The new consensus on minimum wages

by John Quiggin on July 12, 2004

Coming in a bit late, I have the opportunity to survey a range of blogospheric discussion of the topic of minimum wages, which largely supports the view (not surprising to anyone but an economist) that minimum wages are good for low-income workers. The traditional view among economists was that minimum wages reduced employment and thereby harmed workers, but this view has been overturned, or heavily qualified, by empirical evidence, beginning with the work of Card and Krueger.

The debate kicked off with a piece by Stephen Landsburg in Slate, noting that recent US econometric studies had failed to find economically and statistically significant negative effects on employment resulting from higher minimum wages. This was surprising, in view of a range of earlier studies which found right-signed effects, but were statistically weak because of small samples. Landsburg argues that this might be an example of publication bias, in which studies with no statistically significant results tend to get discarded. He concludes

Now that we’ve re-evaluated the evidence with all this in mind, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers. In fact, the minimum wage is very good for unskilled workers. It transfers income to them
Landsburg then goes on to argue against the minimum wage on the curious ground that it’s a less transparent alternative to policies such as an Earned Income Tax Credit. Brad de Long responds, endorsing the EITC, but arguing that minimum wages are also an effective policy instrument for transferring income to the poor.

There are quite a few interesting responses. Steve Verdon develops Landsburg’s argument, pointing out that a minimum wage increase which raises the general cost of goods and services is like a consumption tax and has an associated deadweight loss. That’s true, but it’s also true of whatever tax may be used to finance the EITC. Robert Waldmann suggests changing the structure of payroll tax, but as he himself points out, his argument disregards the point that the budget is already in deficit. Tyler Cowen observes that increases in wages may be offset be reductions in working conditions. Interestingly, no-one seems to have defended the traditional view on empirical grounds.
An interesting and important question is whether these results can be transferred to other countries like Australia, where the minimum wage is higher relative to average weekly earnings. In the survey of the literature we did for the National Wage Case, Steve Dowrick and I concluded that, although there might be some reduction in employment and some leakage to low-wage workers in high-income households, the evidence showed that minimum wages help low-income workers . Our study is here (PDF file)

Overall, my view is close to that of Brad de Long. Minimum wages are a useful policy instrument, but by no means the only or most important one, to improve the position of low-income workers.

Update Jacob Levy asks, reasonably enough

If, as Landsburg claims, the published studies are “all in agreement” about the direction of the effect, then the underlying distribution of studies can’t be as he describes it, can it? Publication bias in favor of significant findings, superimposed on an actually-neutral relationship ought to generate equal numbers of ostensibly-significant findings in each direction.
Actually, the Card and Krueger study found weak positive impacts of minimum wages on employment using a data set where most of the obvious sources of bias had been removed. There may have been earlier studies with similar results, but they would almost certainly have been discarded, on reasonable grounds of weak statistical significance or omitted variable bias. By contrast, studies with similar weaknesses, but with the expected sign would have been published.

{ 15 comments }

1

Rob 07.12.04 at 11:12 pm

Last I looked at this, a while ago to be sure, there was still some question about whether there was an actual wealth transfer to low income workers instead of just a transfer to the middle class. This was argued that a raise in the minimum wage attracts teens and housewives to the labor force. These new enterants, who tend to be white and well of since they have been fine on one income, displace minority workers who tend to be poorer. So while it looks like this would benefit low income workers, it actually has a greater benefit to the middle class.

Anyone know if this has been addressed recently?

2

Bob 07.12.04 at 11:56 pm

Are we to take it that regardless of whether the statutory minimum wage is set at 39% or 52% of the median wage there will be no effect on employment, not even the rate of youth unemployment?

A useful inter-country comparison of set minimum wages can be found here: http://www.cerc.gouv.fr/rapports/summary-cserc6.PDF In Europe, there have been concerns about the effects on the rate of youth unemployment.

3

Matt Weiner 07.13.04 at 12:19 am

The traditional view among economists was that minimum wages reduced unemployment and thereby harmed workers,

Should that be “increased unemployment”?

I have the feeling that if Landsburg had been around in 1865, he would have been arguing that the entire burden of the Thirteenth Amendment fell entirely on one small group–slaveholders–and that the Federal government was obliged to compensate them, or probably come up with some kind of alternate program to improve the lot of the country’s African-Americans. I’m not saying that opposing the minimum wage is in any way comparable to supporting slavery, but Landsburg’s fetishization of existing economic arrangements is pathetic.

4

John Quiggin 07.13.04 at 12:30 am

Fixed thanks, Matt

5

Mario 07.13.04 at 1:21 am

Of course, one of the main benefits of increasing the minimum raise is it increases the wages of non-minimum wage earners because many companies like to pay a certain amount higher than the minimum wage in order to attract more skilled or reliable workers.

6

q 07.13.04 at 2:51 am

“new consensus” or old debate? – I always think this debate is a bit of a distraction from the main event.

Two points are clear:
– abolition of any restrictions on employment contracts would allow employers to employ more people on lower compensation,
– contract and compensation law varies widely across the international spectrum, yet every economy suffers from unemployment,

I will offer a third more contentious one
– that the utility loss any reduction in employment from an increased minimum wage is usually far outweighed by the greater utility, relief of stress, that those people get who benefit feel.

More interesting are the WEALTH effects from such adjustments. The growth of China could be stunted by setting up Chinese-wage factories and compensation in richer nations. But is this the direction that the administrators of a country want to go?

There was a very good segment in the Michael Moore film “Bowling for Colombine” about a black mother of a boy of 6, who commuted 3 hours a day to work a 70 hour week(?*) in two different jobs to earn money on a Welfare to Work program. She was in the documentary because her son had killed another 6 year old with a gun he found.

(*=Not sure of the figures here – this adds up to 91 hours a week which seems unlikely as I don’t see how she could have taken the boy to school as well.)

It got you thinking about exactly WHAT kind of society you really want…certainly the local sheriff was not a happy man…

…and maybe if the minimum wage was higher in her local town, she might have been able to work locally, work fewer hours, and look after her son properly so he didn’t carry a gun to school.

7

tcobb 07.13.04 at 7:12 am

It would be nice to have an objective study made on the subject of the minimum wage, but I keep having this uneasy feeling that most of the studies to date have been conducted by those who had pre-ordained conclusions and cherry-picked their data to support them. Why else do different studies on the subject come up with such contradictory findings?

8

Richard Bellamy 07.13.04 at 12:16 pm

I think one of the important differences between the minimum wage and an increase in the EITC is that the EITC is a tax policy that can get changed from budget to budget, while practically, no one is ever going to suggest LOWERING the minimum wage as long as it hasn’t reached any extremes. THe problem with the EITC, moreover, is that it is complicated and lots of poor people don’t apply for it.

MY suggestion would be to increase the minimum wage ($8 per hour, say), get rid of the EITC for workers, and give it to the employers instead — a negative income tax for all wages paid between $5 and $8 per hour for each employee earning less than, say, $12/hour.

That would make sure the working poor get the money, without big transaction costs, while making sure the burden doesn’t fall disproportionately on employers of low income workers.

9

Cathal Copeland 07.13.04 at 3:17 pm

“The traditional view among economists was that minimum wages reduced employment and thereby harmed workers, but this view has been overturned …”

John Quiggin must have been reading curious traditionalists – those of the straw man variety. The conventional view is the commonsensical one (Economics 101) that minimum wages are good for those workers who remain employed, and bad for those who are sacked or do not find employment because their value-adding capacity is below the minimum wage. The economist, in her instrumentalist way, will simply say: “If you raise the minimum wage, some workers are likely to lose their jobs, or not to find them in the first place. They will be worse off. Other workers will remain employed, and receive more pay. They will be better off. The higher you raise the minimum, the fewer workers will benefit, and the more will suffer. For example, if you raise the minimum wage by 1 cent per hour, almost all workers will enjoy a small benefit and only a handful, if any, will suffer. On the other hand, if you raise the minimum wage to €1000 per hour, a handful of workers will benefit greatly, but the vast majority will lose out. And if you raise the minimum wage to infinity, the effective demand for labour will drop to zero. Just like tomatoes. Now make you policy choice.”

Doesn’t require much ‘research’. All you need is an armchair and think how you yourself would react if you were required to raise your cleaning lady’s wage by (a) 1 cent per year or (b) 100 euro per month or (c) 1000000 euro per nanosecond.

The minimum wage ‘debate’ is something of a no-brainer.

10

Matt Weiner 07.13.04 at 4:29 pm

THe problem with the EITC, moreover, is that it is complicated and lots of poor people don’t apply for it.
And furthermore, the IRS has been auditing people who apply for the EITC at a very high rate, which may further discourage applications.
See this article, which argues that the reduced audits of wealthy taxpayers and increased audits of poor EITC recipients isn’t the IRS’s fault–its budget was cut and Congress mandated scrutiny of the EITC. I’m sure that the fact that this makes it easier for rich folks to cheat on their taxes and results in increased burdens for the poor is something that the Congress regrets deeply.

11

Erik Rosaen 07.13.04 at 4:41 pm

Studies aside, logic dictates that, at the margin, some jobs are lost. The current minimum wage is low enough so that it is close to the market value of unskilled labor. This is probably why it is hard to show an effect one way or the other. Sometimes things are so obvious that a study does not illuminate but can only obfuscate an issue. Can we please keep politics out of economic discussions? I want to help poor people too, but fixing the price of anything, be it farm goods or labor, is just not a good way.

12

q 07.13.04 at 5:21 pm

In order to target the welfare of the poor, an alternative to raising the minimum wage would be to make some health insurance mandatory.

The minimum wage is a “good policy” however on clarity, since it is easily understandable by everyone, whereas insurance contracts are not.

13

JRoth 07.13.04 at 6:23 pm

Cathal seems to be objecting to a straw man, while insisting on the substitution of another. Odd.

Look, we all understand Econ 101. The debate has been the actual, empirical effects. As Cathal acknowledges, a $.01 increase in minimum wage may not, in fact, lead to the layoff of a single worker – it’s certainly hard to see how it could. Yet Econ 101 thinking would insist that somehow, somewhere, a worker is hurt. So we need to get beyond simplistic, billiard ball-level modelling, and develop complex models. And once you make a model complex enough to approach reality, not everyone will agree with the model, and it actually becomes easier just to measure reality than to speculate (I’m not trying to dismiss the predictive power of economics – I’m defending the value of empirical examinations of economic issues).

And, indeed, these recent results seem to suggest that the Econ 101 explanation is more lacking than the consensus had assumed – that for values much greater than $.01, higher minimum wages were a net benefit to the target population of poor people.

Erik’s Libertarian 101 take on the issue is nicely summed up in his own words:

“Studies aside, logic dictates that…”

In other words, “Don’t confuse me with the facts.” I suppose it would be easier to make policy on the basis of bromides like “fixing the price of anything…is just not a good way,” but as long as we’re discussing policies that will impact real, living humans, I’d just as soon look at the studies of real, living humans.

14

C.J.Colucci 07.13.04 at 7:50 pm

I don’t have the technical skills to judge any of the studies, but it strikes me that research showing no significant unemployment effect from incereases in the minimum wage may reflect that, in real terms, the minimum wage, before and after increases, was quite low by historical standards.
In the late-60’s (when in real terms the minimum wage was much higher than it is now), I used to hear people argue that the disappearance of supermarket “bagboys,” as they were called in those prefeminist days, was attributable to the minimum wage. In the last decade or so, they — now called “baggers” and of any gender — have reappeared in at least the higher-end supermarkets. It struck me that this may result from the gradual decline, in real terms, of the minimum wage.
I assume that serious economists can figure this out better than I can and have dealt with it somehow, but I haven’t seen anything in the lay press about it. If so, does anyone know how they have dealt with it.

15

Joshua W. Burton 07.14.04 at 12:18 am

_Studies aside, logic dictates that, at the margin, some jobs are lost._

Isn’t this the point of controversy? _Ceteris paribus_, raising the minimum wage wipes out some jobs, but there are buffering macro effects, whose relative size is disputed.

Consider a scenario in which many customers of KFC in working-class neighborhoods are employees at Burger King, and _vice versa_. If demand for fast food (an affordable luxury) is elastic at the margin, as we would expect, then a marginal dollar of wages might drive 50 cents or more of new demand for fast food, which, if BK and KFC are competing for market share, might compel several dollars of new wage spending on the part of the franchise owners, with no increase in fast food prices. Employment then goes _up_, at the employer’s net expense.

There is a rough implied justice in shaking spare change out of the pockets of low-wage employers, on the hunch that they have been exercising asymmetric market power to keep the prevailing wage below its equilibrium. _If_ this is what’s really going on, a multiplier greater than one will result (as in my scenario) and the “logical” outcome will be reversed. This happy, efficient outcome would be both economically and ethically preferable to other, less targeted, transfer payments from the small entrepreneur to the casual laborer.

Does it actually work this way? It would be nice to know.

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