Economist Harry Holzer on minimum wage increases and job losses

February 29th, 2016 at 7:08 am

Economist Harry Holzer pinged me yesterday re this piece by Ben Spielberg and me on the dust up in Birmingham, AL around their local minimum wage. Harry felt we gave much too short shrift to the the research showing job loss impacts from minimum wage increases. So, him being a reasonable guy, and me being the same, I invited him to write down his thoughts about this.

I offer some responses below.

Do Local Minimum Wage Increases Never Reduce Employment?

Harry J. Holzer, Georgetown University

My friend Jared Bernstein and I have largely similar views on most economic issues, especially regarding the labor market. For instance, when it comes to raising the minimum wage, we both support increases at the state or federal levels up to $10 an hour, and usually oppose much larger increases to $15. (I am also skeptical of going as high as $12, though I am not sure Jared shares this concern).

So I was surprised by Jared’s column (with Ben Spielberg) in yesterday’s Washington Post, which seems to argue that increases at the city or county level never lead to employment losses there.

Bernstein and Spielberg’s main point is to criticize a proposed new law, passed by the legislature in Alabama, that would forbid any city to raise its minimum wage or impose other mandates on employers, like providing modest paid sick leave to its workers.  Like them, I would find such a law both foolish and offensive.

The Alabama law was passed in response to a vote by the Birmingham city council to raise the city’s minimum wage up to $10 an hour over two years. This is not such an egregiously large increase – though I would want to know about a bit more about average wages and skill levels in Birmingham before fully endorsing it. Nevertheless, even if it caused some modest shift in employment over time out of Birmingham and towards other localities in Alabama, it is hard to see how such an increase would be so disruptive to business there as to merit such a draconian response by the legislature.

Yet, in making this argument, Bernstein and Spielberg also overstate their case, and throw caution to the wind. For one thing, they cite just two studies of the minimum wage literature – one by Card and Krueger (on fast food restaurants in New Jersey and Pennsylvania) and one unnamed (by Arin Dube and his coauthors). But David Neumark and William Wascher have written well-known and credible critiques of both studies, and found larger negative employment effects in their work. In this research, small tweaks to the methods used can generate very different findings – and we need to present all of them  (and to use an average of their estimated effects) in any honest discussion of the likely effects of a specific minimum wage increase.

There are other studies that are relevant here as well. Aaron Yelowitz of the University of Kentucky has analyzed the effects of large local minimum wage increases in Santa Fe and found sizable impacts on unemployment there.  A new paper by Peter Brummund and Michael Strain, recently posted at the American Enterprise Institute, studies employment effects of minimum wage increases across county lines and finds that the size of effects often depend on several different circumstances – such as whether or not the new minimum is indexed against inflation (which worsens effects on employment) and the average wage level in the county at the outset (with lower levels tending to worsen employment losses).

And some recent research suggests that the effects of minimum wage increases are fairly nuanced, and therefore harder to discern in the traditional studies, which look only at short-term employment effects on broad groups.  For instance, Jonathan Meer and Jeremy West find that minimum wage increases do not cause large short-term employment losses, but rather slower employment growth over a longer time period for low-wage groups where they occur.  And Jeffrey Clemens of UC San Diego finds substantial negative effects on employment of very specific groups more directly affected by the minimum, like young high school dropouts. In fact, he finds a nearly 6-percentage point drop in the employment of dropouts below the age of 30 as a result of the federal minimum wage increase in 2007-09, though effects on broader groups are much more modest.

A denial of the true research evidence on minimum wage increases has led some cities to increase their minimum wages up to $15 an hour, as Bernstein and Spielberg note. Perhaps Seattle and the Sea-Tac region in Washington state can afford such increases without creating major employment losses; but similar increases in Los Angeles and Washington DC (where voters in a recent referendum voted to go to a $15 minimum before a local judge put it on hold) could have serious negative effects on the employment of large groups of very unskilled workers in these cities. Piling on with additional measures such as extremely generous paid family leave and other worker protections, as the DC Council is trying to do, would likely drive many employers over the river to Arlington VA over time (or cause DC employers to economize on their hiring, perhaps by mechanizing more of their operations).

Yet nothing in the Bernstein-Spielberg piece seriously acknowledges these likelihoods.  There are, of course, large benefits in minimum wage increases that also must be weighed against these losses. But much of the wage increases will accrue to middle class youth or part-time second earners in middle class families, while the high school dropouts suffer the largest job losses.

In short, the debate over the effects of the minimum wage needs less absolutism on both sides, and a more nuanced discussion of their pros and cons. Like Bernstein and Spielberg, I condemn a thoughtless new law in Alabama that needlessly ties the hands of local city councils to enact moderate wage increases. But I hope Jared and Ben will also be more careful in their future writing to acknowledge a broader range of research evidence on this issue, and to urge more moderation in the discussion.

[Back to me: Many reasonable points here. Speaking for myself, my goal in the WaPo piece was to point out the egregious intervention by the legislature to block the local council’s initiative, one that I judge, based on the full spate of the research, including that cited by Harry above, is likely to have its intended effect of helping the majority of low-wage workers affected by the raise. I have, as HH notes, argued that $15 is too high a min wg in certain parts of the country–and thus too high for a federal level, at least w/out a very long phase in.

Min wg expert Alan Krueger recently wrote, in this spirit: “Research suggests that a minimum wage set as high as $12 an hour will do more good than harm for low-wage workers, but a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.”

The challenge in assessing the empirical min wg literature is that while there are papers that find negative results, as HH correctly notes, there are many that do not. Moreover, the magnitude of the negatives matter. Negative elasticities (i.e., job loss effects) well below ‘1’ imply many more beneficiaries–“more good than harm” as Alan K puts it–than those hurt by the increase. So, as is so often the case in empirical economics, we have to humble about our knowledge.

I think it is fair to summarize this huge and contentious body of research as follows: moderate increases in minimum wages have their intended effects. What’s moderate? History suggests increases that capture less than around 20% of the low-wage workforce in their sweep fit this definition. But others may draw defensible lines in other places, both lower and higher.

As I read the state wage data for AL, the Birmingham proposal is moderate by this criterion, as HH suspects. And I’m very glad to hear him agree with me and Ben re the oppressive preemption of the state legislature.]

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13 comments in reply to "Economist Harry Holzer on minimum wage increases and job losses"

  1. Craig Duncan says:

    Thank you for this useful summary: “I think it is fair to summarize this huge and contentious body of research as follows: moderate increases in minimum wages have their intended effects. What’s moderate? History suggests increases that capture less than around 20% of the low-wage workforce in their sweep fit this definition. But others may draw defensible lines in other places, both lower and higher.”

    I particularly like the “20% of the low-wage workforce” criterion. But one follow-up question: how is “low-wage workforce” defined? That is, where’s the cutoff between non-low-wage workforce and low-wage workforce.

    • Jared Bernstein says:

      Good ?. I mean the bottom 20% of wage earners. So the top of the sweep is the 20th %’ile wage, though I don’t mean to imply this is some fixed rule–it’s all much squishier than that.

      • Jon says:

        “As I read the state wage data for AL, the Birmingham proposal is moderate by this criterion, as HH suspects.”

        Any particular piece of data you are looking at? Average hourly earnings? Medium income?

  2. Denis Drew says:

    If a higher minimum wage brings more dollars to lower wage workers — both directly and via pushing up other wages — those extra dollars will be diverted from purchases that higher wage workers/consumers would have made to purchases that lower wage workers/consumers choose instead. Instead meaning that no overall loss of demand would occur.

    Since consumers have some tendency to purchase more from firms that employ workers at their own wage level the overall result may be some higher wage job loss. Think car purchases. 1/ll/14, NYT article “The Vicious Circle of Income Inequality” by Professor Robert H. Frank of Cornell: “… higher incomes of top earners have been shifting consumer demand in favor of goods whose value stems from the talents of other top earners. … as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.”

    If Americans in 1968 had been asked — when the minimum wage was $11; at half today’s per capita income — what it might take for the minimum wage to be reduced almost four dollars almost fifty years later what could they have conjectured: a comet strike, a limited nuclear exchange, chronic world plagues?

    Working two jobs has become such a ubiquitous situation at today’s low low skilled wages that losing low skilled jobs could be balanced off by those happy to quit one. Instead (there’s that word) probably more of today’s unemployed (I’m thinking Chicago’s 100,000 gang bangers) would be entering the labor market. Remember when manufacturing jobs fed many minority families?

    Today’s gang bangers — and my old gang, American born taxi drivers — would gladly work for HALF today’s wages, if this were the year 1916, because they would have understood that that was the most the much less productive economy of that time (everybody’s reading Gordon) could pay. In the era of ubiquitous up-to-date kitchens and four-wheelers no man of spirit is going to slave for $400 a week — no cab driver of spirit for $500 for 60 grueling hours except maybe if they are escaping a virtually distant year in a distant land.

    A $15 minimum wage would directly shift 5% of income from the 55% who earn 90% to the 45% who earn 10% (or from the 54% who earn 70% but that’s another topic). The 65% of McDonald’s customers who come through the drive through have to eat (33% labor costs; 25% price increase) — if $15 pushed Walmart’s average wage to $17.50 (claim average is $12.50) the price increase would be a whopping 3%.

    The beauty of collective bargaining is that you know you have squeezed the max the consumer (the economy) is willing (is able) to pay.

    Given that per capita income grows maybe 20% every ten years, how is the economy (the consumer) not able to shift 5% more to lower wage workers — maybe 10% over time as we rebuild union density (simply make union busting a felony just like any other market coercion starting in progressive states — but that’s another topic). Long overdue to get low skilled jobs up to $600-800 — there was no comet strike.

  3. Rima Regas says:

    It seems it wasn’t that long ago that we were talking about the multiplier effect of putting cash into people’s hands. We didn’t get more stimulus when it became clear we needed more and now we have an economy that has been punishing the precariat for far longer than any previous bubble or recession, with inequality growing wider and opportunities for new professional labor participants being far less quantitatively and qualitatively than they were for their parents.

    Add to that the extreme rise in housing prices due to the demand rise in rentals following the recession and lower wages, and a rise in the minimum wage to a living wage becomes an imperative.

    Now, to the critique here… A rise to $12 an hour will fall well below the actual living wage. As it is, while $15 an hour is good, those earning it will still depend on overtime hours if they can get them, and part-time jobs. In cities like LA, NYC, DC, Boston, a living wage is closer to $30 an hour than $15.

    Obstruction in Congress and the lack of economic policy have forced the issue and inequality is now being dealt with on the other end of things, with the #FightFor15 and the anti-establishment sentiment among voters. Whether that translates into sweeping change come election day is yet to be seen this cycle, but if there is no major change come November, that change will come two years later and again in four years. The situation that millions have been living in is untenable, and I include myself among those Dr. Guy Standing of London School of Economics calls the “precariat.”

    Finally, a rise in demand is needed. I still see established businesses failing or paring down, even in areas that are considered upper middle class.

  4. Dan Riker says:

    Last year the City Club of Portland appointed a committee to study whether Portland should have a minimum wage higher than the state’s minimum wage of $9.25/hour and also whether the pre-emption statute that prevents local jurisdictions from having minimum wages higher than the state’s should be repealed. The committee concluded the answer to both questions was yes. The state legislature just last week approved a minimum wage provision that will set three levels of the minimum wage according to geography – rural areas – midsized – and Portland metro with the top rate getting to $14.75 in six years. There are two proposed ballot referendum petitions underway, either one of which would bring about a faster increase to a higher minimum wage, one of them would set it at $15.00. Under almost any scenario Oregon will have the highest minimum wage yet enacted by any state. However, because the inflation adjuster in the present minimum wage is temporarily removed from the new one until the top rate is reached, when that top rate is reached it probably no longer will be considered a “living wage.” Thus, the effort here to achieved a true “living wage” for anyone working fulltime probably will continue.
    In any case, the City Club report is extremely well done. They did a thorough review of virtually every bit of research ever done on the minimum wage. I also recommend the studies done by the University of Washington School of Social Work on what is required to have a minimum life-supporting income in 37 states, including Oregon. Their study of Oregon is referenced in detail in the City Club Report. The evidence in favor of raising the minimum wage by a substantial amount is overwhelming favorable. I was not on the committee but I am serving on the Advocacy Committee that is promoting the Club’s findings.
    Here is a link to the City Club report:

  5. urban legend says:

    “Never” kind of stacks the deck, but it’s hard to imagine that there is ever a net loss of jobs when it has been a long time since the previous raise. We always seem to forget that competitors all face pretty much the same cost pressure, so competitive disadvantage is rare. That means it’s a matter of elasticity of demand for the goods or services provided by minimum wage or near minimum wage labor. It seems unlikely that raising the cost of a fast food hamburger a nickel or a dime to cover a cost increase for labor would have any effect on fast food sales, given that it serves a niche in a market basket that serves many purposes besides eating per se. There are positive cost effects as well (lower turnover and training costs), and positive demand effects — more money for local clientele — that will tend to moderate the need to raise prices.

    There will never be a final answer in any given scenario. It’s always popular with workers, regardless of whether it would meet the approval of economists of every stripe. It’s never popular with small business people, who have the best ability to tug at our heartstrings to oppose a raise and will always threaten job losses. So whenever you can get it done politically, you should do it, but do it in a way that shows you do care about small business — gradual and all that. The threat of job loss is too nebulous to suggest doing otherwise, with most of the studies showing that to be a bogus claim. Especially when it has been several years, the small business objection will be pro forma, since even they will sense that their customers have too little money to buy what they are offering.

  6. Jon says:

    “As I read the state wage data for AL, the Birmingham proposal is moderate by this criterion, as HH suspects.”

    Any particular piece of data you are looking at? Average hourly earnings? Medium income?

  7. Kevin Rica says:

    IIf we are even discussing whether there may be enough jobs available to absorb the unskilled labor force in the $10-$15 range we are illustrating (and causing) the rage behind the rise of Donald Trump. If he got elected and actually did reduce the labor force by 8 million FTE, the bottom end of the wage scale would rise into the $10-$15 range BECAUSE there isn’t enough unemployment. Can’t have it both ways. (As Dean Baker so rightly noted in “Are We Suffering from Too Many or Too Few Workers?”

    Interestingly enough, the Gal Who Gets It (GWGI) is Peggy Noonan who explains why the peasants are revolting here: HRH (Her Royal Hillary) and many of the fashionable ones may find the peasants revolting, but don’t get it. But the peasants understand basic supply and demand when it comes to their jobs.

  8. Frank Stricker says:

    Just catching up to this debate. I will take Harry Holzer seriously when he pairs is worries about a high minimum wage to worries about the superrich and all the income they are sucking out of the economy. One reason wages are so low–no higher in real terms than they were in the 1970s–is that so much of the added income the economy produces goes to the top 10% and esp. the top 1%.