Raising the Minimum Wage: The Debate Begins…Again

February 14th, 2013 at 7:10 pm

If you, like me, are a veteran of this minimum wage scrum that’s getting underway, you’ve likely heard the arguments before.  But for you newbees out there–or vets who need an update—here ‘tis:

Claim: Instead of helping low-wage workers, an increase in the minimum wage will cause them to lose their jobs.

Certainly that’s the prediction from the classical model of the labor market.  Everyone’s being paid precisely their marginal product (their value added to their firm’s production at the margin) and to increase their pay by mandate is to render them unaffordable.  In fact, the prediction from the simple model is that even a few pennies increase in the minimum wage would lead to extensive job losses.

And yet…we’ve had dozens of federal minimum wage increases and now have 19 states with minimums above the federal level.  Surely if the classical model were correct, we’d have clearly seen its negative impacts by now.

Which makes it, like all good economic questions, an empirical one.  Thankfully, there’s been extensive research on the question which is very usefully reviewed here by economist John Schmitt of CEPR.  Pay particular attention to the results from all those natural experiments created by all the variation among the states.

I’ve often said the true elasticity of job loss with respect to a minimum wage increase hovers about zero.  I’ve seen good studies finding small negatives and good ones finding small positives.  John presents this very cool graph from a “meta-analysis”—a study of a bunch of studies—showing precisely that result.  There are outliers on both sides of zero, but the strong clumping around zero provides a useful summary of decades of research on this question.

Source: John Schmitt, 2013

These results don’t mean that no worker ever loses her job when the minimum wage goes up.  But they do mean that the vast majority get a raise and that anyone blithely citing the classical model, as Rep Boehner did the other day (“When you raise the price of employment, guess what happens?  You get less of it”), is speaking from prejudice, not from the evidence.

Claim: We don’t need the minimum wage, we’ve got the EITC.  

Proposals to increase the minimum wage invariably lead its opponents to profess their love for the Earned Income Tax Credit, a wage subsidy for low-wage workers in low-income households.  That’s great—the EITC is an excellent program, lifting millions of low-income workers and their families out of poverty.  And because eligibility is a function of income, it is extremely well targeted.

But two things to watch out for.  First, it’s a non-sequitur to compare a minimum wage increase to the fact that the EITC exists.  Those who want to tout their preference for the EITC to lift the pay of low earners must explicitly call for an increase.  In doing so, they are calling for more redistribution from tax payers to low-income workers.  I’m fine with that, but is the oped page of the WSJ?

Second, we need both policies: they’re complements, not substitutes.  As income inequality continues to divert wage growth away from low- and middle-wage workers, those who solely depend on the redistribution through the tax and transfer code are implicitly calling for Congress to ratchet up these measures year after year.  That’s not going to happen, so every few years we need to raise the wage floor so as to be certain that low-wage workers get a slightly larger share of the pre-tax growth they’re helping to create (and if we index the wage floor, as the President proposes, we won’t have to keep revisiting it).

Claim: If the minimum wage is so great, why not make it $90 an hour instead of $9.

Keith Hennessey, whose work is usually thoughtful, lapses into the thoughtless as today’s purveyor of this silliness:

If raising the minimum wage is good economic policy, why stop at $9 per hour? Why not increase it to $90 per hour? By the President’s logic, doing so would dramatically increase the income of not just millions of working families, but tens of millions of working families, and indeed of almost all working Americans.

This just betrays a lack of knowledge of the wealth of literature reviewed by Schmitt, including the important insight, shown in Schmitt’s table 1, about the share of workers picked up in the “sweep,” i.e., the area between the current and the proposed new minimum wage.  Historically, as shown in the figure below, increases have affected less than 10% of the workforce.  As Keith points out, a $90 minimum would affect about 100%.  There’s a difference.

Source: John Schmitt, table 1

Keith is stuck in the classical model noted above where any increase violates marginal product theory.  In the real world, there is a range wherein businesses can absorb the increase through various channels other than employment, including prices, profits, and productivity.  No one knows that precise range, though in deference to Keith, I agree that it’s less than 100%.  History shows, as in the first figure above, that increases carrying less than 10% of the workforce along in the sweep do not generate significant disemployment effects.

Claim: The increase doesn’t reach the folks who really need it.

Since eligibility for the minimum wage isn’t conditioned on income, critics complain it that while it reaches low-wage workers, it doesn’t reach low-wage workers in low-income families.  Instead, the critics maintain, it goes mostly to part-time kids.

Nope.  Most—certainly not all—low-wage workers do in fact reside in low-income households and the demographics of those in the sweep belie the part-time-kids claim.

From new analysis by the Economic Policy Institute of the President’s proposal:*

–84% of total affected workers are at least 20 years old.

–73% 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.

–The average worker in the sweep brought home 46% of her household’s earnings in 2011 (from the White House fact sheet).

So while we’ll all the old arguments and counter arguments are being trotted out once again, I urge folks to remember: analysis of the historical record shows that increasing the minimum wage has its intended effect of raising the earnings of low-wage workers who need the raise without harming their employment prospects.  It won’t transform the labor market or rebuild the middle class, but it is a vital if small part of the connective tissue that used to bind even our lowest wage workers to the more broadly shared prosperity that has eluded them for decades.

 

*Note that EPI includes workers directly and indirectly affected by the increase, since research has found that those earnings within a dollar of the new minimum also tend to get a wage boost.  However, the reported shares are little affected if I look solely at directly affected workers.

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23 comments in reply to "Raising the Minimum Wage: The Debate Begins…Again"

  1. Nick Batzdorf says:

    I also think it should be tied to a cost of living index. $9 an hour in Los Angeles or New York is not $9 an hour in the middle of nowhere.


    • Zifnab says:

      In all fairness, cities and states are free to set a min-wage above the federal level. Not sure that the feds need to get involved at such a granular level.


  2. D. C. Sessions says:

    and if we index the wage floor, as the President proposes, we won’t have to keep revisiting it

    That depends a lot on what we index it to, as recent discussions of Social Security indexing have reminded us.

    In my more radical moments, I propose indexing the wage floor to the per-capita GDP. (And income taxes to the median wage.)


    • oli3 says:

      “In my more radical moments, I propose indexing the wage floor to the per-capita GDP.”

      Well, in MY more radical moments, I propose indexing the wage floor to the productivity index.

      I wonder which would be more…


  3. Kevin Rica says:

    Since the number of people affected by minimum wage hikes (the sweep) is so small in the first place, even a very small number of people losing their jobs might be very large in proportion to the number of beneficiaries.

    It all depends on the supply and demand elasticities of the labor market.

    But if the elasticities are as small as Jared implies, then the impact of all the new immigrants the President wants to allow would have a devastating effect on wages for poor people– without the new minimum wage law.

    But if we have the new minimum wage law, employment will not be able to respond to the increased labor force and unemployment will increase one-for-one with every new immigrant.

    So, in short, the President’s position is: “We need to raise the minimum wage to lift hard-working Americans out of poverty” and “We need to give those jobs to immigrants because Americans are too lazy to do them.”


  4. Evan Soltas says:

    Question: Do you, or does Schmitt, have the summary statistics from the graph you posted?


  5. Fred Donaldson says:

    The EITC is only for folks 25 to 64. If you are old and work, and even still not getting Soc Sec (66), you don’t get it, even if wages are your only income. If you have been working since high school and are 24, you don’t get it. What a country we have when laws are set up for credits that exclude the old workers and the young ones not in college?

    Australian minimum wage is more than $15 an hour for adults, somewhat lower for the young, and higher when you complete apprenticeships. They don’t have a big need for food stamps.

    As far as taxes are concerned, Australia is not as bad as California, and their retirement benefits are far superior to ours.

    P.S. Wikipedia lists nations’ annual minimum wage, but compares the teenage rate in Australia to the adult rate in U.S. Of course, Australia is still much higher than us at $20K, but not the real $30,000 plus there. France and many other countries aren’t bad, either, especially when you consider the low or no cost for healthcare, nursing homes, college, etc.


  6. JohnR says:

    “Claim: If the minimum wage is so great, why not make it $90 an hour instead of $9.”

    Ah. Actually, this doesn’t so much betray a lack of knowledge as it betrays a lack of maturity that borders on Kindergarten-level. Why not just say “nyah-nyah-nyah!” after it? I mean, that sort of sillines is easy: “If drinking 5 glasses of water a day is so great, why not drink 50 glasses of water a day instead?” “If taking a single aspirin every day is so great for people with heart trouble, why not take 10 every day?” “If having one wife is so great, why not have ten wives instead?” I mean, what’s the point of such an embarrassingly (theoretically, anyway) stupid “argument”? Sure, it makes you look like an idiot, but it also has a Godwin’s Law-like effect on your point.
    I am, of course, joking*, but to use such an asinine line of attack; to equate a policy proposal that has some sort of basis in reality with a statement that an 8-year-old might regard as superficial, indicates a certain, shall we say, weakness of intellect. Hennessey could have saved himself and his readers a great deal of trouble by simply writing “Obama is big mean old bed-wetting poopy-head, and I don’t like what he said.”
    *haha, Hennessey!


    • Cville says:

      Way to miss the point. The point is why $9, why not $9.50 or $10 or $11 or $90. An economist should be familiar with the negative impact of fixing prices on anything including labor. The right “price” is determined every day by millions of individuals making personal choices. Politicians have no special insight into this process for a single person let alone the correct answer for millions.


      • Bruce Schmiechen says:

        This assertion that “the right price is determined every day by millions of people making individual decisions” is a belief that doesn’t bear scrutiny when markets and prices are examined against such glib theory in the real world. It’s a childish faith that should be an embarrassment to that cohort of the economics profession that tout it, but unfortunately isn’t. An example of why highly ideological “free market” economics shouldn’t be taken seriously.


  7. Zifnab says:

    Can I just ask, in regard to the “It will only help kids in low wage jobs” objection… so what? Is there something inherently wrong with paying an 18-year-old $9/hr? I’ve never held a job that paid less than $8/hr (well above the $5.15 minimum wage of my teenage years) or had a boss that begrudged me the salary or been employed by a business that couldn’t make ends meet because they paid their staff too much.

    So what’s the beef against working teens? Do you not want teens to get jobs? Do you not think teens deserve the money? This is simple ageist drivel. Aside from being a huge slap in the face to hard-working young people, it is plainly divorced from the realities of growing up in a poor family. What do you think high school kids are spending their money on? Pro-tip: Many need to cover their own car insurance, meals, and even rent. Many more need money for college.

    The same jerks that want to pull up the ladder on Medicare and Social Security for anyone under the age of 55 is pushing the nonsense about how teenagers apparently just don’t need money anymore. And conservatives wonder why they’re getting creamed in the 18-25 voter demographic.


    • Fred Donaldson says:

      Many countries set lower minimum wages for teens and higher wages for those 21 and over. It can be done here, instead of paying family providers at teenage wage rates. Two or three tiers are common in industrialized nations, when setting minimum wage. The reason it isn’t done here is so the working class enemies can say a higher wage is not fair to teenagers.

      The reality that some folks make $7.25 an hour and that some rich individuals have earned as much as $3 billion in a year, or $1.44 million an hour (2,080 hours), is astounding

      We could load a Silverado with a ton of quarters, leave ten feet, add another pickup with a ton of quarters, and on and on, a parade of trucks, until we reached from Philadelphia to Seattle – a total of 512,000 Silverados, each filled with 2,000 pounds of quarters. That’s the total (declared) personal wealth of just one Las Vegas casino owner – the same rich guy, funding candidates who want us to live on nickels and dimes.


  8. tim says:

    Has anyone looked at the knock on effect of raising the min. wage? I thoroughly agree with the increase but it effects more than just min wage earners. Some one at $9 now will get a % over min wage demotion once the new wage kicks in, so they will require an increase commensurate with the min wage increase. This should work it’s way up the ladder to about $15. What is the sweep now?


  9. SeattleAlex says:

    Thanks for the recap JB I was counting on you to catch me up re standard arguments as you usually do.


  10. Leroy Dumonde says:

    The thing I love about these debates is that it always goes the same (progressive taxation, public education, they all follow the same storyline…). The right makes gloomy predictions based on the classical model about how the liberal do-gooder policy will backfire. Then when the empirical evidence clearly shows that the their theory is false they scream something along the lines of “theory before measurement!” (insinuating that liberals are just making up their theory after the fact).

    The classical model is a wonderful theory (the test of a theory being that it can be confronted to the data) but it happens to be false in the case of a minimum wage. It’s only a baseline model. There is obviously a bunch of stuff missing from it. The right seems to think that reality should change to conform to their model and not the other way around.


  11. Richard A. says:

    A sizable percentage of low wage workers are illegal. A plot of supply and demand curves for minimum wage workers can have a supply curve for legal workers and to the right another supply curve that is the total supply of labor that includes both legal and illegal workers. Raising the minimum wage will increase the quantity of legal workers while reducing the demand of illegal workers.

    Republicans in the House will block Obama’s attempt to raise the minimum wage. A compromise Obama could make with Republicans is that if employers want to stick with the older minimum wage, they can if they agree to e-verify their employees, otherwise they pay Obama’s higher minimum wage. If Republicans refuse such a compromise, it would expose their hypocrisy on the immigration issue.


  12. dick c says:

    I recently stumbled across the minimum pay rates in Australia. Something along this line makes a lot of sense to me. For many jobs a young teenager might do, $9 seems a little excessive. However, $9 is still ridiculously low for an adult working full time in a permanent position. Australia has a range of rates. From http://www.fairwork.gov.au/pay/national-minimum-wage/Pages/default.aspx :

    For junior employees, the minimum rates are:
    Under 16 years of age $5.87
    At 16 years of age $7.55
    At 17 years of age $9.22
    At 18 years of age $10.90
    At 19 years of age $13.17
    At 20 years of age $15.59.
    For apprentices, the rates are:
    Year 1 of apprenticeship $10.22
    Year 2 of apprenticeship $12.08
    Year 3 of apprenticeship $14.87
    Year 4 of apprenticeship $17.65

    There was also a link to other rates for trainees.


  13. Smith says:

    Higher minimum wage won’t apply to undocumented workers, no minimum and no employer FICA is why they’re hired. Regions with many undocumented workers are trouble:

    “Jared Bernstein, a fellow at the Center for Budget and Policy Priorities, told me that these are also areas in which low-educated workers are most likely to face stiff competition from immigrants.”

    http://www.nytimes.com/2013/02/17/magazine/do-illegal-immigrants-actually-hurt-the-us-economy.html

    Preceded by somewhat racist assertion of reporter, Davidson:

    “Some immigrant neighborhoods have particularly high crime rates.”

    Then:
    “Labor economists have concluded that undocumented workers have lowered the wages of U.S. adults without a high-school diploma — 25 million of them — by anywhere between 0.4 to 7.4 percent.”

    Answer immigration reform?
    “That is not controversial,” Heidi Shierholz, an economist at the Economic Policy Institute, told me. Shierholz also said that “there is a consensus that, on average, the incomes of families in this country are increased by a small, but clearly positive amount, because of immigration.”

    Over long term maybe, but sacrifice poorest 25 million for small gain?

    Not controversial? These guys beg to differ:
    Ottaviano, Peri, 2008
    Borjas, Grogger, 2011

    Borjas also links immigration to inequality, cites winners, losers.

    Imperfect substitution within skills ridiculously based on wages. Hire A, 3/4 wage of B, not substitute if wage is ¾. But difference result of stickiness! B doesn’t get ¼ pay cut!


    • Kevin Rica says:

      Good points Smith.

      However, many of these studies that show small reductions in the wages of unskilled native workers are clearly misinterpreted. Those estimates are estimates of the MINIMUM loss — which would only be true if there is minimal regional labor market arbitrage. But we know that there is pretty effective regional labor market arbitrage over a longer period of time — meaning that the estimated “0.4 to 7.4 percent” wage loss is the absolute lowest end of the possible range. There is no way to estimate the upper end of the range from those studies, but it is probably much higher.

      Anyway, if anyone who thinks that nobody will raise food or work in meatpacking plants without immigrants legal or illegal — is a brain-fried ideologue. And if you think that you could get American to do that work for only “0.4 to 7.4 percent” more — you are clearly –nahh! Nobody even pretends to believe that.


  14. Eric Farmer says:

    I think the point is missed. Anyone who drops out of free education and expects to earn a living flipping hamburgers is a fool. We offer free education through high school and minimal junior college education, so when someone decides that is too much and start at a fast food place in hopes of providing for there family are we the general public again responsible for there poor desisions?
    That is truly the basis for your argument. Is there poor desisions making the responsibility of the consumer?


  15. Obrador says:

    Is the decline in the real minimum wage linked to a decline in the LFPR of white males that people like Charles Murray are moaning about? Just curious


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