Re increases in the minimum wage, let’s not be overly shy about what we know

May 16th, 2016 at 3:32 pm

On the minimum wage, let’s be shy about what we know, but not too shy.

Nuance should be welcomed in debates about empirical findings in economics. But when it comes to increases in the minimum wage, we must be careful to avoid throwing our hands up in despair and concluding that, because there’s an ongoing argument in the journals, we simply cannot know the outcome of an increase in the wage floor.

I was on a radio show in Cleveland this AM with two other economists, a far-right-leaning guy who proposed abolishing the minimum wage, a guy in the middle, and myself on the left.

Forget the “abolish” guy. Not gonna happen and not worth talking about.

But my view differed from the guy with the middle perspective in a way that may be instructive. His view was that, since the issue of unintended consequences from minimum wage increases – specifically employment or hours’ losses among affected workers – is “unresolved” in the literature, we can’t really know what the impact of a minimum wage increase will be.

But just how “unresolved” is the empirical literature? There are, as Harry Holzer pointed out in a note on this blog recently, credible studies that find negative job impacts. There is also solid research that finds “no evidence of job losses for high impact sectors such as restaurants and retail.”

However, what we need for policy analysis is not simply the sign of that impact, which is admittedly ambiguous; we also need to look at the magnitudes and, crucially, make sure we’re asking the right questions. Regarding studies that find job losses, for example, policy makers should consider the relative numbers of workers hurt and helped by the increase, how much they’re hurt or helped, and how minimum wage increases interact with other policies intended to lift the pay of low-wage workers.

It is here in which the empirical research has been largely consistent, as summarized by economists Dale Belman and Paul Wolfson in a recent prize-winning summary of the reams of analysis of minimum wage increases:

[Moderate] increases in the minimum wage raise the hourly wage and earnings of workers in the lower part of the wage distribution and have very modest or no effects on employment, hours, and other labor market outcomes. The minimum wage can then, as originally intended, be used to improve the conditions of those working in the least remunerative sectors of the labor market. While not a full solution to the issues of low-wage work, it is a useful instrument of policy that has low social costs and clear benefits.

Here’s how Alan Krueger, an economist whose path-breaking work on minimum wages has deeply influenced economists and policy makers, put it in a recent piece:

When I started studying the minimum wage 25 years ago, like most economists at that time I expected that the wage floor reduced employment for some groups of workers. But research that I and others have conducted convinced me that if the minimum wage is set at a moderate level it does not necessarily reduce employment. While some employers cut jobs in response to a minimum-wage increase, others find that a higher wage floor enables them to fill their vacancies and reduce turnover, which raises employment, even though it eats into their profits. The net effect of all this, as has been found in most studies of the minimum wage over the last quarter-century, is that when it is set at a moderate level, the minimum wage has little or no effect on employment.

Alan goes on to point out that “…a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.”

That strikes me as the nuance we need to bring to this debate. Some may disagree with his assessment of the national risks of going to $15, though I share Alan’s concerns (we both support a national increase to $12). And at the sub-national level, there are cities with high wage and price bases that can probably absorb $15, particularly with a phase-in period lasting numerous years.

But as much as we can know anything in economics, we know that moderate increases, within the range we’ve seen over the last few decades when dozens of states and cities have raised their minimums, largely have their intended effects, and there’s no reason to pretend otherwise.

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17 comments in reply to "Re increases in the minimum wage, let’s not be overly shy about what we know"

  1. Kevin Rica says:

    Then the way forward is obvious. Do a huuuuge deal with Trump. Bernie gets a huuuuge minimum wage increase to $15/hr. Trump gets to deport everyone. If 4 million jobs disappear, but 7 million workers do too, then 3 million people get to re-enter the labor force or come off the unemployment roles in response to the higher wages and better job availability without any increase in measured unemployment.

    But if anyone doesn’t like that, at least stop pretending that there is a shortage of unskilled, low-wage labor.

  2. urban legend says:

    What always seems to be ignored in these discussions — and probably by businesses afraid of increases — is that increases will affect competitors relatively equally. Thus, employer A will not lose business to employer B if as is likely they have similar labor usage profiles. If both employers choose to raise prices, loss of business will only come from the elasticity of demand for those goods or services. Offsetting that is that the customer will tend to have more money to spend and will more easily absorb. In the case of big box retail, the price increase needed is infinitesimal. If the labor force produces more output (lower turnover, better morale), then absolute profit may not need to be cut into at all even if per unit profit is reduced.

    It just seems that there are so many moving parts in this question that especially when it has been a long time since the last increase, and when low discretionary incomes have been identified by many economists of various persuasions as a big problem in an economy 70% powered by consumer demand, an advocate should feel comfortable saying that he or she (and his or her economic advisers) disagrees with the claims by conservatives and conservative economists that moderate increases in the minimum wage will cause job losses.

    • SMV says:

      urban legend,
      You cannot assume that different companies use the same labor strategy. Companies use different mix of skilled and unskilled labor and different levels of labor vs capital. If your company has invested heavily in automation and competes with companies that use lots of labor an increase in the minimum wage will hurt your competition and help your company.

      As for your comments on retention and loyalty, it is true that if your company pays higher than average wages your employees tend to be more loyal and you can hire more productive employees. This is not true if legislation moves the average.

      Good luck


      • urban legend says:

        Of course, but what’s the overall picture? There’s a lot of cost-structure convergence within industries.

        For a time, anyway, even though there will be an upwards cascading effect to some extent, raising the minimum will compress wages near the bottom, while greater job satisfaction will also tend to moderate the desire to go elsewhere.

  3. Robert Salzberg says:

    Economic impacts are a secondary measure when considering minimum wage levels. Adam Smith wrote that it was insufficient to set minimum wages at subsistence levels and that it should be slightly higher. That analysis is still valid. What has changed since Smiths’ day is that the government supports low wage workers with the EITC, Medicaid, CHIP, Head Start, SNAP, HUD, the ACA etc…

    If the minimum wage was set at a level where a full-time worker didn’t need government support, then we’d have much less need for ‘big government’, work would be more fully rewarded and we wouldn’t be subsidizing wage slaves and corporate greed. Conservatives and progressives should agree on that.

    So let’s not be shy about saying that a minimum wage worker should be self sufficient and shouldn’t be forced to live in poverty or rely on government support for subsistence.

    • Robert Salzberg says:

      “If they can get you asking the wrong questions, they don’t have to worry about answers.”

      Thomas Pynchon

  4. john says:

    It’s a wonderful thing how hysteresisical economists commonly are, arguing a thing cannot be done when it was perfectly doable before the Clinton era began.

    The moderate cannot contemplate setting minimum wage equal to 1968 grossed up by GDP per capita. The same guy in 1968 likely could not have contemplated 1932 grossed up by GDP per capita. Yet 1968 happened.

  5. wayne says:

    I don’t understand something. If an employer will reduce his workforce and make the remaining workers more productive due to a forced minimum wage increase, why wouldn’t that same employer do the reduction now without the wage increase and pocket more profit? Don’t employers employ only the minimum number necessary to get the job done?

  6. Jeffrey Stewart says:

    Good grief!

    Jared Bernstein, self described as being “on the left!” How is it that someone who advocated cutting Social Security benefits using a chained CPI only because it was going to “happen anyway” in return for tax increases on the highest incomes gets to claim he’s “on the left?”

    Jared, a leftist favors an increase in the minimum wage to a living wage estimated to be $16.87 for a single adult by the Alliance for a Just Society. A leftist agrees with the known leftist US president, FDR, that “In my Inaugural I laid down the simple proposition that nobody is going to starve in this country. It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By “business” I mean the whole of commerce as well as the whole of industry; by workers I mean all workers, the white collar class as well as the men in overalls; and by living wages I mean more than a bare subsistence level-I mean the wages of decent living.”

    Jared, what is the “leftist” argument for how people are supposed to live if they don’t earn a living wage? According to the National Employment Law Project, using data from 2012 – 2014, 42.4% of ALL US WORKERS EARN LESS THAN $15 per hour! How are these people supposed to live without government assistance?

    It’s curious and felicitous that “leftist’ Jared’s proposal for a $12 per hour US minimum wage dovetails nicely with known “progressive” and presidential candidate, Hillary Clinton. Jared, your political preferences are showing and they aren’t those of someone “on the left.”


    • urban legend says:

      A 65% increase ($12) is a bit further to the left from 0%. That’s the national minimum. Does the Alliance for a Just Society’s $16.87 apply equally to Tupelo, Mississippi, as to Palo Alto, CA? But it seems you’re either with us all the way, or you’re just as much the enemy as the ones who would do nothing.

      Rome has been left to serious decay for more than half a century. Rome can’t be re-built in a day. The politics for it have to be re-built, too. Meanwhile, I’ll bet those currently scraping by on $7.25 will be thrilled with an extra $10,000 — a lot more thrilled, anyway, compared to no extra income.

      65% over two or three years would be the highest rate of increase in history.

      Small businesses — who provide tens of millions of jobs — are the ones who worry most about the cost of minimum wage increases. It’s a good idea politically to show some concern for them.

  7. Leaving says:

    This is such a simple issue. Why do economists complicate it so much?

    Imagine a closed economy, that is an economy without other nations. In this economy, the minimum wage could be almost anything below the median and the economy would not force unemployment. If an economist believes even remotely in the value of specialization of labor, the minimum wage could get pretty close to the average wage without repercussions.

    All of the problems the US is having, and I mean ALL of them are due to trade policy.

    This is not complicated. It doesn’t require complex formulas, equations, statistics, studies or anything else. Everyone knows what is happening. Everyone. This is one case where common sense Trumps the experts. How sad is that?

    Could there be some regional problems? Of course. Is labor mobile in the US? It used to be, but it is less mobile due to the housing crisis. But it is still generally mobile.

    I’m not a fan of labor mobility necessarily. I think it is an unfortunate consequence of reality, but if we’re going to have mobile labor, let it be for the right reasons — providing a dignified living to people rather than huge profits for elitists.

  8. Leaving says:

    Do I have any friends if I begin posting on my own blog? I’m pretty confrontational.

    Yea, the dumb thing says, ‘content changed’. Why? the css changed. I knew this was a potential problem with blogging platforms. I’m changing it to say, ‘css changed. Content might not be consistent’.

    Can I force this change on an industry? To allow consistency? We’ll see. I’m going to try.

  9. carlyle says:

    Raising the minimum wage will have no bearing on the hours it takes to skin a cat. The cat skinning industry must either train better, use better methods, or purchase better cat skinning equipment. Each or all of these responses have a favorable effect on the economy and cat skinners will live better lives.

  10. Anthony Bell says:

    Any loss of work opportunities would manifest themselves in a reduction in yearly hours worked. If a wage increase leads to a loss of, say, 20% of hours worked but an increase of 50% in hourly wage, then workers would still be better off with a net increase of 50-20% yearly wages. Plus they would have more time off.

  11. Rick McGahey says:

    Worrying about $15 an hour is a little too cautious, although I get the point. As you know, none of the increases to $15 are immediate. For example, a $15 per hour wage phased in 2020, at current inflation rates comes out to somewhere north of $13.50 per hour. And you can put in circuit breakers and monitoring processes to see if you are really getting significant wage losses. We shouldn’t easily dilute national labor standards in order to accomodate low-wage employers–or regions. We wouldn’t (or shouldn’t) allow varying standards for health and safety on the job, or employment discrimination, because some regions are worse performers than others.

  12. Procyon Mukherjee says:

    I have not seen a single experiment on raising of minimum wage fail, in fact in the periods they have been enacted they have shown better growth numbers. But why do we need to argue, when we know that the only way to increase demand would be to increase wages at the bottom half of the pyramid. The move from capital to labor will raise demand, as current capital formation is stuck in the business of expensive buy-backs, which hardly would do anything to demand side of the story.