The non-madness of the minimum wage

August 3rd, 2015 at 1:31 pm

[jointly written with Ben Spielberg]

The “Fight for $15”—a nationwide movement to raise the minimum wage to $15 per hour—has taken a lot of “incoming” from critics. Today, it’s Bob Samuelson’s turn, who under a column titled “minimum wage madness” argues that a substantial minimum wage increase would cause “job losses [to] mount” and constitute an economic “blunder.”

The critics, including Samuelson, make one important point. Should the nation adopt a $15 minimum wage tomorrow, the share of workers affected in places with relatively low wages would be far larger than under any other historical increase. This scenario would increase the chances of unintended consequences, like loss of jobs or hours of work, for those affected by the policy.

But as far as we can see, no one is proposing $15 tomorrow. All the proposals we know of phase in gradually over the course of numerous years. For example, the $12 minimum wage proposal Samuelson cites reaches that level in 2020, after which it is indexed to the median wage. To be fair, it’s of course the case that larger increases reach more workers, and that both $12 and especially $15 would affect larger shares than many prior increases. But that also depends on the length of their phase-ins and the characteristics of the labor market in the place where the increase is to take place, criteria that critics typically ignore.

Though the proposal for the $12 federal minimum (the Raise the Wage Act) has been endorsed by President Obama and there are prominent advocates for a national minimum of $15 (e.g., presidential candidate Bernie Sanders), the vast majority of the action is at the sub-national level.  Cities like Seattle and San Francisco, with relatively high wages and prices, are slowly phasing in their increases.  San Francisco, with a minimum wage currently at $12.25 an hour, won’t get to $15 until July 1, 2018, and Seattle, currently at $11, won’t reach $15 until January 2019.  The $15 minimums in Los Angeles and DC (if adopted) won’t be fully phased-in until 2020, providing businesses with some time to adjust and, because of wage growth between now and then, affecting a smaller share of workers than if the increase were to go into effect today.

Samuelson’s analysis is also one-sided. He cites potential job losses; he ignores the much larger number of wage gainers. For example, Samuelson cites a widely-discussed Congressional Budget Office analysis of the prospective impacts of raising the minimum wage to $10.10 by 2016. He notes that CBO estimated that 500,000 workers would lose or not get jobs without mentioning CBO’s finding – in the same report – that 24.5 million would get raises (16.5 million directly and 8 million indirectly).

In fact, here’s a useful rule of thumb when evaluating the arguments of minimum wage critics – when someone, as Samuelson did today, emphasizes job loss possibilities while ignoring the often much larger beneficiary side of the equation, you know they’re trying to mislead. We should by no means write off potential negatives. But we cannot begin to understand what’s going on with the national movement if we ignore the positives—millions of people rationally support large increases because they expect to gain from them.

That’s rationality, not “madness.”

In this regard, analysts for and against increases in the minimum wage must consider the policy from the perspective of low-wage workers. Specifically, how do the risks of unintended consequences compare to the risks of continuing to earn poverty-level wages? Or, put differently, does the potential gain from increased wages make it worth venturing into territory, like a $15 wage floor, that is outside the sample of the moderate increases that have prevailed thus far?

In fact, there are two main reasons why low-wage workers may rationally support even large increases in the minimum wage. First, even the most pessimistic employment estimates from the literature tend to imply disemployment effects that rise more slowly than minimum wage increases. Thus, even if they buy conservative job-loss estimates, low-wage workers may well conclude that they’re more likely to come out ahead with a higher minimum wage. Second, they may also recognize that even if they do lose work and could possibly face a longer job search, a minimum wage increase would mean they could eventually expect a higher-quality job.

The bottom line: low-wage workers around the country have sparked a movement for large minimum wage increases for a reason.  And their proposed increases are phased in gradually over several years.  It might behoove some of those commenting from the sidelines to stop calling them crazy and start entertaining the idea that they might actually know what they’re doing.

Awesome cheesecake recipe…I mean really, really great.

August 3rd, 2015 at 12:21 pm

Someone told me that last week was “national cheesecake week.” That’s kind of strange but it did inspire me to share probably my fav dessert recipe. You have a small sliver of this with your coffee in the AM and I guarantee you’ll have a great day (i.e., against the counterfactual wherein you do not have said slice).

Mix 2 cups of finely crushed graham cracker crumbs, 3 T of sugar, 6 T of melted butter (I didn’t say it was health food), and 1 t of cinnamon.

Press that into a springform pan.

Whip with mixer 3 8oz bricks of softened cream cheese. Mix in 1 cup sugar gradually. Add 3 eggs one at a time. DO NOT OVERMIX or you’ll get cracks in the final product. Just mix until the mixture is pretty smooth, not totally smooth.

Stir if 3/4 t vanilla by hand.

Pour into pan.

Bake at 325 for 1 hour.

A few minutes before the hour is up, whip 1 pint sour cream, 3 T sugar, and 1/2 t vanilla.

Then, once the hour is up, spread this sour cream mixture on top of the cheesecake and bake for another 15 mins.

Cool, refrigerate, and let me know in comments section if this is the miracle I say it is.

 

Letter to the Fed

July 31st, 2015 at 11:07 am

7/31/15

Dear Chair Yellen,

First, you’re one of my heroes, and not just because of how much I’ve learned from your economic analysis over the years, but also because my daughters are growing up in a world where the world’s chief economist is the same gender they are.

Second, I just don’t get what seems like a real drive from your team to raise interest rates in order to slow the economy. To be more precise, I can see one reason why you might feel compelled to do so, but a lot more reasons why not.

Let me start with the latter:

–Yes, the recovery is trundling along, but not fast enough to create price or wage pressures. One under-appreciated result of this (which I know you and your team know but which I find kind of shocking) is that six years into the recovery, there’s still a gap between actual GDP and potential GDP. Moreover, with yesterday’s downward revision to real GDP growth in the recovery, that gap is a little larger than we thought. Double moreover, as your staff was among the first to show, the prolonged weakness of the recovery is itself partly responsible for the decline in potential. The punchline, from the perspective of Fed policy, is that the current economy is like a slow runner who still hasn’t caught up to a goal line that’s moving closer as she runs towards it.

gap15q2

Source: CBPP. The figure shows potential and actual GDP, in real terms.

Don’t get me wrong. I agree with you that the US macro economy has a lot to show for itself, especially given the misguided fiscal policy thrown at it by the dysfunctional Congress. Especially compared to the other advanced economies out there, our resilience and flexibility is evident. We’ve got liquid financial markets, deep supply chains, and a great Central Bank!

But you well know this recovery has yet to reach all comers, especially the least advantaged among us, and I know for a fact that this deeply concerns you. I just don’t see how raising rates, even a smidgen, helps them. I do see how it hurts them–maybe not a lot given a small bump up in the funds rate, but why go there at all?

–Where are the price and wage pressures? Not only have you missed your 2% inflation target every quarter since 2012q2, but as the figure shows (using revised data on yr/yr PCE core inflation) you’re missing it on the downside by a greater margin over time. What’s again remarkable here is that core inflation has been decelerating while the unemployment rate has been falling sharply, and is now, at 5.3%, within spitting distance of your full employment rate of 5.1%.

core_15q2

Source: BEA

Surely this signals that something fundamental is wrong with a model that’s apparently telling you to raise rates sooner than later.

On the wage side, though there’s always variance, most wage and compensation series have been stuck at around 2% year-over-year growth (nominal) with some, but not much, evidence of acceleration in response to the tightening labor market. The figure below shows our mash-up of four wage series (see data note below the figure), including this morning’s ECI, which came in well below expectations.

mash_15q2

Source: First factor from a principal components analysis. Data are yearly changes in four BLS series: production, non-sup wages, weekly median earnings of ft workers, and Employment Cost Index, both compensation and wage components.

Yes, there’s some acceleration toward the end, but surely that’s expected at this stage in the recovery, and at 2%, it’s not inflationary. As you’ve pointed out, your 2% inflation target plus 1.5% trend productivity growth allows for noninflationary nominal wage growth of 3.5%. And here again, I want to strongly emphasize how critical persistent full employment is if we want the benefits of productivity growth to begin to reach middle and lower wage workers.

Chair Yellen, with real growth over the recovery a little slower than we thought, output gaps and job market slack still on the scene, prices appearing to decelerate and wages/compensation revealing little in the way of threatening pressures, try as I might—and I repeat, I’m solidly in your camp—I don’t see the rationale for tightening, even a little. You might of course cite expectations–I know the Fed must try to see around corners–but your own staff models are predicting growth and inflation to proceed in like fashion to the above for the next few years to come. And like most forecasters (including myself), if anything, your predictions have consistently been too optimistic.

Well, OK—if I squint really hard I can see one rationale, but since I haven’t heard your team speak to this, I may well be bending over backwards on your behalf here. There’s another recession out there somewhere and you may well be worried about hitting the zero lower bound again. Thus, you want the fed funds rate to be on a perch high enough such that you have room to come down without hitting zero. This is especially important if you’re worried, as I am and I suspect you are too, that an austerity-smitten Congress will not move fast enough with counter-cyclical fiscal policy.

Neither do I want to overstate my case here. I don’t think a 25 basis point hike in the funds rate, if that’s what you’re contemplating, will make a big difference to the trajectory of any of the variables I’ve cited above.

But it will make a little difference, in the wrong direction, so I still don’t get it and I’m not alone.

Your fan and long-time supporter,
Jared

PS: Iced-coffee on me if you want to meet at Starbucks to chat about any of the above!