Tag: minimum wage

Do Minimum Wage Increases Raise Crime Rates?

They do for younger workers and property crimes, finds a new paper by Zachary S. Fone, Joseph J. Sabia and Resul Cesur.

Back in 2016, President Obama’s Council of Economic Advisors (CEA) claimed raising the minimum wage to $12 per hour could prevent up to half a million crimes annually. The basic idea was simple: there is good evidence criminal behavior is negatively related to wages. The CEA thought raising the minimum wage would raise the opportunity cost of low-paid workers engaging in crime.

Implicitly they were saying this crime-reduction effect would dominate any impact of job losses or hour reductions leading to more property crime, for economic reasons, or violent crime, for despair-related reasons. But this new paper suggests the CEA’s intuition on the balance of the effects was wrong, for younger workers especially.

The economists use three large crime datasets over a two-decade period to undertake regression analysis of the effect of minimum wages on different crime rates. They control for policing characteristics, crime policy, demographics, health and social welfare policies, minimum high school dropout ages and government lifestyles regulation. Doing so presents robust evidence that minimum wage hikes do not reduce crime. In fact, they increase property crime arrests among 16-24 year olds – the group for whom the minimum wage is most likely to bite.

Their regressions find little evidence minimum wage hikes affect violent or drug crime, or net crime among older individuals. But the impact on young people is positive and strongest when the minimum wage hikes are larger. Digging deeper, they find that the property crimes spike is driven larcenies rather than burglaries, motor vehicle theft or arson. The results are strongest for counties with populations over 100,000 and are likely driven by the traditional labor demand impact of minimum wage hikes (fewer jobs or reduced hours).

The results they obtain of the crime responsiveness to minimum wage hikes implies that a 10 percent increase in the minimum wage between 1998 and 2016 led to nearly 80,000 additional property crimes committed by 16-to-24 year olds. This would imply that implementing the $15 per hour Raise The Wage Act today could generate another 410,000 property crimes.

No Free Lunch At Whole Foods

Recently, I wrote about “other channels of adjustment” for firms facing minimum wage increases (other than reducing hiring or laying off workers). My main point was this: though a minimum wage hike need not lead to job losses at every single firm, in the absence of firms not knowing how to incentivize their workers properly to maximize profitability, other business responses are not costless.

A good example can be seen in today’s story about Whole Foods. Under pressure from campaigners, Amazon recently raised its pay for its lowest-paid employees to $15-an-hour. Now some workers aren’t enjoying the effects:

The Illinois-based worker explained that once the $15 minimum wage was enacted, part-time employee hours at their store were cut from an average of 30 to 21 hours a week, and full-time employees saw average hours reduced from 37.5 hours to 34.5 hours. The worker provided schedules from 1 November to the end of January 2019, showing hours for workers in their department significantly decreased as the department’s percentage of the entire store labor budget stayed relatively the same.

“We just have to work faster to meet the same goals in less time,” the worker said.

            …

The labor budget and schedule cuts at Whole Foods in the wake of the minimum wage increase appear to be similar to changes Amazon made after it raised the pay of warehouse workers to a minimum wage of $15 an hour. That move was widely praised but Amazon also cut stock vesting plans and bonuses that had provided extra pay to some workers.

Some Whole Foods workers say the cuts have led to understaffing issues. “Things that have made it more noticeable are the long lines, the need to call for cashier and bagging assistance, and customers not being able to find help in certain departments because not enough are scheduled, and we are a big store,” said one worker in California.

Whole Foods and Amazon therefore seem to be adjusting to higher hourly pay in several ways: cutting hours for employees and sweating them harder during those reduced hours, cutting back on stock plans and bonuses, and passing on the extra cost to consumers in the form of worse service. None of these are costless:

-       cutting hours or bonuses negates the earnings boost from hourly pay increases

-       sweating workers harder makes the work environment less pleasant, and may reduce job opportunities for workers incapable of “upping their game”

-       a worse shopping experience is a quality-adjusted price increase for consumers

These are exactly the types of impacts I was referring to re: high minimum wages. When statutory wage floors are increased, the fact that the firm would not have opted to undertake these changes in the absence of the wage hike suggests changes would otherwise not have been profitable, and as such are still costly (though some firms are no doubt currently not efficient – making it feasible for some that higher minimum wages could jolt them to a better business model.)

There’s a great discussion of this issue towards the end of a brilliant EconTalk podcast on the minimum wage this week.

For more on the minimum wage, read here, here, here, here, here, here and here.

Other “Channels Of Adjustment” To Minimum Wage Hikes

The “Fight for $15” scored a victory Monday as New Jersey Governor Phil Murphy signed legislation for the state to hit a $15 per hour minimum wage target by 2024. Vermont is considering similar legislation, and I testified to their Senate Economic Committee about the proposal on Tuesday.

Earlier this week I wrote on the bad arguments used to justify such policies. But in my written evidence for Vermont I also discussed the consequences.

There’s been a long back-and-forth about the impacts of minimum wages on jobs and hours, which I shan’t repeat here. But I also tried to address advocates’ insistence that other “channels of adjustment” exist, meaning employment levels or hours might not fall.

This is true – every business affected will react differently, depending on their industry, business model, staffing practices or ability to pass increased costs onto consumers.

But the key point is this: unless we presume there is currently monopsony power wielded by companies, or firms are passing up profit-enhancing opportunities that would come from boosting pay,  these other adjustments are not costless.

It’s tempting when advocating policy to engage in motivated reasoning, claiming there are no trade-offs from minimum wage hikes and imagining everyone will benefit. In the case of increasing the minimum wage to $15, this is wishful thinking.

1)   Improved productivity

It’s sometimes said businesses can cope by taking steps to improve productivity to maintain their profitability. But improving worker productivity itself is costly.

Boosting productivity might require replacing inexperienced low-skilled employees with more experienced, higher productivity employees. This comes with search and turnover costs in the short-term and reduces opportunities for low-skilled workers in the longer-term. We know this can have a scarring effect on young workers, who lose entry-level job opportunities that provide basic skills and habits, including punctuality, and dealing with customers and colleagues. David Neumark and Olena Nizalova found that, even their late 20s, workers who had been exposed to high minimum wages when they were younger worked less and earned less. This effect was especially strong for blacks.

“Improving productivity” might instead entail putting pressure on workers to produce more, cutting their hours so they are more productive in hours they do work, or cutting back on side perks and benefits. These amount to a worsening of the work environment for employees, offsetting some of the gains from the wage increase.

Higher minimum wages might also deliver higher productivity by encouraging the automation of low-skilled jobs. In the past decade we have seen the proliferation of supermarket checkout machines, iPads to order food in restaurants or fast-food outlets, and the use of apps to replace human employees for checking in for flights, ordering tickets and other activities. Shake Shack in New York, preempting the minimum wage hike, trialed a largely staff-free restaurant. Some fast-food outlets are even exploring the possibility of burger-making machines.

Of course, some of these trends represent pure, cost-effective free-market innovation. But continually raising the minimum wage incentivizes labor-saving capital investments, acting like a subsidy to automation. Based on data from 1980-2015, economists Grace Lordan and David Neumark found “that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers, and increases the likelihood that low-skilled workers in automatable jobs become nonemployed or employed in worse jobs.” The effects were particularly damaging for older workers previously in manufacturing jobs.

2)   Firms taking the hit to profits

Some claim companies will just have to take a hit to profits. No doubt some firms will accept a worse bottom line in the short-term, and perhaps adjust their hiring plans on a forward-looking basis. Others might see a permanent fall in profitability if they are in more concentrated markets. But lower profit rates discourage firms from entering markets, or cause some existing firms to close, especially those with razor thin margins. If you do not believe this, it is difficult to claim you believe in capitalism.

3)   Boosts to consumer spending

$15 minimum wage proponents sometimes claim that low-paid workers’ propensity to spend additional earnings means minimum wage hikes boost demand and raise the level of GDP, benefiting the broader economy. But this ignores contractionary impacts from lower profits reducing investment, higher prices reducing other spending or reduced employment opportunities cutting some people’s incomes. Standard economic theories suggest that, overall, increasing a price floor brings more distortions to the economy. An overwhelming majority of economists (69% to 4%) disagree with the idea that a $15 minimum wage would substantially boost aggregate economic output.

4)  Reduced turnover

By raising the minimum wage rate, it is claimed, firms will benefit from reduced staff turnover, with happier and more productive employees. But if this were a net benefit to the firm, wouldn’t they be raising wage rates already? That some firms do, and observe benefits, does not mean you can generalize that effect to the whole economy. It is also unclear why it is assumed reduced turnover would be good for productivity at an economy-wide level. The higher wage for low-skilled workers might reduce the incentive, on the margin, to leave the company for better positions or to seek promotion or invest in human capital, especially if there is wage compression. This could reduce economy-wide measured productivity over time.

In short, not all firms will adjust to higher minimum wages by cutting back the number of jobs or hours of employment. But other reactions to minimum wage hikes are not costless. Absent monopsony power or employers misestimating the best wage to incentivize workers, there is no free lunch.

The Rationale for Minimum Wage Increases

This morning I gave oral testimony to the Vermont Senate Economic Committee on their proposal to raise the state minimum wage to $15 an hour by 2024. As part of my written evidence, I explored in detail the rationale for minimum wage hikes from the “Fight for $15” campaigners and other think-tanks. Below is a slightly edited version of that section of my testimony, which has wider applicability.

Theoretically, a minimum wage hike can improve the functioning of a labor market when employers are “monopsonistic.” When firms have significant labor market power over employees, raising a wage floor can increase both pay for workers and employment levels. Some economists have argued that most firms do have a slight degree of monopsony power over their employees. This suggests a modest minimum wage can, in some cases, actually improve economic efficiency, ending so-called “exploitative” low wage rates without reducing employment.

But those advocating minimum wage hikes across America today do not use this economic line of argument. Bureau of Labor Statistics data shows 84 percent of employees paid at or below the federal minimum wage work for businesses in retail, leisure and hospitality, and education and health services. These industries do not tend to be characterized by powerful companies which dominate local labor markets. The theoretical economic case for minimum wage hikes to solve “market failures” is therefore weak.

Instead, proponents of higher minimum wages assert that legislation should deliver some target level for minimum hourly wages to fulfill other objectives. Their rationale is really about giving minimum wage earners more money. And they use a host of metrics to show that, currently, minimum wage earners are just not being paid enough.

But what should determine where the minimum wage level is set? Ideas seemingly differ across $15 wage proponents. Some implicitly argue that minimum wages should be set to cover certain essential living costs. Democratic presidential primary candidate Elizabeth Warren, for example, suggested this when she claimed:

When I was a kid, a minimum wage job in America would support a family of three. It would pay a mortgage, keep the utilities on and put food on the table. Today, a minimum-wage job in America will not keep a mama and a baby out of poverty.

Others prefer different metrics. In testimony to this committee, David Cooper of the Economic Policy Institute documented extensively how current minimum wage rates had not “kept up” with average wages or economy-wide productivity levels, and did not provide incomes for full-time workers to cross certain poverty thresholds.

None of these claims are disputable as facts. But I want to suggest that those metrics are not appropriate for judging what the Vermont minimum wage should be. Devoid of broader context, they are misleading and might lead to damaging policy conclusions.

Cost of living: It’s important to remember that employers pay employees for the perceived value of the work undertaken, not to compensate workers for their rent, food, energy, transport, clothes or child-care bills (which will differ hugely by family and are beyond employers’ control).

High living costs are a very under-discussed cause of economic hardship. My own research has found typical poor American households face higher prices on essential goods and services due to misguided interventions and regulations that cost them between $800 and $3,500 in total per year.

Rather than tackle the causes of these high prices, minimum wage hike campaigners want businesses to bear the cost of compensating workers for their living expenses. This is not economically sensible. Putting the full burden of the cost of living on shareholders and customers of low wage employers, divorcing pay rates from the work employees undertake, market conditions, and firms’ ability to pay, could risk a significant diminution in low wage job opportunities.

Productivity: Economy-wide labor productivity has risen faster than minimum wage rates over the last fifty years. Given productivity changes should affect worker total compensation levels, $15 wage campaigners imply that minimum wage workers are being paid below what their productivity commands.

But comparing productivity gains of all workers to speculate what hourly wage rates should be for minimum wage workers alone is misguided. After all, different industries experience different productivity growth rates over time.

Sadly, a productivity growth series solely for minimum wage workers is not available. But long-term data for the food services industry might be a reasonable proxy. Bureau of Labor Statistics data show that from 1987 to 2017, labor productivity in the food service sector rose by an average of just 0.4 percent per year (with unit labor costs increasing by 3.2 percent per year). If the minimum wage had been pegged to this productivity measure, it would have increased by 13 percent in real terms – from $7.16 in 1987 (2017 dollars) to $8.06 in 2017.

The actual 2017 federal minimum was, of course, $7.25 in 2017 and the Vermont minimum wage was $10. Using this productivity series and start date then, the Vermont minimum wage is now higher than justified by food service productivity improvements since 1987.

This does not prove that Vermont minimum wage rate increases have exceeded the productivity growth of all minimum wage employees, nor does it tell us what the minimum wage level should be according to this measure (given the necessary arbitrary start date). But it does show the danger of making spurious comparisons between economy-wide productivity and minimum wage rates. Pegging minimum wage rates to aggregate productivity trends might lead us to deliver much higher wage floors than justified by the productivity of workers in certain sectors, causing significant job losses or other adjustments.

Poverty: A stated ambition of $15 minimum wage advocates is to lift households above poverty thresholds. Minimum wage hikes can achieve this by raising incomes for minimum wage earners. Yet poverty is measured at the household level. The very reason why minimum wages were not used as a primary tool to reduce poverty for households in recent decades is that they were not considered particularly well targeted or effective.

First, people who earn around the minimum wage are often not from poor households. In 2014, the economist Joseph Sabia estimated just 13 percent of workers on hourly rates between $7.25 and $10.10 lived in households below the poverty line. Many people earning around the current minimum wage rate are second earners (particularly part-time) or young people who live in households with parents not in poverty. Second, minimum wage hikes could have adverse consequences on employment prospects by raising business costs.

That’s why economists have long concluded that in-work income transfers to families with children through programs such as the earned income tax credit (EITC) are better targeted at reducing poverty. Many believe they are preferable to minimum wages as a poverty reduction policy, because they encourage work while boosting incomes of poor households, rather than discouraging employers from hiring (though they come with other problems).

Yet poverty thresholds themselves ignore the EITC and other transfers that have expanded in recent decades. Comparing the income for a full-time minimum wage earner to poverty thresholds is therefore very misleading on the living standards many households actually enjoy.

In short, the metrics that $15 minimum wage advocates use to make the case for substantial hikes are not economically sensible benchmarks. For all the noise and economics-y language of their arguments, economists generally oppose manipulating prices to obtain social policy objectives.

Your focus in considering this policy proposal should center instead on traditional labor market economics.

Changing the legislated minimum wage affects both:

1)   the incomes of minimum wage workers who maintain their jobs and hours

2)   the number of jobs and hours of work employers demand, and broader working conditions, due to the change in business costs.

Standard economics tells us that, in most cases, raising the minimum wage will boost 1) and reduce 2). What becomes crucial then is considering the potential size of these two effects and judging their importance to achieving your objectives. The first requires drawing on economic evidence. The latter is more a question of philosophy.

 

The Impact of The New German Minimum Wage

Germany introduced a new economy-wide minimum wage for the first time in 2015, at a relatively high rate of €8.50 ($9.67 today). This rose to €8.84 in 2017. For reference: between 10 and 14 percent of eligible workers were thought to earn less than €8.50 before the policy was introduced.

This is interesting from a research perspective. Most minimum wage studies examine the impact of minimum wages at low levels or assess small changes to their rate. But here we have a case study of a whole regime change with a high rate introduced for the first time.

A new paper by IZA Institute of Labor Economics provides a clear literature review on the effects so far. Studies have exploited three different strategies to assess the impact: utilizing regional variation of the “bite” of the minimum wage, using treatment and control groups, and assessing the impact on firms. As the table below shows, a broad consensus is emerging, which sits well within the existing minimum wage literature:

  • Unsurprisingly, hourly wages have increased at the bottom of the income distribution, though there is little evidence of a ripple effect further up.
  • Most studies find a small but negative effect on overall employment (up to 260,000 fewer jobs), driven by reduced hiring (not layoffs) and a reduction of casual and atypical employment.
  • All studies that assessed it find a negative effect on contractual hours.
  • As a result, although hourly wages increased, the reduction in hours meant gross monthly earnings does not appear to have increased much for low-paid employees.
  • Since gross monthly earnings have not substantially increased, and those earning minimum wage are often not from the poorest households, the policy hasn’t seemingly reduced the risk of being in poverty.

German minimum wage studies

For more on the state of the academic debate on minimum wages, read my Regulation article.

Will D.C. End Tipping?

The “Fight for $15” has broken out again in Washington, DC, with the city council considering raising the minimum wage to $15 per hour. The proposal includes a provision to extend that price floor to restaurant and other workers who receive much of their income from tips. Surprisingly—at least for some people—that has generated some push-back from tipped workers.

Over the weekend, the Washington Post ran a persuasive op-ed by local bartender Ryan Aston criticizing the idea. Aston writes in part:

There seems to be this myth going around that most tipped employees in restaurants aren’t earning a livable wage; after 13 years in the industry, this baffles me completely. I earn roughly $45 an hour with tips included; I don’t know a single server or bartender in the District whose wages have to be supplemented because they haven’t earned the minimum.

So what happens [if the provision is adopted]? Restaurant profit margins are already often razor-thin, and to be forced to pay the largest (and already highest-earning) portion of a staff four times more than before creates a real accounting problem. Generally, it means you need to bring in more money in sales and cut costs elsewhere. This translates to jacking up menu prices and laying off staff. Whom would this help?

Next, once menu prices have soared and staff has been cut, tips will dwindle. Remember, your weekly budget doesn’t change just because I got a raise. Within a few years, I’d be surprised if anyone tipped at all, and without tips, the incentive to give good service would be nonexistent. The great American bar culture would die. That would be a real tragedy.

Fight-for-$15 supporters may dismiss Aston’s concerns as hypothetical. But he has support from research by California-Irvine economist Richard McKenzie. In the spring 2016 issue of Regulation, McKenzie reports the results of surveys he conducted of food service worker on the effects such policies would have on tipping. He writes in part:

Tipping abolitionists might be surprised to learn that all servers surveyed chortled at the suggested replacement of their tip incomes with a “living wage” of $15 an hour. Most servers responded with comments of the essence,“How stupid can these people be?”

… To examine this issue, I asked the servers I interviewed if the service they provided affected their tips. All strongly agreed it did. Indeed, servers said that if they raised their service level from a “3” (average service) to a “4” (above-average), their average tip percentage (not total tips) would rise by over 25 percent. If they elevated their service from “4” to “5” (excellent service), their average percentage tip would rise another 25 percent, which means that an increase in service level from average to excellent would raise their average percentage tips by 57 percent. All servers strongly agreed that overall service quality would drop precipitously if their tip income were replaced with a fixed hourly wage, especially for “loud,” “obnoxious,” and “arrogant” customers, as well as customers with unruly and messy children.

He concludes:

Tipping abolitionists may be surprised to find that some of the most ardent opponents of tipping abolition are servers and their customers. One North Carolina server volunteered: “I made $60,000 in tips last year, reported $40,000—and had a before tax income of $80,000! That’s why I quit my teaching job.” And customers will likely suffer impaired service as the tipping incentive disappears.

A Colorado Minimum Wage Waiver?

Classical liberal economists oppose minimum wage laws because they restrict mutually beneficial labor market trades.  

This is the basic economic case for complete freedom of contract. Wage floors mean potential employees who would otherwise be willing to sell their labor at a lower price are unable to. Employers are banned from employing more people or giving workers longer hours at a lower wage too.

It is in this spirit that Colorado State Rep. Dave Williams has proposed an amendment to the state’s minimum wage law. Williams’ legislation  would allow an opt-out in cases where applicants for jobs or employees and employers mutually agreed to a wage below the state minimum. Paying less than the minimum wage would essentially be legal again in cases where the employee or applicant had agreed to waive their minimum wage “right” (though the employer would still be bound by the federal minimum).

This has potential benefits similar to lowering or abolishing the state minimum wage. On the margin, it would help workers with low productivity levels looking for entry-level jobs. It would also reduce the risk of hiring for employers in cases where potential employees had little work experience. While there would of course be a not insignificant risk that employees might later claim the agreement was not truly “voluntary,” such a waiver would overall shift Colorado labor market law closer to the freedom of contract that libertarians prize.

For that reason, it will of course be opposed by most minimum wage proponents. Traditionally, minimum wage advocates have recognized that such laws outlaw exchanges. But they believe this is a good thing, asserting that market-based wage setting is unfair or exploitative, or appealing to older theories such as monopsony, which says that employers in certain industries have significant market power and are able to hold wages below productivity levels absent regulation. In such a scenario, minimum wages can even raise employment levels.

Almost all minimum wage studies these days are empirical in nature, testing whether minimum wages or increases have the classical or monopsonistic effect. Though the degree of the effect differs, the overwhelming majority find negative employment or job growth consequences from minimum wage increases. From an employment perspective then, any reform in the direction of Williams’ should be welcome.

But another benefit of a debate around this law could be educational. It is difficult to make the case for complete abolition of minimum wage laws, in part because opponents lament that some workers would see pay cuts. No doubt there would be some companies that sought to move to a model with lower pay, with attempts to get employees to sign forms waiving the wage. This is the “seen” effect. But what is not seen is that there are people out there willing to work in Colorado between the federal and state minimum wages, who are currently unable to do so.

Williams’ legislation highlights that minimum wage laws are coercive, ceasing to give us control over our own labor. Indeed, under Williams’ legislation, employers would have to post notices to inform applicants and employees that they have the right to negotiate wages. Well, above the federal minimum at least!

There is therefore a principle and a consequence at stake. The principle is freedom to contract your labor. The consequence is that minimum wage laws tend to cause “unemployment”. While complete abolition of minimum wages would be preferable, Williams’ legislation helps highlight the principle and ameliorate the consequence. 

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