Tag: minimum wage

The Curse of Motivated Reasoning against Econ 101

Earlier this month, James Kwak penned an extensive critique for The Atlantic of the Econ 101 view that government-imposed minimum wage rates lead to job losses. There is a lot of muddled thinking in the article, not least that it constantly conflates poverty and inequality. But for the sake of brevity, here are 9 observations:

  1. The theoretical and empirical literature does suggest the minimum wage question is more complex than first imagined, and it should not surprise us that reality lies somewhere between the perfectly competitive model of the labor market and the monopsonistic one, depending on the time and sector analyzed.
  2. However, the bulk of the detailed empirical literature still supports Econ 101’s prediction that raising wages by government dictat reduces labor demand, particularly for certain groups (the young and lowest skilled). Of course, the “bite” of the minimum wage is significant. That an increase from $7.25 to $8 may not have a large effect on the labor market does not mean that a rise to $15 wouldn’t have a much bigger effect.
  3. Reductions in labor demand need not mean higher unemployment per se (and so tracking time series of unemployment against minimum wage rates is unhelpful.) It may affect hours offered, lower the quality of jobs as firms cut back on financing training, or lead to cuts to other employee benefits. More recent evidence also stresses the dynamism of the labor market – minimum wage hikes may not manifest themselves through immediate job cuts (not least because of redundancy costs and stickiness of contracts/orders), but can lower the propensity to hire in future and hence slow job growth.

Workers Will Get a Raise Today — or Will They?

The legal minimum wage will increase in 20 states today. The Wall Street Journal news story on that fact starts out accurately enough:

Minimum wages will increase in 20 states at the start of the year, a shift that will lift pay for millions of individuals and shed light on a long-running debate about whether mandated pay increases at the bottom do more harm or good for workers.

But it quickly segues into the same error that afflicts most such stories:

In California, the minimum goes up 50 cents, to $10.50 an hour, boosting pay for 1.7 million individuals.

Wages are also going up in many Republican-led states, where politicians have traditionally been skeptical of the benefits of minimum-wage increases.

In Arizona, one out of every nine workers is slated to receive a wage increase….So will tens of thousands of workers in Arkansas, Michigan and Ohio….

In all, about 4.4 million low-wage workers across the country are slated to receive a raise because they earn less than the new minimum in their respective states.

Every one of those sentences assumes facts not in evidence. What these new laws do is ensure that no worker can be paid less than a statutory minimum. They cannot ensure that every worker with a minimum-wage job will still have one if his employer required to pay more. They won’t prevent employers from replacing labor with technology, such as these McDonald’s order-taking kiosks. McDonald's kiosk

The Journal isn’t alone, of course. Here’s the Associated Press lead:

It will be a happy New Year indeed for millions of the lowest-paid U.S. workers. 

And CBS:

Millions will ring in the new year – with a raise. The minimum wage is going up in 20 states and Washington, D.C. as well.

And a Washington Post headline:

There’s some really good news for low-wage workers this weekend

What all these chipper stories fail to take into account is the possibility that some low-wage workers will lose their jobs because their work just isn’t worth the new minimum wage or the employer can’t be profitable with higher costs. There’s abundant evidence that higher minimum wage laws reduce employment, especially among young and minority workers. If only Journal reporter Eric Morath had read this op-ed headline in the Journal a year ago:

The Evidence Is Piling Up That Higher Minimum Wages Kill Jobs

Economist David Neumark, perhaps the leading student of the effects of minimum wage laws, wrote:

Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired. 

Among the many studies supporting this conclusion is one completed earlier this year by Texas A&M’s Jonathan Meer and MIT’s Jeremy West, which reaffirmed that “the minimum wage reduces job growth over a period of several years” and that “industries that tend to have a higher concentration of low-wage jobs show more deleterious effects on job growth from higher minimum wages.”

The broader research confirms this. An extensive survey of decades of minimum-wage research, published by William Wascher of the Federal Reserve Board and me in a 2008 book titled “Minimum Wages,” generally found a 1% or 2% reduction for teenage or very low-skill employment for each 10% minimum-wage increase.

I hope these stories will prove accurate, that millions of low-wage workers will get higher wages and that the new minimum wage rates will not reduce the growth in jobs that Americans need. But I’d have to shut my eyes to economic theory and empirical evidence to believe that. In fact, you’d pretty much have to be an economics denier to believe that a mandated increase in the price of labor won’t reduce the amount of labor demanded.

 

Two Minimum Wage Charts for Andy Puzder

Donald Trump has tabbed Andy Puzder to lead the Department of Labor. Puzder is the CEO of CKE, the restaurant outfit (read: Hardee’s and Carl’s Jr.). CKE, thanks to Puzder saving it from the bankruptcy hammer, employs 75,000 workers (read: jobs). Puzder knows that “high” minimum wages, such as the $15 per hour one thrown around by progressives, is a job killer for low-skill workers.

During his nomination hearings, Andy Puzder will no doubt be grilled about his views on “high” minimum wages. His inquisitors will trot out glowing claims about the wonders of a $15 per hour minimum wage, as did President Obama in his 2014 State of the Union address. As the President put it: “It’s good for the economy; it’s good for America.” Not so fast.

The glowing claims about minimum wage laws don’t pass the most basic economic smell tests. Just look at the data from Europe. The following two charts tell the tale and should be tucked into Andy Puzder’s briefing portfolio.

There are six European Union (E.U.) countries in which no minimum wage is mandated (Austria, Cyprus, Denmark, Finland, Italy, and Sweden). If we compare the levels of unemployment in these countries with E.U. countries that impose a minimum wage, the results are clear. A minimum wage leads to higher levels of unemployment. In the 21 countries with a minimum wage, the average country has an unemployment rate of 11.8%. Whereas, the average unemployment rate in the seven countries without mandated minimum wages is about one third lower — at 7.9%.

Seattle’s Minimum Wage Increase: Sky Is Not Falling Yet, but “Ambiguous” Effects for Low-Wage Workers Due to Negative Unintended Consequences

The debate over the Seattle experiment has generated more heat than light to this point. A new report from Jacob Vigdor and his colleagues at the University of Washington attempts to shed some light on the effects of the first incremental stage of the increase. They use data from the state’s Employment Security Department from when the law was passed through the fourth quarter of 2015, at which point the minimum wage stood at $11 per hour. This does not include the second stage of increases that took place January 1, 2016, or the further increases that will eventually bring it to $15 per hour and much higher thereafter. The early results show the mixed effects of the first incremental increase, there does not appear to be much evidence of firms being driven out of business, and some low-wage workers have seen their hourly wage increase, it also reduced the employment rate and hours, with the end result for these low-wage workers being “ambiguous and likely fairly small.”

The report only analyzes the first initial stage of the scheduled minimum wage increases, as the authors note and as illustrated in Figure 1. In addition, due to the timing of the study, it can only capture the short-run effects of this first incremental increase. As such, this analysis cannot provide insight into the impact of future additional increases to the minimum wage or what the longer-run effects might be.

If Black Lives Matter, Repeal the Minimum Wage

The civil unrest following last week’s police shootings of black men in Louisiana and Minnesota, followed by the sniper attack on police officers in Dallas, has sparked a new bout of public concern over the hardships of Black America. Those hardships include significantly higher violent crime victimizationhigher joblessness, higher poverty, and lower income than the general U.S. population.

Previous moments of such concern have prompted politicians to respond with the standard, tired slate of policies that supposedly would “empower” and “lift” African Americans. All too often, those policies mainly empowered government employees and vendors, while the gap between Black America and the rest of the country remains. By the time the policy failures became obvious, public and political interest had waned, and little else happened until new headlines brought new concern.

Perhaps this time will be different, and policymakers will try some different ideas that might actually help. Cato offers many recommendations for reforming education, criminal justice, and the social safety net that would especially help black Americans.

To those, add this simple, seemingly counterintuitive recommendation: repeal the minimum wage.

Though some politicians deny it, the link between the minimum wage and unemployment is well established; denying that empirical research is akin to denying the research on climate change. Among the findings is that the minimum wage’s detrimental effects fall hardest on young black males: the same group that suffers some of the worst hardships of Black America. Perhaps if they had greater opportunities to take starter jobs that would give them both income and the work experience that leads to better-paying jobs, they’d have a better chance to escape violence and poverty. (Meanwhile, far too many young African American males are pushed into the black market, where they earn sub-minimum wages for dangerous work.) Indeed, the empirical work suggests that there’s a direct causal relationship between the minimum wage and crime.

Repealing the minimum wage for the sake of black youth would be a great piece of historical closure. The minimum wage was established, in part, to push blacks and women out of jobs that progressives believed should go to white family men. The economic struggles of African Americans today reflect, in part, how well the progressives’ plan worked.

D.C.’s $15 Minimum Wage Will Dim Employment Prospects for Younger, Less-Skilled Workers

Yesterday the D.C. City Council unanimously approved a measure that would gradually raise the $10.50 minimum wage to $15.00 by 2020, and then index future increases to changes in the Consumer Price Index. These new scheduled increases will come on the heels of an already significant 39 percent increase currently being phased in. With the passage of this bill, D.C follows California and  in passing substantial minimum wage hikes beyond the scope of past experience in the U.S. The related adverse disemployment effects will primarily impact younger workers and people with limited job skills or educational attainment, putting the important first rung of the job ladder out of reach for many of them.

While proponents of an increase tend to focus on families, roughly half of minimum wage workers are between 16 and 24, and a more than one-fifth are teenagers. People lacking a high school diploma are more likely to be in minimum wage jobs, and even with some recent incremental improvements, the 4-year adjusted cohort graduation rate for D.C. public schools is only 64.4 percent and for African-American students it is less than 62 percent. While the aggregate unemployment rate for the District might not seem alarmingly high at 6.4 percent in April, there is a lot of variation between the eight wards, with the unemployment rate as high as 9.9 percent in Ward 7 and 12 percent in Ward 8.  One survey found that almost half of responding businesses had already reduced staff or hours to cope with the first raft of minimum wage increases. Younger workers and people with limited educational attainment will find it increasingly difficult to find employment as labor costs continue to surge.

These minimum wage jobs often play an important role in helping people develop the skills they need to eventually move on to more lucrative and promising jobs, far from being a dead-end where these workers get stuck forever. The majority of minimum wage workers that stick with it get a raise within a year. An earlier study looking at data from 1979 to 2002 found that almost two-thirds of minimum wage employees who continue working earned higher than the minimum wage within a year. More recently, 72 percent of minimum wage earners got a raise between 2014 and 2015. About a fifth of these people saw their earnings rise due to mandated minimum wage increases, but 57.5 percent of people working continuously got a raise or moved into a higher-paying job outside of those effects, and this share could have been even higher in the absence of those legislated minimum wage increases. Far from stagnating in these entry-level jobs, most of the people in these positions use these opportunities as a springboard to better things.

Supporters of the new bill may say that they want to ensure that hard work is rewarded and that people can support their families, but D.C.’s substantial minimum wage increases will make it much harder for many people, especially younger workers and people with limited job skills, to find any work at all.

Negative Effects of Minimum Wages

California and New York have approved bills to increase their state minimum wages over time to $15 an hour. Presidential candidates Hillary Clinton and Bernie Sanders favor raising the federal minimum wage. But such mandated increases do more harm than good, and they hurt the exact groups of people that policymakers say that they want to help.

Labor economist Joseph Sabia of San Diego State University summarized the academic evidence on minimum wages in this 2014 bulletin for Cato.

Sabia’s own statistical research with economist Richard Burkhauser “found no evidence that minimum wage increases were effective at reducing overall poverty rates or poverty rates among workers.” And a study by economists David Neumark and William Wascher “found that while some poor workers who kept their jobs after minimum wage increases were lifted out of poverty, others lost their jobs and fell into poverty.”