The new Census study on the minimum wage

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.

Comments

". . . those immediately affected by the wage hike do seem better off . . . ." Do teenagers who would have got jobs with no minimum wage hike but, because of the hike, do not get jobs count as "immediately affected"? Also, how big are the hikes under consideration?

"Also, how big are the hikes under consideration?"

Yeah, I expected Tyler to mention this. I think the evidence, including this latest paper, suggest that small increases in the minimum wage do not result in substantial unemployment nor substitution away from labor at least in the short run.

But large increases, e.g. to $30 per hour, would presumably have negative repercussions on the economy. But the data we have cover small increases in minimum wages; we haven't had large increases.

We clearly can't count people who have lost their jobs due to minimum wage hikes as being affected. It would mess with the narrative of the increase making them better off.

the paper shows either no impact or slightly positive impact on employment from a min wage increase

" I would rather look for measures that boost both efficiency and equity, and not just along the shorter time horizons."

However, if those measures don't exist, then you're stuck with the measures that just increase one or the other.

Besides, if we want both equity and equality, what's so bad about a policy that makes just one of those better?

The "what's so bad" is the negative impact of the policy that Tyler expects. That was in the post.

I was confused by exactly what policy options he is getting at here. If he has alternatives in mind, that would be good to add to the conversation here.

Prof. Cowen has seemingly never felt a need to have any alternative to anything other than the rich getting richer.

No half baked empirical study is going to convince me that you can raise the price of something without reducing demand for it. Unskilled jobs and crucial starter jobs will be lost, though the true number will be largely invisible.

Then why even look at reality? You obviously already know the truth, so it's not like it can change your mind.

Also, nobody said that no jobs are lost, just that less jobs are lost than expected, while the advantages seem to work out nicely. Our economy is sufficiently complex that even simple interventions can have multiple effects that work in different directions.

From a more theoretic POV, it is absolutely possible for demand not to fall as much as the price rises. Namely, if the product is critically necessary. See food shortages, for example. Even if the price increases tenfold or more, you can't just eat a tenth - maybe half, but that's already very questionable.

I could very well see it being similar with workers. Companies absolutely need workers. But they can get away with paying them less than what they are worth to them because they're exchangeable. So increasing minimum pay might reduce employment for those workers which are actually paid what they are worth, but it seems this is the exception, not the norm.

I'm still not sure though I'm much in favour of minimum wage. Aside from possible negative effects, it's also relatively easy to get around, like fake self-employed people who are actually almost indistinguishable from regular company workers.

"Also, nobody said that no jobs are lost, just that less jobs are lost than expected, while the advantages seem to work out nicely."

I'm sure that the newly unemployed will appreciate this and accept their fate as an inevitable consequence of making sure others make more.

I'm confused. Aren't we supposed to cheer for the free market because 'even though there will be some losers, it will be a net-gain for everyone' ? But minimum wage seems to do something similar, but now it's bad?

In my opinion, yes, we should accept that there are always losers in any system or intervention, and instead do those interventions that are a net-gain, while setting up safety nets for the losers. Most countries that do that seem to be doing pretty well. On the other hand, trying to set up a system without losers doesn't work at all.

I think the issue here is that the recorded gains to the "winners" from the minimum wage aren't really gains- they are a transfer from employers to employees, while the losses are deadweight- both unemployed workers *and* employers are made worse off since their transaction no longer occurs. You can obviously appeal to arguments about marginal utility of income, but then the arguments become more nuanced.

'you can raise the price of something without reducing demand for it'

Starbucks seems to have made a boatload of money directly contradicting that assertion.

...and Starbuck's competitors are making money from people like me by charging a whole lot less for their coffee. Too bad we don't have that kind of choice in the market for labor.

'and Starbuck’s competitors are making money from people like me by charging a whole lot less for their coffee'

Well, if you mean that McDonald's or 7/11 coffee costs more than it did before Starbucks started appearing everywhere, welcome to your cheaper coffee. Though a complex area (how does one quantify taste?), it is reasonable to assume that their profit margin on coffee has increased in pace with their increasing its price while remaining cheaper than Starbucks.

Getting people used to a higher price level for a product is unlikely to reduce its demand, as long as that new price level is accepted. Which Starbucks seems to have done successfully in terms of pricing coffee at a retail level.

In other words, economics for you is a matter of religion, not science. You're not alone of course.

It's called being price-inelastic.

Widgets do not try harder or get job-related training if you pay more for them. The widget remains a widget. People are not widgets.

How hard would you work for $1?

Most min wage increases are simply not large enough to tease out their real effects on the economy.

If we start getting this living wage stuff then maybe we will begin to see the negative consequences.

At the end of the day, The min wage is almost a full dollar or two below what most people are willing to work at. Here in Florida it is set to 8.05 an hour. Good luck trying to get people to even train for less than 10 dollars an hour....

Raising the minimum wage is good for people who keep their jobs after the increase and I assume it is good for "off-the books" workers who will pick up the legacy, now illegal, lower paying jobs. There must be some people either in the short term or medium term who will lose jobs or have their jobs restructured out of existence. It will be interesting to see data from the places with the $15/hr. type increases.

I've always wondered about the effects on people who were already making the new minimum wage prior to it's being raised: one minute they may have thought they were doing fairly well for themselves; the next minute they're working some crappy minimum-wage job again.

Hard for me to trust a study that starts by quoting Piketty that income inequality has increased dramatically. The facts on that don't support that assertion.

That genius Nancy Pelosi cooked up a three stage hike in the minimum wage, first in July 2007, and then in July 2008, and finally in July 2009. Well timed, Nancy!

Now check the ratio of employment to population for those aged 16 to 24 years, and the labor force participation rate for the same ages. The ages most vulnerable to the impact of a minimum wage hike. Collapse in the participation rates with little recovery, and small recovery in employment-population ratio. Heck of job, Nancy.

A permanent ratcheting down in employment would have played a role in a permanent loss in real GDP.

So, no, I am not going to buy a Census argument about how robust earnings growth as been for low income people. Maybe we should consider how income inequality has been worsened by policies which force, or subsidize, people to stay low income.

Do you think the largest economic crisis in a very long time might have had any relevance to the numbers of youth looking for work as opposed to staying in school longer?

MR has such intelligent commenters that apparently they all already know the absolute truth and don't need studies to challenge them. Amazing how intelligent these people are!!!

I wonder how these commenters would respond to someone of a different political persuasion dismissing evidence out of hand because it goes against their priors. I suspect not well.

On the subject of minimum wage, there are very good reasons to put the burden of proof on those who try to claim that a minimum wage increase has no effect (or a negligible effect) on employment.

First, that's because it requires arguing against the logical - and well-supported by evidence - notion of downward-sloping demand curves.

Second, it's because we essentially do "know" that a minimum wage would have a very negative impact on the labor market at some high enough level. Are you arguing that there wouldn't be huge negative consequences to setting the minimum wage at an amount around median hourly wages? We'd see some mix of high unemployment, evasion through a black market or any available but economically inefficient legal means (e.g., restructuring businesses to use independent contractors who could earn below minimum wage, or low-wage service businesses overwhelmingly dominated by establishments using family labor who could earn below minimum wage), or a massive bout of inflation to erode the real minimum wage back to a reasonable level (if such a high minimum wage was set nationally).

So I can see some argument that relatively small increases in the minimum wage simply don't have a lot of impact on employment because demand for low-skilled labor is relatively inelastic.

The more workers who are impacted by a proposed change in the minimum wage, however - meaning the higher that it's set relative to median wages - and the more that it becomes clear that a relatively high minimum wage is permanent (i.e., if it's also inflation-adjusted), then the progressively tougher it is to believe that such a minimum wage will have only a small impact on employment.

Tweet from @lymanstoneky: This paper is fascinating and moves my priors towards thinking minimum wages boost incomes.

But the paper is explicit: incomes ONLY rise for people who LEAVE the area with higher minimum wages!

Maybe they should focus their studies on Puerto Rico. For that matter, small towns all across the US.

Are the gray bands margin of error? If so, those graphs don't look like they have statistical significance.

In general, I find this a very hard study to read. Granted, I don't have a PhD in Economics, so it might just be above my head. But I can usually make sense of an Economics paper, this one seems to obfuscate the data.

Here is a post that suggests that the minimum wage increases crime

http://marginalrevolution.com/marginalrevolution/2014/02/will-raising-the-minimum-wage-boost-crime.html

"There is a recent 2013 paper on this topic by Andrew Beauchamp and Stacey Chan, the abstract is here:

Does crime respond to changes in the minimum wage? A growing body of empirical evidence indicates that increases in the minimum wage have a displacement effect on low-skilled workers. Economic reasoning provides the possibility that disemployment may cause youth to substitute from legal work to crime. However, there is also the countervailing effect of a higher wage raising the opportunity cost of crime for those who remain employed. We use the National Longitudinal Survey of Youth 1997 cohort to measure the effect of increases in the minimum wage on self-reported criminal activity and examine employment–crime substitution. Exploiting changes in state and federal minimum wage laws from 1997 to 2010, we find that workers who are affected by a change in the minimum wage are more likely to commit crime, become idle, and lose employment. Individuals experiencing a binding minimum wage change were more likely to commit crime and work only part time. Analyzing heterogeneity shows those with past criminal connections are especially likely to see decreased employment and increased crime following a policy change, suggesting that reduced employment effects dominate any wage effects. The findings have implications for policy regarding both the low-wage labor market and efforts to deter criminal activity."

Uhh...so did everybody miss this line from the paper on p. 19:

"In both income growth windows, there is evidence that minimum wages increase income
growth at the bottom of the income distribution for movers, but little to no evidence of any statistically
significant effects for non-movers"

Let me rephrase that for you: the paper found that the income growth ONLY HAPPENED FOR PEOPLE WHO MOVED OUT OF THE STATE, AWAY from the wage increase.

Given that geographic mobility has declined, and the paper only looks at low wage workers, the income growth is almost certainly concentrated among a very small group of people. This seems like something that would be pretty important to note in the abstract, but that would make their findings less eye-catching.

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