Results for “"minimum wage"”
288 found

How well does a minimum wage boost target the poor?

There has been a recent kerfluffle over the Sabia and Burkhauser paper (ungated here) suggesting that minimum wage increases do not very much help the American poor.  Sabia and Burkhauser report facts such as this:

Only 11.3% of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households…Of those who will gain, 63.2% are second or third earners living in households with incomes three times the poverty line, well above 50,233, the income of the median household in 2007.

That’s what I call not very well targeted toward helping the poor.  To the best of my knowledge, these numbers have not been refuted or even questioned.

There has been a significant campaign lately to elevate this Arindrajit Dube piece (pdf) into a rebuttal of Sabia and Burkhauser.  I’ve now read through it, and while it is pretty dense, I don’t see that it supplies any such effective rebuttal (it is however a valuable paper, and survey paper, in its own right).

Here is an excerpt from the Dube paper:

An additional contribution of the paper is to apply the recentered influence function (RIF) regression approach of Firpo, Fortin and Lemieux (2009) to estimate unconditional quantile partial effects (UQPEs) of minimum wages on the equivalized family income distribution.

Dube also writes:

The elasticity of the poverty rate with respect to the minimum wage ranges between -0.12 and -0.37 across specifications with alternative forms of time-varying controls and lagged effects; most of these estimates are statistically significant at conventional levels.

Dube in fact counts up twelve papers on the side of “minimum wage hikes can make a reasonably-sized dent in poverty.”

Now, I don’t intend this as any kind of snide, anti-theory, or anti-technique comment, but when there is a clash between simple, validated observations and complicated regressions, no matter how state of the art the latter may be, I don’t always side with the regressions.

One interpretation of the Dube results is:

a) although a minimum wage hike applies only to some members of a community, its morale or network effects spread its benefits much more widely, or,

b) through some kind of chain link effect, a minimum wage hike pushes up the entire distribution of wages for lower-income workers

Alternatively, I would try

c) the public choice critique of econometrics is correct, these minimum wage hikes are all endogenous to complex factors, and no one has a properly specified model.  We are seeing correlations rather than causation, despite all attempts to adjust for confounding variables.

So far I am voting for c).  And there is a very simple story to tell here, namely that states which are good at fighting poverty, through whatever means, also tend to have higher minimum wages for political economy reasons.  It seems unlikely that controls are going to pick up that effect fully.

Or try another model, more tongue in cheek but instructive nonetheless.  If government is quite benevolent and omniscient, and has always done exactly the right thing in the past, we will see in the data that the minimum hikes of the past are at least somewhat effective in fighting poverty.  At the same time, the remaining options on possible minimum wage hikes will not help at all.

Dube’s paper, econometrically speaking, is a clear advance over Sabia and Burkhauser.  But Dube pays little heed to integrating econometric results with common sense facts and observations about the economy.  As Bryan Caplan has stated, the knowledge and judicious invocation of simple facts about the economy is one of the most underrated skills in professional economics.

I also get a bit nervous when the number of studies on one side of a question is counted and weighed up against common facts.  Some of these pieces are simply measuring the same correlation in (somewhat) differing ways, and the number of them says more about the publication process than anything else.  These pieces also are not all in what I would call great journals.  Maybe that is an unfair metric of judgment — I am writing this on a blog, after all.   Nonetheless I looked at the list of cited sources and pulled out the two clumps with what appeared to be the highest academic pedigree, in terms of both economist and outlet.

The first clump is a group of papers by David Neumark, with co-authors.  I find that Neumark does not himself think that minimum wage hikes do much if anything to help poverty, and he has a good claim at being the world’s number one expert on the economics of minimum wages.  In fairness to Dube, he does have some good (although I would not say decisive) criticisms of one of Neumark’s papers pushing this line.

The second source is a paper by Autor, Manning, and Smith, an NBER working paper.  They write “…the implied effect of the minimum wage on the actual wage distribution is smaller than the effect of the minimum wage on the measured wage distribution.”

Of course that hardly settles it.

You might call this one a draw, but then we return to the question of where the burden of proof lies.  I’m still stuck on, to repeat the above quotation, this:

Only 11.3% of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households…Of those who will gain, 63.2% are second or third earners living in households with incomes three times the poverty line, well above 50,233, the income of the median household in 2007.

From where I stand, that hasn’t yet been knocked down.

How well do minimum wage increases target poverty?

David Henderson writes:

Economists Joseph J. Sabia and Richard V. Burkhauser examined the effects of state minimum wage increases between 2003 and 2007 and reported that they found no evidence the increases lowered state poverty rates.

Further, they calculated the effects of a proposed increase in the federal minimum wage to $9.50 on workers then earning $5.70 (or 15 cents less than the minimum in March 2008) to $9.49. They found that if the federal minimum wage were increased to $9.50 per hour:

. Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.
. A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.
. Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.

There is more from David here.

Are the minimum wage and EITC complements? And if so, when?

In response to Greg Mankiw’s recent NYT piece, I’ve been hearing the argument again that the minimum wage and wage subsidies are complements.  According to this view, if you have only wage subsidies, employers will lower what they offer to the workers and capture too much of the value of the subsidy.  A higher minimum wage is supposed to prevent this from happening and thus ensure that workers capture more of the gains.

Even if you accept every premise of this argument, I am not sure how it is supposed to apply today, at least within a Keynesian framework.  For the Keynesians, the employment problem today is almost purely one of demand, not labor supply.  To spur more hiring, we therefore should wish the employers to capture more of the surplus.  A belief in hysteresis makes it all the more compelling simply to get potential workers into a job as soon as possible.

So a higher minimum wage and wage subsidies might be complements at some time period, but they should not be effective complements today.  Furthermore, if demand problems are going to be with us for a long time (not my view), a higher minimum wage and wage subsidies might not be complements anytime soon.

I recall @ModeledBehavior having made some related points on Twitter.

When are minimum wage hikes most likely to boost unemployment?

When the wage profile for low-skilled workers is sloping upward with time, minimum wage increases are less likely to increase unemployment (for the moment put aside your estimate of the absolute likelihood that minimum wage increases will boost unemployment, just ask the question in relative terms).  After all, the employer might feel that with rising wages and rising productivity, those low-skilled workers might “grow into” the higher and legally mandated new wage rate.  So maybe keep them, noting that the search costs of pulling in a good replacement will be higher too.  Furthermore, even if some of those workers are laid off they have a higher chance of being reemployed elsewhere, due to the relatively strong labor market.

What about when the wage profile for low-skilled workers is sloping downward over time?  One would expect the opposite result to hold, namely that employers are less likely to hold on to workers when confronted with a mandated wage increase.

For much of the 1990s, the labor market for less skilled workers was in decent shape.  Since 1999 or so often it has been in bad or declining shape, excepting the “bubbly” years of 2004-2006.  Therefore a minimum wage hike today would be more likely to boost unemployment than the minimum wage hikes of the past.  And that unemployment is more likely to be long-term, corrosive unemployment than in previous decades.

I do understand that a minimum wage hike, in the eyes of some, is more “needed” today, perhaps for distributional reasons.  But can we admit it is more likely than average to lead to additional unemployment?

Does anyone disagree with this logic?

Addendum: Scott Winship offers some relevant comments.

Facts about the minimum wage

…the minimum wage is very much a bottom latter rung for the labor market, which you can see in Meer and West’s evidence that workers frequently transition out of the minimum wage. In their data 59% of workers who earn the minimum wage in one year earn more than it in the next year if they remain employed (5.8% are unemployed and 16.8% have left the labor force). The median wage increase they get is $0.90 per hour, which is a 23% raise. The 75th percentile raise is $2.45 per hour.

That is from Adam Ozimek.

Is the main effect of the minimum wage on job growth?

In their new paper, Jonathan Meer and Jeremy West report:

The voluminous literature on minimum wages offers little consensus on the extent to which a wage floor impacts employment. For both theoretical and econometric reasons, we argue that the effect of the minimum wage should be more apparent in new employment growth than in employment levels. In addition, we conduct a simulation showing that the common practice of including state-specific time trends will attenuate the measured effects of the minimum wage on employment if the true effect is in fact on the rate of job growth. Using a long state-year panel on the population of private-sector employers in the United States, we find that the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments.

In a slightly different terminology, the effect of the minimum wage may well be attenuated in the short run, but over longer time horizons there is a “great reset” against low-skilled labor.

Questions about the minimum wage

This is by kebko, from the MR comments section:

Is there any other issue where any economists insist that price floors benefit the lowest added-value suppliers?

Not that I know of, although feel free to correct that impression in the comments of this post.  This is one reason, by the way, why I do not find the monopsony explanations of minimum wage benefits convincing.   Monopsony should not be particularly strong across labor, if anything the contrary (more employers hire labor than say aluminum).

If labor does differ from other factors of production, one feature is that labor can “decide to work harder.”  So perhaps a minimum wage pushes people into tougher jobs.  As I’ve argued in the past, this may be bad for them but good for their families.

David Henderson offers some remarks about the minimum wage and monopsony.

Are your views on sticky nominal wages and the minimum wage consistent?

Let’s say your labor is worth $10 an hour but you won’t go back to work for less than $12, thereby leading to the unemployment of you.

In essence you are self-imposing a minimum wage on that market, but the employer is responding by leaving you jobless.  (Analogous to “self-deportation,” a sarcastic wag might suggest.)

Let’s say, alternatively, that you finally decided to settle for $10 but the law now stipulates $12.  It’s not quite the same (“the public regime has shifted”), but still I can imagine that an employer, if he did not hire you in the first setting, also would not hire you in the second setting with the higher legal minimum.

Keynesians believe that worker-imposed minimum wages do not lead to reemployment very readily.  Other people, some of whom are also Keynesians, believe that state-imposed minimum wages are reasonably consistent with employment/reemployment.

If there is significant monopsony in labor markets, can a worker-imposed minimum wage improve outcomes?

I know many economists who will argue: “let’s raise the state-imposed minimum wage.  Employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”  I do not know many Keynesians who will argue: “In light of the worker-imposed minimum wage, employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”

Again, I am not saying that the worker-imposed minimum wage and the state-imposed minimum wage are identical in their nature.  Still, it would be interesting, in terms of a model, to deduce where the relevant difference comes from.

Is the difference that the worker-imposed minimum wage is too high?  That the worker has not publicly precommitted to his or her personal stubbornness?  That a legal minimum wage applies to a larger and broader class of workers?  Something else?

In policy terms, does it suffice to argue that minimum wage increases should be restricted to periods of high or at least adequate demand?  Have you noticed that is not what we are seeing?

Addendum: For an additional exercise, under what model are your views on the minimum wage, sticky nominal wages, and payroll tax cuts consistent?  Consider please a payroll tax for each side of the market.  Toss in the liquidity trap for true extra credit.

Krugman on the minimum wage

I am always happy to link to interesting new arguments which have not been considered on this blog before:

…the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right: given a second-best world in which you use imperfect tools to help deserving workers, two tools together can produce a better outcome than either one on its own.

He is drawing from this Rortybomb post.  For other, different arguments, here is Angus and here is David Henderson.

The minimum wage in China

Minimum Wage Impacts in China: Estimates from a Prespecified Research Design, 2000-2007

Jing Wang & Morley Gunderson
Contemporary Economic Policy, forthcoming

Abstract:
We use a prespecified research design to estimate the employment effect of minimum wages in China over the period 2000 to 2007. Our results are consistent with theoretical expectations and institutional realities of Chinese labor markets. These include: negative employment effects in slower growing regions; larger negative effects in non-state-owned organizations that tend to be more responsive to market pressures; much larger lagged effects reflecting the time needed for adjustments to occur; no adverse employment effects in the prosperous and growing Eastern region; and a positive employment effect in state-owned enterprises in the East – consistent with monopsonistic behavior.

That is from National Affairs.

The minimum wage and monetary misperceptions theories

I have never heard a market-oriented economist argue that a rise in the minimum wage boosts the demand for labor.  You might try this argument: "The government is certifying that these workers are worth this much.  The government is defining the market price.  Entrepreneurs will believe that price and hire workers in the expectation of finding an equivalent or even superior marginal product.  The government said that was the right price." 

No go.  Market-oriented economists instead claim that entrepreneurs "see through" to the real marginal products of these laborers.  The demand for labor, rather than rising, would fall and unemployment would result.

So what happens when the Fed "sets" short-term interest rates or influences other prices?  What is postulated by monetary misperceptions theories, including Austrian business cycle theory?  Entrepreneurs no longer see through to the fundamentals.  Instead, entrepreneurs are taken to believe this Fed-influenced rate is the correct price and they make their plans accordingly.

What is the difference between these two cases?  I believe we need a better theory of when people take price signals as informative and when not.  Too often people just assume that the inferential abilities, or lack thereof, go the way they want them to.

More Krugman on the minimum wage

Krugman offers a response to a few critics, including I believe myself.  His latter two points are on the macro model, his first point is trying to establish the relevance of the macro model for the minimum wage analysis:

1. Why did I go from minimum wages to overall wages? Clearly, a cut in minimum wages –which only apply to some workers – can raise the employment of those workers at the expense of other workers. But the advocates of a cut are claiming that they can raise overall employment. The only way that can happen is if a reduction in average wages raises employment.

There is a simple story here.  Lower the minimum wage and firms with market power will in general hire more labor.  (Sethi's critique refuses to consider that mechanism but simply shift the MC curve and watch it happen.)  In the most straightforward setting the total wage bill increases, even if the average wage falls.  With a higher total wage bill, there is no downward deflationary spiral.  This general equilibrium point was emphasized by Jacob Viner in his very careful 1937 review of Keynes but it remains a neglected insight.

The negative scenario, namely the total lower wage bill, can possibly occur if employers use the lower legal minimum wage to lower wages for currently employed workers who were at the previous minimum.  A few observations here:

1. Even then the net effect is indeterminate and not necessarily in the Keynesian direction.  The total wage bill still could go up or even if the total wage bill goes down the total flow of purchasing power need not decline, given that employers just don't sit on their extra money.  (This same point applies to all other second-best scenarios.)

2. The model already has assumed short-run wage stickiness, so it would be odd to suddenly relax that assumption as a way to get the total wage bill to fall.  

3. Given that minimum wages don't cover so many workers, the AD effects are likely quite small in any case.

4. The new workers may well be collecting EITC, which will strengthen any aggregate demand effect from their employment.

5. The increase in aggregate supply — more work goes on! — itself has a positive effect on aggregate demand through subsequent Hutt-like, supply-side multipliers.  It would be unusual if velocity shifts were completely neutralizing with respect to this increase in production.

6. The "then why don't we raise the minimum wage to $30 an hour" meme is an overrated "right-wing talking point" in a lot of policy debates.  Still, in this context, it remains a good question from a purely analytical point of view.  Such a change would not boost aggregate demand in most plausible models and from that admission you can work backwards.

Mixing up average wages and the wage bill is a common Keynesian confusion; they're not always moving in the same way, though they may seem to in some very simple models.  Krugman's #1 is assuming a link between the micro and macro change that simply doesn't have to be there.  

That all said, it's a fair enough point to note that changes in the minimum wage will likely bring only small positive effects in any case.

Should we cut the minimum wage?

Yes.  Bryan Caplan has the answers:

Paul [Krugman] does address the real balance effect, but he still ignores the main arguments I've made before:

1. Cutting wages increases the quantity of labor demanded.  If labor demand is elastic, total labor income rises as a result of wage cuts. 

2. Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers' income.  So unless employers are unusually likely to put cash under their mattresses, wage cuts still boost aggregate demand.

An even simpler way to explain it: Imagine every firm divided its existing payroll between a larger number of workers.  How is that bad for aggregate demand – or anything but good for employment?

P.S. If you prefer specific facts to textbook arguments, see Scott Sumner's legendary Table 12.2 on wages and the Great Depression.

As Bryan titles his post: "Cutting the Minimum Wage Really is Good for Aggregate Demand."  The actual arguments in Krugman's blog post concern an overall downward spiral in wages and prices, not minimum wage cuts at all.  The chance that minimum wage cuts set off such a spiral is very, very small.  Krugman's third paragraph makes perfect sense but the fourth paragraph and onwards is simply discussing a different topic.

I would add two points.  On Bryan's #1, workers at the current minimum wage are unlikely to receive nominal wage cuts if the minimum wage were lowered, for the usual morale and efficiency wage and lock-in reasons.  So the chance that total labor income rises is very high.  Second, no I don't believe in an upward-sloping AD curve, but in any case multipliers from production increases plus wage bill increases are likely to be more potent than multipliers from aggregate demand increases alone.

Addendum: Will Wilkinson offers relevant comment.

Is the minimum wage coercive?

Over at CatoUnbound, Dan Klein writes:

In 2006 there appeared a “raise the minimum wage” statement signed by 659 economists. I wanted to know why they favored the minimum wage, so I wrote up a questionnaire and sent it to them. But I also used the occasion to get their views on a very important matter: Did they view the minimum wage law as coercive?

Ninety-five graciously completed the survey. Very few of them simply accepted that the minimum wage law is coercive. More than half said the law is not coercive in any significant sense.[1]

But the minimum wage law (and concomitant enforcement) threatens the initiation of physical aggression against employers who pay less than the minimum wage. It threatens physical aggression against people for engaging in certain kinds of voluntary exchange. To me, that is coercion. Just imagine if your neighbor decided that he would impose a minimum wage law on us. Wouldn’t we all agree that he was coercing us? If it is coercion when he does it, why isn’t it coercion when the government does it?

Coercion is not always bad, all things considered, but surely Dan is correct.  Ed Glaeser, Richard Epstein, and others are due to respond.