment, the job-platform later instituted a $3 per hour minimum wage for all jobs. Horton is thus able to supplement his experimental results with analysis of a policy change in the same environment. Consistent with the experimental result, the imposition of the minimum wage across the board caused substantial declines in hours worked with little effect on hiring overall but a big effect on the lowest-wage workers who found that their probability of being hired dropped substantially after the minimum wage was imposed.

Minimum wage up, fringe benefits down

Gordon Tullock used to make this claim, as have I on many occasions:

This paper explores the relationship between the minimum wage, the structure of employee compensation, and worker welfare. We advance a conceptual framework that describes the conditions under which a minimum wage increase will alter the provision of fringe benefits, alter employment outcomes, and either increase or decrease worker welfare. Using American Community Survey data from 2011-2016, we find robust evidence that state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations, for whom coverage declines offset 9 percent of the wage gains associated with minimum wage hikes. We find evidence that both insurance coverage and wage effects exhibit spillovers into occupations moderately higher up the wage distribution. For these groups, reductions in coverage offset a more substantial share of the wage gains we estimate.

That is from a new NBER working paper by Jeffrey Clemens, Lisa B. Kahn, and Jonathan Meer.