I tried working my way through the Dube, Lester, and Reich (2010) paper that I think is a good representative of the “latest research” that allegedly overturns the old consensus. Now that I am pretty sure I know what happened, I have to say that if these results are allowed to guide the debate, then something really wrong is going on here.
First, let’s make sure we understand the context. Here’s their abstract:
Abstract—We use policy discontinuities at state borders to identify the
effects of minimum wages on earnings and employment in restaurants
and other low-wage sectors. Our approach generalizes the case study
method by considering all local differences in minimum wage policies
between 1990 and 2006. We compare all contiguous county-pairs in the
United States that straddle a state border and ﬁnd no adverse employment
effects. We show that traditional approaches that do not account for local
economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated to minimum
wage policies. Our ﬁndings are robust to allowing for long-term effects of
minimum wage changes. [Bold added.]
That part I put in bold is crucial. When Dube, Lester, and Reich look at contiguous county-pairs that straddle a state line (and hence can have different minimum wage laws applicable to them), they too find that a “naive” regression will show that minimum wage hikes will retard the growth in unskilled employment.
However, they “correct” this result by putting in an additional explanatory variable that picks up the effect of the “state-specific trend” in employment. Once you do that, all of a sudden the point estimate of employment turns slightly positive, or at least is close to zero (depending on the specification). Now these authors don’t ever really spell it out in plain English, so let me quote from the John Schmitt CEPR literature review that Krugman liked so much. The CEPR paper says what Dube, Lester, and Reich did, and how their findings (allegedly) turned the original, anti-minimum-wage findings on their head:
Dube, Lester, and Reich’s study also identified an important flaw in much of the earlier minimumwage research based on the analysis of state-level employment patterns. The three economists
demonstrated that overall employment trends vary substantially across region, with overall
employment generally growing rapidly in parts of the country where minimum wages are low (the
South, for example) and growing more slowly in parts of the country where minimum wages tend to
be higher (the Northeast, for example). Since no researchers (even the harshest critics of the
minimum wage) believe that the minimum wage levels prevailing in the United States have had any
impact on the overall level of employment, failure to control for these underlying differences in
regional employment trends, Dube, Lester, and Reich argued, can bias statistical analyses of the
minimum wage. Standard statistical analyses that do not control for this “spatial correlation” in the
minimum wage will attribute the better employment performance in low minimum-wage states to
the lower minimum wage, rather than to whatever the real cause is that is driving the faster overall
job growth in these states (good weather, for example). Dube, Lester, and Reich use a dataset of
restaurant employment in all counties (for which they have continuous data from 1990 through
2006), not just those that lie along state borders and are able to closely match earlier research that
finds job losses associated with the minimum wage. But, once they control for region of the country,
these same earlier statistical techniques show no employment losses. They conclude: “The large
negative elasticities in the traditional specification are generated primarily by regional and local
differences in employment trends that are unrelated to minimum wage policies.”
This, I submit, is crazy talk, assuming I correctly understood what Dube, Lester, and Reich actually did in their study. Here’s my list objections:
#1)==> We are already supposed to be comparing apples to apples, by focusing on contiguous county-pairs across state lines, right? That’s why we did it this way. Yes, if the minimum wage laws all happened to be raised in an area that had a bunch of oranges to be picked, and then there was a bad harvest every time the minimum happened to get increased, then you could get a spurious negative result. But if you’re looking at contiguous county-pairs, then this shouldn’t happen. If there’s a bad orange crop in one county, then there should be a bad orange crop in the next county over (which happens to be in an adjacent state). To find the pairwise negative effect on employment that the old literature documented quite clearly, but then to correct for “state-wide” employment trends due to good weather, is crazy. You are overcorrecting.
#2)==> What Dube, Lester, and Reich are really saying here, is that maybe for some reason minimum wage hikes happen to be concentrated in regions that have lower than average employment growth. Hence, just because we find that teenage employment grows more slowly in regions with higher minimum wages, doesn’t mean we can blame it on the relatively higher minimum wage. But hang on a second. Minimum wage hikes aren’t randomly distributed around the country, such that we might happen to get an outcome where they tend to be concentrated in slow-growth regions. On the contrary, minimum wage hikes are implemented by “progressive” legislatures, who also (given my economic worldview) implement other laws that retard adult employment growth.
For example, suppose that if a state legislature jacks up the minimum wage, then it is also likely to pass “pro-labor” stuff like laws giving unions more organizing power, laws allowing unfairly terminated employees to receive years of back pay, and laws granting extra perks for maternity leave. Now, these last three items I listed: Would they reduce the employers’ incentives to hire teenagers or adults, more? On the margin, they would make it costlier to hire adults, because if penalties are expressed in years of back pay, or have to do with paid leave, or strengthen unions who traditionally are going to organize adults…You get the picture. Adults make more than teenagers, and so these rules will penalize adult employment more than teenage employment.
Thus, if my model here is correct, it would produce the pattern we actually see: Looking narrowly at minimum wage laws, they seem to retard teenage employment. But then when you ask if states with high minimum wage laws have a bigger slowdown in teen employment versus adult employment, the signal becomes much weaker. It looks like, by dumb luck, for some reason all the minimum wage hikes happen in states that also have slower-than-average employment growth among adults. And hey maybe this is due to weather, even though the weather doesn’t seem to be slowing the adult or teenage employment growth in the next county, which is in a right-to-work state with no minimum wage law.