Results for “"minimum wage"”

290 found

David Neumark, this time with William Wascher, continues his reign of enlightenment:

We study the effects of minimum wages and the EITC in the post-welfare reform era.  For the minimum wage, the evidence points to disemployment effects that are concentrated among young minority men.  For young women, there is little evidence that minimum wages reduce employment, with the exception of high school dropouts.  In contrast, evidence strongly suggests that the EITC boosts employment of young women (although not teenagers).  We also explore how minimum wages and the EITC interact, and the evidence reveals policy effects that vary substantially across different groups.  For example, higher minimum wages appear to reduce earnings of minority men, and more so when the EITC is high.  In contrast, our results indicate that the EITC boosts employment and earnings for minority women, and coupling the EITC with a higher minimum wage appears to enhance this positive effect.  Thus, whether or not the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable depends in part on whose incomes policymakers are trying to increase.

Here is the paper, here are non-gated versions.  In short, the standard liberal recipe of boosting the minimum wage and the earned income tax credit is probably good for women, bad for men.  The interesting question is what kind of model could rationalize this result…

Alan Blinder: I would not put large weight on this, but I think that to some extent attitudes and mores matter.  Regardless of Pareto efficiency, we do not allow indentured servitude or child labor.  Similarly, a $7.25 minimum wage would state that society deems it wrong to pay less.

Peter Dorman: Since Tocqueville (at least) there is a well-established argument that greater equality of income and respect is associated with better democratic performance.  This is a near-consensus position in political theory.

Arindrajit Dube: Increased income (and reduced inequality) has broad effects throughout society and polity; this includes (but is not limited to) increased self worth, increased ability to use added time to spend with kids, attend community college, etc., from an income effect.

Amitava Dutt: Reducing poverty, reducing inequality.  Creating a culture where people realize that some basic needs of people should be satisfied.

Robert M. Feinberg: I’m not sure if this is exactly what is meant here, but I would see notions of fairness playing a role.

John R. Morris: Economic justice for low income people.

Jesse Rothstein: I believe that a great deal of bargaining happens within parameters that are determined, in part, by societal expectations. Government policy has some role in determining those expectations.

Paul Swaim: …I think it is important that adults working full time can earn  enough to make a substantial contribution to supporting a decent living standard and take pride in their status as workers. Put differently, people playing by the rules should not feel like total losers (or be considered as such by their fellow citizens). The minimum wage can probably make a modest contribution to approaching this objective.

William Van Lear: Suggests a society committed to fairness and recognizes that power has a role in determining outcomes.

Mark Votruba: Vast disparities in wealth and income stability of democratic capitalism, as suggested by Alan Greenspan.  I would add that our sense of community is undermined, which in turn undermines the social norms towards “appropriate” social behaviors, especially by those at the bottom.

Jeffrey Waddoups: Reducing wage inequality will increase the quality of democratic institutions.

Bernard Wasow: A low cost demonstration of concern for low wage workers that causes little damage.  Elicits a buy-in by low wage workers to the polity

Henry W. Zaretsky: Improved living conditions for affected workers and their families.  Less likely to become dependent on public programs such as welfare and Medicaid.  More incentive to seek work.   More stake in the system.  More independence.

It is easy to read these and think "Ah, how narrow is neoclassical economics in contrast to these fine thoughts."  My response is instead: "These people are making a mountain out of a molehill."  Bernard Wasow is the guy who makes the most sense.

If you wish to understand the gap between market-oriented and more left-wing economists, this piece is an excellent place to start.

David Neumark has a good review of the minimum wage literature for a popular but intelligent audience.

MaxSpeak is pushing a letter from economists, already signed by notables Alan Blinder, Clive Granger, Rebecca Blank and others, to raise the minimum wage.  Don’t worry, I won’t bore you with the usual story about unemployment.  A small increase in the minimum wage will have only a small unemployment effect, nuff said.  Nevertheless, parts of the letter strikes me as absurd.  The letter says, for example, that "The minimum wage is also an important tool in fighting poverty."  Rubbish.  But don’t take my word for it. 

The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market.  We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers…. an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.

The source? Card and Krueger in Myth and Measurement (p.3).

The letter also states that most of the people earning the minimum wage are adults.  Most workers are adults so this is hardly surprising.  What is more surprising is that 25% of the workers earning the minimum wage are teenagers, even though teenagers are a much smaller percent of the workforce.  In addition, over half the workers earning the minimum wage are younger than 25.  The letter can spin things how it wants but it would be more informative to say that most of the workers earning the minimum wage are young workers who with a little age and experience would have their wages increased in anycase.

That brings me to a second strange statement, the idea that "the minimum wage helps to equalize the imbalance in bargaining power that
low-wage workers face in the labor market."  One wonders how bargaining power is defined.  Do these economists really believe that the fat cats are getting rich slurping up surplus from the low-wage workers?  If you measure bargaining power as a difference between wages and marginal productivity it is surely high wage workers who lack bargaining power.

The real rebuke, however, to the bargaining power idea is this: a lot of people earning the minimum wage are teenagers but more than 90 percent of working teenagers earn more than the minimum wage.  Either most teenagers are very good bargainers or wages depend less on "bargaining power" than on productivity.  Either way the letter is confused.

The debate over the minimum wage is more about rhetoric than reality. 

Greg Mankiw and Brad DeLong are having some back and forth over the minimum wage.  I’m willing to admit, unabashedly, that I form my judgments on this matter by theory more than "raw evidence."  When the evidence is unclear, or points in multiple directions, I favor the most plausible explanation.

Unlike like most market-oriented economists, however, I am not obsessed with the story of the downward-sloping demand curve for labor, to the exclusion of all other possible mechanisms.  I am more likely to see markets as extremely flexible and to look to the quality of job as a critical variable.  If minimum wages go up, I expect some mix of two scenarios:

1. The employer restores the previous net wage by worsening working conditions.

2. The employer upgrades the quality of job and thus marginal products, to meet the new level of minimum wage.

Now #1 is not much of an argument for boosting the minimum wage.  But is #2?

It sounds good but the employer had decided in the first place not to create those higher productivity jobs.  So those jobs must cost more and we should expect a negative effect on employment, albeit perhaps a slight one.

It is also the case that those jobs will go to the "most easily upgradable" workers among the low-wage working set.  I suspect those are the low-wage workers with relatively high human capital and high levels of adaptability.  Among the class of low-wage workers, the effects are probably anti-egalitarian.  That again does not make the minimum wage sound so great, even though the employment effects could be small or perhaps even zero.  I might add this also explains why the most articulate low-wage workers probably, for reasons of self-interest, favor increases in the minimum wage.

I don’t buy into the Card-Krueger monopsony scenario, at least not outside of rural Nebraska.  If you wish to defend it (does anybody? — even Krugman scorned it), comments are open.

I invite all participants to the debate to indicate the relative weights they place on "theory" vs. "history."  I’ll invent an imaginary, meaningless scale and opt in at "0.7" in favor of theory.  If the evidence were clearer, of course, my weights would change.

Will Wilkinson offers a good summary of economic thought on the topic.  His early salvo:

The law of demand is very, very empirically adequate as it is…

Here is my previous post on the minimum wage.  Here is Tyrone on the minimum wage.

Addendum: Jane Galt (where is Jennifer?) adds commentary.

"Minimum wage, bah humbug.  It is easy to defend.  Tyrone snorts at you.

First let us clear out some garbage.  The minimum wage should not be $50 an hour, and simply citing this possibility does not serve as an effective reductio.  And yes racist South African labor unions supported minimum wages, but wouldn’t you expect them, vile as they may have been, to support higher wages in any case?

We know the empirical evidence on minimum wages is mixed.  I am familiar with the Card-Krueger smackdowns but at the end of the day you have to work hard to get a big effect on employment.  Most importantly, all of these studies miss the longer-run effects that make a legally binding minimum wage such a good idea.

Don’t obsess over static neoclassical economics, where you start with a firm, a competitive market, and a set of marginal products already in place.  Think dynamic and look at the longer-run.  If you ban jobs beneath some hourly wage, you will end up with more jobs above that wage.  Ex ante, companies can set up their production to mesh with high-wage rather than low-wage jobs.  Surely we should prefer an economy with higher marginal products, higher wages, and higher median income.  Yes this redistributes a bit of wealth from capital but what an efficient way to do so.  And we all know that long-run dynamic gains tend to swamp one-time static losses.

Don’t expect to pick up these effects in any study with a short time horizon.

Furthermore there is more slack in the system than many economic models would indicate.  As a young’un, I worked in a supermarket.  When they raised the legal minimum wage, they raised my wage as well.  I was happy.  No one fired me.

Minimum wages probably lower the net amount of government intervention in an economy.  Lower minimum wages would mean higher welfare payments to make up the difference.  Ever heard of EITC?  In reality, minimum wages and EITC work together to keep the poor at decent standards of living.  More importantly, they keep poor workers in the private sector rather than letting them become wards of the state.  Try living on the minimum wage (much less beneath it), and without the safety net of your parents, if you don’t get my point.

Perhaps you think the minimum wage is an excessively blunt policy instrument, given that many near-minimum jobs are held by upper middle class teenagers.  Fair enough, but this also means that the minimum wage doesn’t put many of those people out of work.  We can go back to focusing on the net effects on the poor.

Tyler, what is really your problem with the minimum wage?  Free market economists love to bash it because they can posture as friends of the poor.  They can pretend that basic economics has great relevance.  They can claim to know something useful, rather than facing the fact that opposition to big government really means opposition to massive income transfers.  Since the American public is not willing to go this route, free market economists have to focus their yapping on the minimum wage and the (actually quite small) benefits of free trade.

Tyler, don’t you agree?  Tyrone signs off."

There he goes again.  As a child, he would never even sit straight at the dinner table.  Readers, if you now wish to refresh yourself, try this, or perhaps even this.  And maybe someone over at CrookedTimber is up for Opposite Day, but on some other topic…?

The minimum wage reduces employment, especially among low-skilled workers for whom the minimum wage is most binding. That remains the consensus view but note that holding the consensus view does not preclude thinking that the decrease in employment is small relative to the increase in the wages of those who remain employed. If the employment effect is small, however, it is also important to understand why it is small – the policy implications of monopsony, which I think implausible, are quite different from the implications of the the idea that other aspects of the labor-contract adjust in response to enforced changes in wages (i.e. the converse of the hot water argument). See also Tyler on this.

When I discuss minimum wages in class I tell my students that one of the best ways to get a high-paying job is to get a low-paying job and work your way up. The minimum wage can put the least employable out of work and have permanent negative effects when training and work skills not acquired in youth are difficult to accumulate later on. I think the theory makes sense but until recently it had not been extensively investigated.

David Neumark and Olena Nizalova look at the how exposure to the minimum wage in the past impacts workers today. They find that teenagers who grow up in states with a minimum wage that is significantly and consistently higher than the federal minimum have lower earnings and work less a decade or more later when those workers are in their late twenties. The negative effects are larger for blacks, for whom the minimum wage tends to be more binding.

To generate variation, Neumark and Nizalova use data on minimum wages by state relative to the Federal minimum. The data is more aggregated than I would like and the variation by state only picks up in the late 1980s so there is less data than meets the eye. In theory, there is nothing special about the minimum wage as the driving factor that pushes people out of the work force, unemployment brought about by bad economic conditions should have similar effects. Thus, I wish that they had discussed the literature on hysteresis and unemployment. Welfare could also pull people out of the work force. I’m not fully convinced that they adequately control for economic conditions although they do use some clever techniques to try to address some of these issues. Nevertheless, my priors are supported so this must be a good paper! More seriously, Neumark and Nizalova are to be credited with opening the question of the long run effects of the minimum wage.

The bottom line? If you don’t work at McDonald’s when you are a teenager, don’t expect to manage a McDonald’s when you are middle-aged.

Addendum: Thanks to John Thacker and others who pointed out that one of my sentences, now fixed, was difficult to parse if you hadn’t read the paper – which sort of defeats the purpose of the blog, doesn’t it?

Eric Rasmusen offers an update on recent minimum wage controversies in the blogosphere; you’ll find the relevant links in his post, including to my own views.

Steve Landsburg imparts much wisdom on the minimum wage; read Brad DeLong as well. Steve writes:

How do we know what was in all the unpublished research about the minimum wage? Of course we don’t know for sure, but here’s what we do know: First, the big published studies were no more statistically significant than the small ones. Second, this shouldn’t happen if the published results fairly represent all the results. Third, that means there must be some important difference between the published and the unpublished work. And fourth, that means we should be very skeptical of what we see in the published papers.

Now that we’ve re-evaluated the evidence with all this in mind, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.

The work of Card and Krueger has emphasized the puzzle of why minimum wage boosts don’t cause a big downturn in employment. They offer up a complicated story about labor market monopsony.

My take:

On this issue (and many others) I’ve been much influenced by my colleague Gordon Tullock. Gordon notes that the government can make an employer raise nominal money wages, but can’t stop him from turning off the air conditioner. [A more optimistic scenario is that the employer invests in creating a higher-productivity job.] Surely just about every job out there can be made worse, one way or another, in a way that saves the employer money.

So the scenario is now simple. The government boosts the minimum wage. Low-wage workers earn more. Few lose their jobs. Workers sweat more too, one way or another. Few are much better off.

Addendum: There is a neat twist on this argument, drawing on the idea of an intra-family externality. Let’s say you hold the “traditionalist” view that the poor don’t work hard enough for their families. If Tullock’s mechanism is operative, you might then favor increasing the minimum wage. The end result would be more sweat at a higher money wage.