Policy

The Minimum Wage: A Little Light Empiricism on a Heavy Subject

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Today here at Reason, Steve Chapman reminded policymakers in the context of raising the minimum wage that we generally understand it to be a rule at the heart of economics that other things being equal, increasing the cost of something will lower the demand for it. In it he quoted New York Times columnist Paul Krugman, generally a fan of modern Democratic Party policies, and indeed a fan of raising the minimum wage to $9 as President Obama wants, admitting back in 1998 that indeed increasing the price of labor may lessen the demand for it.

The modern Krugman thinks, in this case, that economic logic must bow to empirical reality, and says that it is a settled matter than in this instance, raising prices will not decrease demand.

There is a reason why economics as a science coalesced around coming up with logical regularities that likely underlie the buzzing, blooming confusion of reality where so many countervailing forces and influences are at work to reach any real world outcome that it would be remarkably easy to be fooled about what is causing what, and what is not having any effect.

That's good science: looking through appearances to find underlying regularities. Thus, there is a reason why one should be super extra skeptical about empirical science that seems to contradict an underlying law on which so much of the discipline depends.

That said, some bits and pieces of countervailing empiricism and thoughts on the question of whether raising the minimum wage costs people jobs.

*Robert Murphy thinks he's got some numbers indicating higher minimum wages have some measurable effects on teen employment (likely to be the sort of unskilled worker whose value-added to a company might be less than minimum wage):

First of all: Notice how high the teen unemployment rate is, across the country. If minimum wage laws have no effect, why should this be so?….if we look at the 19 states that have a minimum wage higher than the federal minimum, the average unemployment rate among teens is 25.2%. In contrast, if we look at the 31 states that have either no state-level minimum wage or one that equals the federal level, the average teen unemployment rate is 21.5%. A pretty big difference, and this is from sample sizes of 19 and 31….

But beyond the arithmetic averages is the clustering of the states, in their respective groups, when you rank them from the highest to lowest teen unemployment rates. The most striking result to me: If you look at the top 5 and the bottom 5, you find: Four of the top five states have higher-than-federal minimum wages, while only 1 out of the bottom five does. I'm not sure how to set up the statistical problem, but I think that would be an incredibly unlikely result, if minimum wage laws had nothing to do with teen unemployment rates.

Furthermore, if you look at the top and bottom 10, you get: Out of the top 10, six of them have higher-than-federal minimum wages, while out of the bottom 10, only 1 does.

Murphy does not seem to be adjusting for different price levels in the states to get a "real" minimum wage.

Commenter Walter Wessels in Murphy's thread brings up what strikes me as an interesting point and a good start into understanding why "just looking at the facts!" isn't always the best way to tease out the effects of an action in a complicated, complicated world--when you aren't sure what facts are the relevant facts:

Most labor economists dismiss using the unemployment rate as a measure of the effect of the minimum wage. Why? Because economic theory says the minimum wage should reduce employment, so you should look at the employment rate. The "unemployment rate" does not measure the number of people who lost their jobs due to the minimum wage (or anything else, for that matter. It measures the number of persons actively looking to work. As Jacob Mincer showed, a minimum wage could increase the unemployment rate if it caused more people to want to look for work (which he called the "pull" effect. Alternatively, the minimum wage could reduce unemployment if the lack of jobs and turnover discouraged workers from looking for jobs. What is worse, an increase in unemployment could, but need not, be consistent with the minimum wage increasing the value of looking for a job, thus making all workers better off, and alternatively, a decrease in unemployment could (but need not ) be consistent with a minimum wage lowering the value of looking for a job (making everyone worse off). To put it another way, the effect of minimum wage on unemployment tells us nothing, at least without other data. So once again, one can become labeled by the Bureau of Labor Statistics as unemployed without losing a job, and one can lose a job, leave the labor force, and not be "unemployed" at all.

*It does not appear, though, that the minimum wage is the prime causal factor in general unemployment. (Nor is their any reason on free-market logic to think it should be.)

*Don Boudreax wonders about getting so empirical in an attempt to challenge basic economic logic in this one area:

Of all valuable goods and services bought and sold in markets, human labor is one of the few in which many people seriously believe that the law of demand – the proposition that, ceteris paribus, the higher is the cost of acquiring a unit of some given good or service, the fewer will be the units of that good or service sought to be acquired per period of time – does not necessarily apply.

And so empirical studies are done to test the law of demand as it applies to human labor and, lo and behold, some studies find that it does not apply while other studies find that it does.  So we are to conclude from this fact that employers of workers whose pay is in the range of the legislated minimum-wage might well not seek to economize on their production costs, in the face of higher mandated wages, by reducing the quantities of labor they hire, by working their laborers harder, or by lowering on other dimensions (say, fewer fringes) their hourly costs of employing labor.

Such a conclusion seems to me to be an incredible leap, one born chiefly of the romantic wish to believe that (apparently) well-meaning government mandates aimed (apparently) at 'the poor' really are an easy way to help the poor earn more income.

*Perhaps the numbers don't show long-term employment effects on minimum wage because:

there have been very few long-run changes in the minimum wage in the United States, so evidence on their effects is scant. The minimum wages is set in nominal terms, so it declines with inflation, is raised, declines with inflation, is raised, etc.  This yields a sawtooth pattern of the real (inflation-adjusted) minimum wage in which almost all changes in the real minimum wage are temporary. And [University of Michigan econ grad student Isaac [Sorkin] argues that temporary changes in the minimum wage have muted effects. 

*Reason in 1995 questioned the famous Card-Krueger study of fast food employment effects in two states after one minimum wage hike in 1992, the ur-source of "minimum wage hikes don't increase unemployment" modern smarty-pantsery, as did the National Bureau of Economic Research.

Do we have reason to believe that workers are not likely to be hired if the employer thinks they don't add value above the wage he pays them? Do we have reason to believe workers exist whose value added is less than $9? Do we have reason to believe that people tend to want less of something the more it costs, other things being equal? Do we realize that the "other things" that have to be equal are a huge, dizzying, number? Do we grant that employment numbers can go up after a minimum wage rise without that meaning that the rise in the wage did not cost some people a job? (Since there are many, many other reasons that employment might be going up that countervail the effect of the wage hike?)

Then it pays to think twice about hard factual true empirical numbers that make people conclude you can raise a minimum wage without causing people on the margins to lose a chance to work. (And those are exactly the people for whom some kind of job is most important.) This is not to make a statement about overall social good (if you believe in such a thing) when comparing the complicated effects of who wins and who loses when wages are raised for those working in that $9 an hour range. Just that it's hard to get around the thought that someone is going to lose or not get a job over it.