Abolish the Minimum Wage??!! A Debate

April 4th, 2013 at 12:55 pm

Had a rousing and often substantive debate last night sponsored by the group Intelligence Squared.  My partner was the great and eloquent Karen Kornbluh (listen to the podcast–I really thought Karen did a great job merging morality, compassion, and the facts of the case); the opposing team was Russ Roberts and Jim Dorn.  The proposition was “the minimum wage should be abolished.”   I’ll let you guess which side Karen and I took, but the good news: the audience votes at the beginning and end of the debate and team that gets more people to switch to their side wins.  We won.

I’ve pasted in my opening statement below, but allow me to summarize the opposition’s argument, half of which is, I think, a fair point from a libertarian perspective, though one with which I deeply disagree.

Their first point is that the minimum wage hurts a lot of people.  But a) that’s not what the research shows (even the bulk of the work that finds some negative impacts shows that the vast majority of affected workers benefit from the policy), and b) half the time they argued that it’s a small policy that affects few people so getting rid of it won’t be a big deal.  Karen and I tried to figure out how a small, ineffectual program could be so damaging to America that it had to be abolished but I thought they were quite muddled on this point.

Their other point was this: if we abolish the minimum wage, more people who are not worth hiring at $7.25 an hour will get jobs at…who knows?…maybe $2 or $3 or $4 an hour.

That’s a standard economics point–sliding down a demand curve–and there’s certainly logic to it.  But let’s think a bit more about its implications:

As I stressed throughout the night, you’ve got to be empirical about all of these questions–there are always tons of moving parts in the economy–and the evidence doesn’t support the claim.  As shown in the figure below, during the 1980s, for example,  the real value of the minimum wage slid 32% (1979-89) so we have a natural experiment (thanks, Ronnie…).  And the job indicators for younger workers didn’t out-perform their norms at all.

The employment rate of teens, for example–just measuring from peak-to-peak (1979-89) to control for the cycle–fell one percentage point, i.e., it went “the wrong way.”  Their unemployment fell too, however, but also by only one point.  And in the 1990s, the real minimum wage went up by 11% (1989-2000, peak-to-peak again), while both unemployment and employment rates fell slightly again, so a confusing pattern once again.  In the 2000s cycle the real minimum fell 12% but teen unemployment went up and employment went down, very much the wrong pattern from the abolisionists  perspective.

In other words, no first-order evidence that changes in the real minimum wage had much to do with employment opportunities for young workers.  Now, this is nothing like careful analysis–it’s just broad trends.  But it makes the point, especially given the steep 1980s real decline in the wage floor, that you shouldn’t blithely assert without evidence that abolishing the minimum wage would automatically lead to a “sliding down the demand curve.”  The whole point of the new research–and I’m talking about work that finds both positive and negative impacts–is that those impacts hover around zero, which should lead objective observers to be highly skeptical that phasing out the minimum wage would lead to large employment gains.

But here’s the other part of our argument against the slide: it’s the ultimate low-road strategy.   Let’s dump our labor standards and emulate developing economies where such instiutions as minimum wages have not yet evolved.

Our opponents believe–I’m quite certain they would happily agree with this assesment–that all that matters is to get people working at any wage level…if that’s $1 an hour, than that’s what the market says they’re worth and so be it.

Thankfully, for the rest of us, and for most of last night’s audience, that’s neither a correct assessment of the evidence nor a vision of America we share.

 

minwg_teens

Source: BLS; Unemp and Emp Rate changes are percentage points; real min wg is percent change.

*****

Opening Statement: Minimum Wage Debate

Jared Bernstein

Here’s my main point: abolishing the minimum wage would be a terrible policy mistake that would needlessly hurt millions of low-wage workers.  It is a not a policy anywhere near the current agenda—in fact, the current debate asks whether the minimum wage should be increased.  Yes, Michelle Bachmann and Herman Cain endorsed the idea in the R primary, but the idea of abolishing a policy that’s been in place helping low wage workers since the 1930s–is about as far out of the mainstream as you can get.

Let me explain why.

I got all this grey hair through a lifetime of analyzing social and economic policies.  I began as a social worker in NYC working with the poor and worked my way up, or down, or sideways to whatever is I’m doing today.  And over all those decades, I’ve focused almost exclusively on two things: what’s gone wrong in our economy and which policies could give less advantaged folks a fair shot.

It is through that simple agenda that decades ago, I became interested in min wg policy.

As globalization, technological change, and a bunch of other stuff we can talk about has evolved, economic growth no longer reaches working families the way it used to.  And the further you go down the pay scale, the less growth you’re likely to see.

The minimum wage partially helps offset that problem.  In fact, you will be hard pressed to find a policy that does what it sets out to do—to raise the pay of our lowest wage workers—more effectively.  And importantly, reams of high quality research shows that it does so with a minimum of the type of side effects that I suspect our opponents will emphasize.

Consider this: the American minimum wage has been in place since 1938—that’s 75 years ago.  It has been raised 22 times; 19 states now have their own minimum wages, above the Federal level.  If this policy was so damaging that it needs to be abolished, how could it be that citizens and legislatures in 19 states decided not to abolish it but to raise it above the federal level?

If it was as damaging as our opponents claim, how could the min wg not only survived this long, but flourished and expanded?

The answer, once again, is because it is widely understood and accepted by mainstream economists, policy makers, and perhaps most importantly, low-wage workers themselves, who overwhelmingly support the policy—as doing what it’s supposed to do: steering a bit more of the economy’s growth their way.

To do what our opponents advocate—to get rid of the min wg—would figuratively take the wage floor out from under millions of low-wage workers, many of whom, as Karen will emphasize, depend on the minimum wage to support their families.

For these reasons, President Obama has recently proposed increasing the federal minimum wage.  Now, I firmly believe that economists can and should have good, robust arguments about such proposals…whether it should be increased or not.  But that’s not what we’re arguing about tonight.  Our opponents think America should have no minimum wage at all.

To me, a better question than should the min wg be abolished is why anyone would even suggest such a bad idea.

I think the answer comes down to two factors.  First, common misconceptions, ones that have should have been banished by the research.  Second, because of a laissez-faire market ideology that trumps common sense and empirical evidence.

A word about that evidence: there’s probably no question that’s been analyzed more carefully by economists than this one of impact of minimum wage on low-wage workers.  And the conclusion is that it raises the pay of low wage workers without hurting their job prospects.

Of literally thousands of estimates on the impact of minimum wage on the job impacts of affected workers the vast majority find that the benefits to low wage workers far outweigh any costs in terms of reduced hours or job loss.

Economist John Schmitt recently published a graph of these estimates—1,500 of ‘em—and while there were outliers on both sides of zero, the mass of the estimates were just slightly below zero or slightly above.

Now, recall that I mentioned all those states with their own min wg levels.  That’s provided min wg researchers with something very rare in economics: pseudo experimentation.

The best way to test the impact of an intervention like a min wg increase is to compare places that are as alike as can be in terms of the relevant economic variables, yet only one place sees a min wg increase.  And these studies consistently find results for say, job loss effects for workers that hover around zero.

Now, the empirically established fact that minimum wages don’t hurt the people who get it isn’t the same as showing that they help them.  So why do we need a minimum wage and why would abolishing it be so harmful?

Karen will say more about this, but here I’ll just note that opponents like to say the minimum wage just goes to rich kids who don’t need to the money.  I wish that was true.  But analysis of the President’s planned increase shows:

–The average min wg worker brings home about half of her household’s earnings;
–84% of total affected workers are at least 20 years old;
–over 60% of the benefits of the increase go to those in the bottom half of the workforce by income level;
–47% of affected workers are full-timers, 83% work at least 20 hours per week.

So, we have here a simple policy that for 75 years has been doing what it’s designed to do with little fanfare and minimal, if any, negative side effects, reaching mostly workers from low and moderate income families who need the money.  I’m perfectly happy to argue about whether it should be increased.  But abolishing it makes absolutely no sense at all.

 

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8 comments in reply to "Abolish the Minimum Wage??!! A Debate"

  1. Dave says:

    I just want to suggest one other way of approaching these sort of arguments.

    You mention that economists should always have good arguments about proposals, and I would agree. But this is not in any a symmetrical problem, where economists on each side need the same level of argument to prove their point.

    If the claim is that our common sense and decency, our sense of fairness, is at odds with economic claims, I think the burden of proof should be on the economic claims that they do, in fact, trump our sense of fairness.

    I can imagine a country where there is no minimum wage. If their argument is that more teens would be able to find work, my argument is what kind of negligent parents would allow their children to work for $2.00/hour? I won’t send my kids out to find there way in a system like that. So if you want teens to clime the ladder of success, you had better start out with something that looks fair.

    When I look back on my beginnings, I cannot fathom how poorly paid I was. I made the minimum wage to start, and throughout my life I have never looked back and thought my wages seemed justifiable based upon the level work. I always believed, and I still believe, I was horribly underpaid at minimum wage compared to the level of work I did.


  2. PattyP says:

    Keep fighting the good fight, Mr. Bernstein!


  3. Fred Donaldson says:

    A simple tiered approach works very well, when you pay teens and new workers at a lower minimum wage:

    http://www.fairwork.gov.au/pay/national-minimum-wage/pages/default.aspx

    I don’t understand why we need ONE minimum wage to apply to every working person, regardless of age or experience. A number of tiers makes more sense and obviates the GOP brash conclusions of one size fits all.


  4. Sandwichman says:

    I’m not for abolishing the minimum wage because I don’t believe in the ideal being the enemy of the better-than-nothing. But that’s about it. I don’t think that the minimum wage actually does much in the way of keeping people out of poverty and I think that, like food banks, it is used as a stopgap policy that excuses people from thinking about what actually needs to be done.

    The FLSA minimum wage legislation was brought in three-quarters of a century ago along with the 40 hour work week. If I recall correctly the minimum wage at the time was 40 cents an hour. The FLSA hours standard is still 40 hours. There used to be a reason why hours and wages legislation were coordinated. If you put a limit on hours only, employers could simply pay the workers less.

    The point is that a reduction in hours, along with an increase in wages is what is necessary to improve living standards. When unions opted for the wages, wages, wages path (urged by Leon Keyserling and Walter Reuther) was when they started their long historical decline.


  5. Tom in MN says:

    “and there’s certainly logic to it.” I can’t recall the last time I heard that said about a conservative argument. I would guess that is why this has been studied so much.

    This is another example of a policy that should have been indexed to inflation from the beginning. We need a law that says all dollar amounts in laws are indexed for inflation by default.


  6. Kevin Rica says:

    Jared,

    I agree with everything that you just said.

    But what is more important to current debate is implication your analysis:

    large wage increases & small employment losses ==> low elasticity of labor demand

    but:

    low elasticity of labor demand ==> large increases in employment requires huge wage cuts.

    So CIR (no immigrant left behind) will require huge wage cuts to restore labor market equilibrium (just keep unemployment at its current elevated levels).

    If that wage adjustment is blocked by a higher minimum wage, then the new labor market entrants will require a one-for-one increase in unemployment or labor market exits.

    Ouch!!

    I guess you just proved what Paul Krugman said: “open immigration can’t coexist with a strong social safety net; if you’re going to assure health care and a decent income to everyone, you can’t make that offer global.”


  7. Auros says:

    So, I am aware that there’s research showing that the Earned Income Tax Credit probably “leaks” into a subsidy of employers of low-wage workers (the same way we’d expect a subsidy in any market to go partially to sellers and partially to buyers — in this case we have workers as producers in the labor market, and employers as consumers). And the minimum wage acts to counteract that leakage, essentially clawing back the subsidy portion of the EITC on behalf of the workers; in this sense they are, as Arindrajit Dube puts it, complementary. (Though I think Mike Konczal mis-transcribed him as saying “complimentary”.) OTOH, it seems like because of the way the EITC is structured (providing more support if your total family income is low and if you have kids — which helps ensure it’s not a subsidy for teenage kids of middle-class families), there may be a reduction in a different kind of leakage relative to the min wage.

    In any case, I wonder if there might be enough Republicans who could be persuaded to jump over and support a large EITC hike, in exchange for Dems reducing pressure on them over the minimum wage. It seems like the minimum wage is never going to get through Boehner’s House anyways, so there’s a trade-off between using that to embarrass Republicans in the hope of winning some marginal seats away from whatever few semi-moderate Republicans are left, and trying to get a policy immediately that would help reduce inequality and improve the economy. The “right” choice isn’t completely obvious — getting a Democratic House in 2014 would mean we could do way more for working and middle class Americans than compromise will ever get us — but it seems like it’s just going to be impossible to do that until at least 2022; we have to make sure to hold a bunch of key statehouses in 2020 (or build a campaign over the next decade for a federal anti-gerrymandering amendment).


  8. bakho says:

    Good arguments.
    Another argument for MinWage- It promotes employer investment in productivity.
    If employees can be hired for $2 per hour, then employers only need them to be productive enough to exceed that level.
    If employees must be hired for $10 per h (where I think MinWage should be at least), then employers must invest in worker training and tools that will enable that worker to produce more than $10 per h.
    The MinWage is incentive for productivity.
    An economy of low productivity workers will be less wealthy than an economy of high productivity workers.


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