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Pivoting off Karl’s recent posts, I want to throw my two cents in on the minimum wage. Actually, I’ll make that one cent, because I’ve already written about my take on the empirical evidence plenty before and there’s no sense in rehashing that. What I do want to draw attention to is a smart post by Robert Waldmann from 2009 that illustrates why now in particular is a bad time for the minimum wage:
Empirical estimates of the effect of the minimum wage on employment suggest that the effect is very small. One famous study by Card and Krueger showed a positive effect of an increase in the minimum wage. The logic used by Card and Krueger to understand how this could happen suggests that things are different now.
Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly. If they are forced to pay the higher wage, their desired level of employment will be lower, but that level is the sum of employment plus vacant jobs. A binding minimum wage can reduce the number of vacant jobs by more than it reduces the sum of employment plus vacant jobs. Thus more employment.
I think this is not relevant to the current situation. There are very few vacant jobs. Quit rates are low. According to their logic, the effect of the minimum wage on employment depends on the unemployment rate. The evidence of a small effect is almost all from periods of unemployment far below 10%. I don’t think it is relevant to the current situation.
As you can see in this graph quits are still quite low, and so Robert’s logic still holds.
It’s always worth noting that when basic laws of supply and demand don’t seem to hold it’s not because of some universal and eternal forcefield simply protecting a market from these laws, but for reasons typically explained by some usually more complicated economic theory. Either that or it’s a mystery, and maybe the exception to the rule is simply due to some irreducible complexity economists will never grasp. But if this is the case it should make you worry even more: since you don’t know where the exception is coming from, you have no idea what will cause it to give way.
When the laws of supply and demand seem violated, it’s probably for a reason, and that reason may not hold in all circumstances. “When and under what circumstances will the result you believe continue to hold?” is an important question to ask yourself. Take the minimum wage. I don’t know any economist who believes that the minimum wage won’t definitely cause unemployment at some level. Maybe it’s a $10 minimum wage, maybe it’s $8, and just maybe it varies a lot by location, industry, and job. That some studies in the past have failed to show a significant unemployment effect of the minimum wage should not lead you to toss aside the concepts of supply and demand and conclude that they are meaningless or disproven in this context.
Here is David Brooks’ advice about how the President can bargain with both parties to make progress towards fixing some of our long-term problems:
Most important, the president will probably have to take advantage of the following paradox: bigger is easier. If he just tinkers around the edges with modest proposals, then everybody will be on familiar ground. But if he can expand the current debate, then, suddenly, everybody is on new ground.
The general approach should be to offer the left something it really craves. Then offer the right something it really craves. Then, once you get them watering at the mouth, tell them they’re going to have to bend on the things they don’t care about in order to get the things they do.
Now I don’t agree with the things Brooks’ calls for giving the Democrats, but I can think of one thing Obama should give the Republicans and the Democrats should happily give up: get rid of the minimum wage. Wait, wait, don’t roll your eyes and close this window! Stay with me!
Economists from both sides of this debate agree that the minimum wage is less important than most people think and politicians act. Futhermore, there is widespread agreement it is a highly imperfect way to make poor people better off. The Earned Income Tax Credit is better targeted at low-income families instead of middle class teenagers, and it doesn’t have the downsides of potentially causing disemployment. So Democrats should be glad to trade this policy in for a smarter, more effective, and more efficient one, and in doing so cash in on Republican’s emotional attachment to this issue.
Yes, it would be a huge symbolic loss for Democrats. But like Brooks said, getting reform done is going to require giving and taking, so a good strategy for both sides to maximize actual real benefits is to give when the policy is symbolic, and take when the policy is most efficient and beneficial.
Karl responded recently to a post by Barbara Kiviat who wondered “why should we care about the minimum wage?”. Karl’s general point is that the minimum wage is harming lot’s of families, and Barbara’s point is that we shouldn’t spend so much time on a policy that has little affect on the economy and doesn’t help low income families anyway. But if Barabara thinks both sides care too much about this issue, then shouldn’t she be arguing for Democrats take advantage of the Republican’s foolish obsession and trade a repeal of the minimum wage for a policy that actually benefits poor people?
I’ve argued before that the balance of new minimum wage evidence shows that the minimum wage causes unemployment, so I won’t rehash that evidence here (if you’re under the assumption Card/Krueger is the end of the debate, I’d encourage you to follow the link). But I do want to focus on the inefficiency of the minimum wage. This report from the CBO shows that showed the 2007 increase in the minimum wage cost employers $11 billion, of which $1.6 billion benefited poor families. In contrast, an expansion of the earned income tax credit (EITC) would have cost $2.4 billion, $1.4 billion of which would have gone to poor families. The EITC is cheaper and more targeted. Note that this is only the marginal cost of the most recent increase in the federal minimum wage, not the total cost of federal and state minimum wages, which would be much higher.
What the minimum wage does is effectively push the costs of a multi-billion dollar, illusory, anti-poverty program onto employers. It’s an inefficient way to help poor people, and a hidden tax on businsses that forces them to spend $4 so that the government doesn’t have to spend $1.
Considering how low Barbara believes it’s cost would be in terms of impact on poor people, she should want Democrats exchange a repeal of the minimum wage for a policy that actually helps poor people. After all, what do you do when someone values something more than it’s worth to you? Sell it and buy something better.
Via Mark Thoma comes an interview with economist Arindrajit Dube about his research on the minimum wage:
In an interview with The Real News, Arindrajit Dube, labor economist and Assistant Professor of Economics at University of Massachusetts, said that increasing the minimum wage in some areas has not reduced jobs as expected by the conventional theory.
Dube said the conventional wisdom surrounding minimum wage comes from research done before the early ‘90s. … Dube told TRNN that around the early to mid ‘90s some economists realized these studies were badly flawed, and began looking at local evidence instead of just national evidence. The famous work of labor economists David Card and Alan Kruger looked at the border of New Jersey and Pennsylvania when New Jersey raised its minimum wage. Within a year, he said, not only had employment in New Jersey not decreased, it had actually risen in some groups.
He said the report received strong criticism from the economic community, but Dube’s studies apply this technique across borders of all the states, over a twenty year period to track the effects in many cases, and for a much longer period.
Dube sort of creates the impression here that the current conventional wisdom is based on outdated research, which is not the case. While the conventional wisdom may have been founded on research from before the 90s, the majority of post Card and Kruger research, what has been called “the new minimum wage research”, supports the notion that minimum wages decreases employment. For instance, a 2006 paper from David Neumark and William Wascher summarizes the new minimum wage research like this:
The studies surveyed in this paper lead to 91 entries in our summary tables (in some cases covering more than one paper). Of these, by our reckoning nearly two-thirds give a relatively consistent (although by no means always statistically significant) indication of negative employment effects of minimum wages—where we sometimes focus on results for the least-skilled—and fewer than 10 give a relatively consistent indication of positive employment effects. In addition, we have highlighted in the tables 20 studies that we view as providing more credible evidence, and 16 (80 percent) of these point to negative employment effects. Correspondingly, we have indicated in our narrative review that, in our view, many of the studies that find zero or positive effects suffer from various shortcomings.
This is consistent with their 2008 book, Minimum Wages, which I don’t have on me at the moment.
In any case, I have not read Dube’s paper but it looks like an interesting extension of Card and Kruger. In the meantime, the majority of the new minimum wage research supports the hypothesis that the minimum wage increases unemployment.
A recent story on how the minimum wage is hurting South African workers is getting some attention. It opens with this tragic scene:
The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor — the supposed beneficiaries of the crackdown — clambered atop cutting tables and ironing boards to raise anguished cries against it.
“Why? Why?” shouted Nokuthula Masango, 25, after the authorities carted away bolts of gaily colored fabric.
The story naturally generates sympathy for the workers and should make anyone question the desirability of the minimum wage in that country. In one sense though these workers are relatively lucky; when the minimum wage destroys their jobs they at least have a chance to cry out and get attention for their plight, most jobs destroyed by the minimum wage are jobs that are never created, so the workers never even get a chance to be heard. I think progressives should think about this story when they consider whether minimum wages help the poor.
Conservatives will probably agree with this and want to call progressives hypocrites or uncaring, but would they feel better if the sheriff gathered these workers up and deported them after they closed down the business? The minimum wage is not the only thing destroying jobs, so too are the stepped up immigration restrictions that most conservatives support.
Structural labor market problems are not the majority of what’s causing unemployment, but they are a significant and potentially growing problem. It’s time to reconsider policies like minimum wages and immigration restrictions that prevent job creation or, even worse, actively destroy jobs.
Modeled Behavior 