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.
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.
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.
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.
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…
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.
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.
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.
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.
By Kevin Rins and John Voorheis, this is one of the most thorough and detailed studies to date. Here is one excerpt:
…we find that raising the minimum wage increases earnings growth at the bottom of the distribution, and those effects persist and indeed grow in magnitude over several years. This finding is robust to a variety of specifications, including alternatives commonly used in the literature on employment effects of the minimum wage.
How does their work differ from other treatments?:
Most public datasets commonly used in the minimum wage literature have limited ability to address how earnings growth responds to minimum wage increases because they are either composed of repeated cross-sections or have panel dimensions that cover relatively limited periods of time.
My personal view still is that the next generation of firms likely will create fewer jobs, and aggregate output and employment will be lower. I would rather look for measures that boost both efficiency and equity, and not just along the shorter time horizons. But on the pro-minimum wage side, you should consider that those immediately affected by the wage hike do seem better off, and their higher income in the meantime may itself bring some efficiency-enhancing gains.
From Amanda Y. Agan and Michael D. Makowsky, here is an new and important approach:
For recently released prisoners, the minimum wage and the availability of state Earned Income Tax Credits (EITCs) can influence both their ability to find employment and their potential legal wages relative to illegal sources of income, in turn affecting the probability they return to prison. Using administrative prison release records from nearly six million offenders released between 2000 and 2014, we use a difference-in-differences strategy to identify the effect of over two hundred state and federal minimum wage increases, as well as 21 state EITC programs, on recidivism. We find that the average minimum wage increase of 8% reduces the probability that men and women return to prison within 1 year by 2%. This implies that on average the wage effect, drawing at least some ex-offenders into the legal labor market, dominates any reduced employment in this population due to the minimum wage. These reductions in re-convictions are observed for the potentially revenue generating crime categories of property and drug crimes; prison reentry for violent crimes are unchanged, supporting our framing that minimum wages affect crime that serves as a source of income. The availability of state EITCs also reduces recidivism, but only for women. Given that state EITCs are predominantly available to custodial parents of minor children, this asymmetry is not surprising. Framed within a simple model where earnings from criminal endeavors serve as a reservation wage for ex-offenders, our results suggest that the wages of crime are on average higher than comparable opportunities for low-skilled labor in the legal labor market.
But two days ago I ran into Amanda and family at Penang restaurant in Philadelphia…
That is studied by Renkin, Montialoux, and Siegenthaler in a recent paper, which is also a job market paper for Tobias Renkin from the University of Zurich. Here is the abstract:
We study the impact of increases in local minimum wages on the dynamics of prices in local grocery stores in the US during the 2001-2012 period. We find a significant impact of increasing minimum wages on prices in grocery stores. Our baseline estimate of the minimum wage elasticity of grocery prices is 0.02. This magnitude is consistent with a full pass-through of cost increases into prices. We show that price adjustments occur mostly in the months following the passage of minimum wage legislation rather than at the actual implementation of higher minimum wages. This forward-looking pattern of price adjustments is qualitatively consistent with pricing models that feature nominal rigidities. We find no differential price effect for products consumed by poorer and richer households, and no evidence for demand effects. Our results suggest that consumers rather than firms bear the cost of minimum wage increases. Moreover, poor households are most negatively affected by the price response. Price increases in grocery stores alone offset at least 10% of the nominal income gains of the poorest households.
Of course this also would suggest the sector is relatively competitive. And if you are wondering, here is the full slate of job candidates from Zurich.
This is evidence from Seattle, from a new paper by Subir K. Chakrabarti, Srikant Devaraj, and Pankaj C. Patel. Here is the abstract:
We assess the effects of rise in minimum wages on hygiene violation scores in food service establishments. Using a difference-in-difference analysis on hygiene rating of food establishments in Seattle [where minimum wage increased annually between 2010 and 2013] as the treated group and from New York City [minimum wage was constant] as the control group, we find an increase in real minimum wage by $0.10 increased total hygiene violation scores by 11.45 percent. Consistent with our theoretical model, an increase in minimum wage in Seattle has no influence in more severe (red) violations, and a significant increase in less severe (blue) violations. Our findings are consistent while using an alternate control group – Bellevue City, King County, located near Seattle.
Of course this makes perfect sense. Even when minimum wages do not much decrease employment, they are not a free lunch, so to speak. “There ain’t no such thing as a healthy free lunch” [TANSTAAHFL, the pronunciation differs only slightly] could be the new catchphrase.
For the pointer I thank the excellent Kevin Lewis.
In addition to the Seattle study, another minimum wage paper crossed my path this week and it takes a very different approach than much of the literature. In Denmark the minimum wage jumps up by 40% when a worker turns 18. Thus the authors, Kreiner, Reck and Skov, ask what happens to the employment of young people when they hit their 18th birthday? Answer: employment drops dramatically, by one-third.
A picture tells the story. On the left is measured wages by age, the jump up due to the minimum wage law is evident at age 18. On the right is the employment rate–the jump down at age 18 is also evident as is a bit of pre-loss as workers approach their 18th birthday.
The authors have administrative data covering wages, employment and hours worked for the entire workforce of Denmark so their estimates are precise.
Denmark has laws making age discrimination illegal but these do not apply when a young person turns 18 and firms may legally search for under or over-18 age workers.
A variety of restrictions mean that under-18 age workers can do less than adults (e.g. they can’t legally lift more than 25 kilos or have a driver’s license.) Thus, productivity increases at age 18, making the employment loss at this age even more dramatic.
The authors can’t tell for certain if workers are quitting or getting fired but there are few other obvious discontinuities around exactly age 18. Students are eligible for certain benefits at age 18 but the authors are able to look at sub-samples where this objection doesn’t apply and the results are robust.
In a section of the paper that adds important new evidence to the debate, the authors look at the consequence of losing a job at age 18. One year after separation only 40% of the separated workers are employed but 75% of the non-separated workers are employed. Different interpretations of this are possible. The separated workers will tend to be of lower quality than the non-separated and maybe this is correlated with less desire to have a job. Without discounting that story entirely, however, the straightforward explanation seems to me to be the most likely. Namely, the minimum wage knocks low-skill workers off the job ladder and it’s difficult to get back on until their skills improve.
Hat tip: Ben Southwood.
The Seattle Minimum Wage Study, a study supported and funded in part by the Seattle city government, is out with a new NBER paper evaluating Seattle’s minimum wage increase to $13 an hour and it finds significant dis-employment effects that on net reduce the incomes of minimum wage workers. I farm this one out to Jonathan Meer on FB.
This is the official study that was commissioned several years ago by the city of Seattle to study the impacts of raising the minimum wage, in a move that I applauded at the time as an honest and transparent attempt towards self-examination of a bold policy. It is the first study of a very high city-level minimum wage, with administrative data that has much more detail than is usually available. The first wave (examining the increase to $11/hr) last year was a mixed bag, with fairly imprecise estimates.
These findings, examining another year of data and including the increase to $13/hr, are unequivocal: the policy is an unmitigated disaster. The main findings:
– The numbers of hours worked by low-wage workers fell by *3.5 million hours per quarter*. This was reflected both in thousands of job losses and reductions in hours worked by those who retained their jobs.
– The losses were so dramatic that this increase “reduced income paid to low-wage employees of single-location Seattle businesses by roughly $120 million on an annual basis.” On average, low-wage workers *lost* $125 per month. The minimum wage has always been a lousy income transfer program, but at this level you’d come out ahead just setting a hundred million dollars a year on fire. And that’s before we get into who kept vs lost their jobs.
– Estimates of the response of labor demand are substantially higher than much of the previous research, which may have been expected given how much higher (and how localized) this minimum wage is relative to previously-studied ones.
– The impacts took some time to be reflected in the level of employment, as predicted by Meer and West (2016).
– The authors are able to replicate the results of other papers that find no impact on the restaurant industry with their own data by imposing the same limitations that other researchers have faced. This shows that those papers’ findings were likely driven by their data limitations. This is an important thing to remember as you see knee-jerk responses coming from the usual corners.
– You may also hear that the construction of the comparison group was flawed somehow, and that’s driving the results. I believe that the research team did as good of a job as possible, trying several approaches and presenting all of their findings extensively. There is no cherry-picking here. But more importantly, without getting too deep into the econometric weeds, my sense is that, given the evolution of the Seattle economy over the past two years, these results – if anything – *understate* the extent of the job losses.
This paper not only makes numerous valuable contributions to the economics literature, but should give serious pause to minimum wage advocates. Of course, that’s not what’s happening, to the extent that the mayor of Seattle commissioned *another* study, by an advocacy group at Berkeley whose previous work on the minimum wage is so consistently one-sided that you can set your watch by it, that unsurprisingly finds no effect. They deliberately timed its release for several days before this paper came out, and I find that whole affair abhorrent. Seattle politicians are so unwilling to accept reality that they’ll undermine their own researchers and waste taxpayer dollars on what is barely a cut above propaganda.
I don’t envy the backlash this team is going to face for daring to present results that will be seen as heresy. I know that so many people just desperately want to believe that the minimum wage is a free lunch. It’s not. These job losses will only get worse as the minimum wage climbs higher, and this team is working on linking to demographic data to examine who the losers from this policy are. I fully expect that these losses are borne most heavily by low-income and minority households.