Wednesday, July 12, 2017

Minimum wage

Perhaps this isn't worth a blog post, but it's not as if I've been posting much otherwise. Sometimes it's better to have low standards. So here goes.

Two things strike me as not just true but obviously true about any increase in the legal minimum wage (including an increase from nothing to something):
  1. it will increase the wages paid to those earning the lowest legal wage
  2. it will be a disincentive to employing such people
What's interesting is how rare it is to see both points acknowledged. Proponents of an increase tend to focus exclusively on point #1, either not mentioning point #2 at all or else dismissing it very lightly (for instance, Colin Gordon's generally excellent Growing Apart says little more than that, "a raft of recent research has put to rest the old saw that a higher minimum wage kills jobs or repels investment," which is not true). Opponents of the minimum wage, or at least of increases to it, tend simply to trot out the old saw that Gordon mentions (which is clearly not yet at rest, partly because it has at least this kind of currency and, more importantly, because of this recent evidence). And I'm not talking only about ordinary people. I mean professional experts, including economists.   

So what's my point? Partly I'm just expressing frustration, so my point is: Aaagh!! Partly also I can see why some people are tempted to reject what experts have to say about policy matters. And partly I continue to be interested in economics, what it can and cannot do, and what (if anything) it has to teach us. 

In addition to the two obvious truths listed above I might add these:

     3. what really matters is whether the good of point #1 outweighs the bad of point #2
     4. the way to find out is to see what happens when the minimum wage is increased  

Point #3 involves ethics, but the usual economists' preference for utilitarianism is probably more or less fine here. (Not everyone sees it that way, which is one reason why some people ignore point #2. If #1 is a question of fundamental justice then consequentialist considerations such as #2 might be irrelevant. I don't see it that way, but some do.) Still, this does mean that the relevant question is not about unemployment (or wages) so much as it is about utility. And no one that I know of measures this.

That means that we basically never get to point #4. That is, people do look at what happens, but a) this is really difficult because human interactions are very complicated, and b) the 'what happens' that even the best people look at is not the relevant what happens, i.e. what happens to utility.

Hence the following are the kinds of things the best economists (as far as I know) say on the subject. First, the authors of the recent Seattle-based study that made the headlines:
The second Seattle minimum wage increase, to as much as $13/hour on January 1, 2016, resulted in [...] a reduction of over $100 million per year in total payroll for low-wage jobs, measured as total sum of increased wages received less wages lost due to employment reductions. 
In other words, roughly speaking, people got paid more per hour but were employed for fewer hours, with a resultant net loss of earnings overall. But with the following qualifications:
These analyses are designed to reveal the impact on the entire Seattle low-wage labor market and do not necessarily reveal the full effect of the minimum wage increases on individual workers. Most importantly, our data do not capture employment or earnings in contract or “gig” jobs, work paid “off the books,” self-employment, or work done outside the City of Seattle.
We may not find the same things we found in this study in other cities, states, or at the national level. There are multiple factors that make Seattle and this minimum wage law unique, including high housing costs and relatively large increases in the minimum wage beginning at what had been the nation’s highest state minimum wage. 
So this study is far from being the "proof that increasing the minimum wage doesn't work" that is is presented by some people as being.

Secondly, and finally, here are Isabel Sawhill and Quentin Karpilow speaking sensibly about what economists knew about increasing the minimum wage in 2014:
While a higher minimum wage will help to boost earnings, critics worry about its effects on hiring, arguing that employers will create fewer jobs if they have to pay higher wages. Although past increases do not appear to have adversely affected employment, there is no denying the risk that much larger increases might pose to the least skilled workers. Raising the minimum from its current $7.25 to $15.00 per hour, as some have advocated, would more than double the cost to an employer and likely have some impact on hiring.
The Seattle study does not contradict this. While it does show an adverse effect on employment, the increase that showed this was not the increase to $11 per hour made in April 2015 but the increase to $13 an hour made in January 2016. The Seattle study, in other words, confirms Sawhill's and Karpilow's view (which I think is pretty orthodox) that a modest increase to the minimum wage is likely to be helpful (or at least harmless), but that anything too dramatic could be harmful. They advocate increasing the minimum wage to $10.10 per hour, and redesigning the Earned Income Tax Credit.

This kind of work strikes me as being very useful. Its informed skepticism and moderate recommendations are hardly likely to get many people fired up (although I doubt I'm alone in finding thoughtfulness refreshing), but that shouldn't be the measure of value. 


  1. the (or at least a central) problem is that the reporting of the report can't get into the details of the limits and powers of the methods used, what assumptions they had to make to organize the data and all and how such phenomena fit into the larger economy.
    Just one of many such problems for our democratic processes is that as lay people we are limited in our grasps of the complexities in play and yet generally feel certain that we have a command of the issues, generally along the lines of what we already believe.

    1. Agreed. It isn't that complicated though. By which perhaps I just mean that when you know something, even if only a little, about a case then the simplification in its media coverage can be shocking. It isn't only the news media though, as I say. People who (ought to) know better simplify hugely. Perhaps they think they have to, but it comes across as supporting a political agenda.

  2. One question: Why would the failure to capture impact on things like off-the-books work etc., . . .

    "Most importantly, our data do not capture employment or earnings in contract or 'gig' jobs, work paid 'off the books,' self-employment, or work done outside the City of Seattle."

    even matter in a study of the impact of whether raising the minimum wage would affect job availability? Is this a pre-emptive disclaimer in case a counter argument were raised that overall job availability wasn't actually measured? But how would that even matter since the issue is jobs in the above ground part of the economy since that's where a higher or lower minimum's effects would be felt, no?

    1. Well, I can't speak for the authors, but I can try to guess. One argumnet against raising the minimum wage is that this attempt to help people earning low wages will actually backfire and increase the extent to which they are unemployed. The Seattle study appears to confirm this prediction. But if the people who seem to be losing out are in fact not affected so badly because they work off the books or outside Seattle or whatever, then the results are not so bad for them after all. Of course there could be other objections or criticisms, but I would think this is one kind of concern the authors are trying to address.