17 Jun 2015

On the Minimum Wage “Experiments”

Economics, Shameless Self-Promotion 54 Comments

I wonder if minimum wage workers feel comfortable reading Noah Smith. An excerpt:

The early evidence said that minimum wage laws reduce employment growth–just as the textbooks and intro classes taught students for decades.

Then, there was a wave of studies in the 1990s that challenged this orthodoxy, including the famous Card-Krueger paper in 1994. Furthermore, these new studies also found that regions with higher minimum wages tended to have lower employment growth. But if you included a bunch of other factors, then the effects of the minimum wage variable lost independent explanatory power. It seemed like maybe it was just a coincidence that states that had slower employment growth (for various reasons) also tended to have legislatures that passed more aggressive minimum wage hikes.

Also, all (to my knowledge) of the empirical studies finding that minimum wage hikes have no ill effect on employment growth are talking about a modest hike, not the ridiculous hikes that are being now implemented. (For more on the scholarly debate, see my EconLib article.)

54 Responses to “On the Minimum Wage “Experiments””

  1. Josiah says:

    What’s odd is how little pushback on the $15 minimum wage there has been from the economist defenders of smaller minimum wage increases. Surely they must realize that the $15ers risk discrediting their entire enterprise.

    • khodge says:

      As long as these are cities doing it, the harm is local. As the good economist Smith points out, these are actually very good experiments. Also, to Bob’s comment, minimum wage workers very likely do not see the connection (which is correlated to the fact that they are minimum wage workers).

      Starting with those premises, the only real damage are small business owners (whom Card and Krueger made a point to ignore in their “ground breaking” study).

    • Bob Murphy says:

      Kind of like Nordhaus et al. not flipping out over patently absurd climate change interventions.

      • Josiah says:

        Bob,

        Do you have something specific in mind? My relocation is that Nordhaus has thrown shade at folks like Stern who “go too far” in their analysis.

    • skylien says:

      Right Josiah,

      Such economists only ask for “modest” minimum wage increases (usually phased in over long periods of time) because it is much easier to explain/hide their ill effects by other factors.

      • Brian says:

        skylien,

        Exactly. As long as the effects of the increases are lost in the noise, they can continue to pretend there’s no effect. On the other hand, it doesn’t take much to see the effect, if one cares to look. Here’s a quick analysis from last year’s minimum wage increases.

        http://truebaboo.blogspot.com/2015/01/increase-minimum-wage-kill-jobs.html

      • Josiah says:

        Such economists only ask for “modest” minimum wage increases (usually phased in over long periods of time) because it is much easier to explain/hide their ill effects by other factors.

        If they thought modest minimum wage increases would have ill effects why would they support them? Are they just evil?

        • aby says:

          probably because they think the benefits outweigh the ill effects. But pretending that there is virtually no downside still makes sense politically.

        • skylien says:

          Of course I don’t think they are evil. But before I tell you why I think they do this I am curious what you think. So why only “modest” and why phase-ins if no ill effects are to expect, why not instantly and a little more than just modest? Obviously there is much more room if modest is no problem.

          • skylien says:

            *…are to be expected.*

          • Harold says:

            The answer to the “why only modest” question could be because there is evidence about modest rises and there is no evidence for large rises having no ill effects.

            We know things are more complex that Econ 101 models on their own would have us believe (e.g. the TIE). If we use a really large minimum wage then the Econ 101 models are pretty good describers of reality. For modest rises the complications could be the most important factor. There is not necessarily any inconsistency in favoring relatively low minimum wage but not favoring a very high minimum wage.

            • skylien says:

              But if it is only evidence based, then why not push it? And start gathering information on larger increase by demanding large and instant increases? Card and Krueger partly found even positive effects on employment, so even more reason to push it.

              If evidence already showed that Econ 101 is wrong with modest increases, then find out if it is wrong for large increases too. What is keeping us back?

              • Harold says:

                We know for certain (or about as certainly as we know anything) that bad effects kick in at some point. It would seem prudent to take it slowly rather hthan overshoot.

              • skylien says:

                How do you know it for certain if you don’t have evidence for it?

                You can’t claim that econ 101 does not count for modest increases, while it counts for sure for not modest increases without evidence.

                This rather sounds like econ 101 counts all the time, but is just masked by other factors if it is done modestly and with long phase-ins… Else how would it be even possible to find even positive effects empirically?

              • Harold says:

                We do have evidence for it from observing how people behave. We know that econ 101 is fairly accurate predictor of what happens. Just not totally accurate.

                “This rather sounds like econ 101 counts all the time, but is just masked by other factors ”

                It is not that it doesn’t count, but that it is not 100% accurate. One way econ 101 may fail in the detail is if some of the underlying assumptions are not true.

                So we have evidence that if you push up the minimum wage a lot it will increase unemployment. We have some evidence that pushing it up a bit does not. I am not going to go into which evidence is right because that does not matter to this argument. It is simply a nonsense argument to say if you think a modest increase is good then you must think a bigger increase is better.

              • skylien says:

                No this explanation doesn’t work. There is only 3 ways to view this:

                1: Either MW no matter how high, not matter the change of MW is either negative or postive always.

                2: MW at a certain absolut level is at the sweet spot, below of which an increas would be positive (no matter if modest or not) above of which an increase is negative (again no matter if modest or not).

                3: No matter the MW level, as long as the increases are modest there will not be a negative effect. That would mean you would need to argue that increasing MW modestly all the time (of course in real terms) would never have negative effects.

                Your view only works with number 3 which should be obviously absurd. Do you see what I mean?

        • Grane Peer says:

          Josiah,
          Dig a hole fill it back up. Dig a hole fill it back up…

          • skylien says:

            Grane, please stop this, it’s not necessary.

            • Grane Peer says:

              skylien,

              Josiah asked “If they thought modest minimum wage increases would have ill effects why would they support them?”

              I thought I offered a succinct answer. Maybe you disagree with my conclusion but it makes sense to me. I am not sure what you think I have done that I must stop.

              • skylien says:

                How does your comment answer the motivation of economists to argue for minimum wage increases despite thinking they have ill effects (on the employment level)?

              • Grane Peer says:

                Skylien, Josiah wrote bellow that he thinks I was free associating. I didn’t think I was doing that but he is basically correct. When I said dig a hole fill it back up I was implying something about interventionist economics in general. The motivation is locked in, each intervention creates the need for a further, never reaching a satisfactory state, just digging holes and filling them back up. I could have phrased that differently but I thought the nod to Keynes was fitting, if you see what Ben B did with it, I’m thinking shovel ready jobs. Doing stuff for the sake of doing it, digging holes that will have to be filled up.

                Maybe my comment was stupid, I can accept that but I am still miffed by what you think I was doing wrong. Even without my explanation what was wrong with my comment?

              • skylien says:

                Well, I wanted to discuss it without snippy comments poisening the discussion for once.

                Also I didn’t see what you meant. So I thought it was only a provocation, sorry for that.

                However I still think it doesn’t answer the question of Josiah, because MW is not dependend on the existence of some other former intervention.

              • Grane Peer says:

                Skylien,

                Why do you suppose they would be interested in a minimum wage? Is this a response to a natural increase in the cost of living? It doesn’t look like we are running out of stuff.

                I am sorry if I derailed your conversation but that is not something I can do on my own, regardless of what is said or what is intended.

              • skylien says:

                They are because it is popular, and because they really think it might help the poor.

                And partly it is because of adjustments to price inflation. Of course if it is increased just along with price inflation (roughly at least), then you won’t see much of an effect of additoinal unemployment due to MW. That should be clear.

              • Grane Peer says:

                Skylien,
                That was my point. You said it wasn’t dependent on another intervention, well the price inflation is an intervention. Popular sentiment or not the thrust of the argument for raising the minimum wage drops off without the higher price levels. There are arguments to the contrary but the higher prices are due to monetary expansion, no matter how you slice it it is interventionist.

            • Ben B says:

              Both the proposed hole-digging projects and the increased minimum wage policies must address the concern that the workers’ wages will be higher than their expected DMVP?

              They both must address the problem of wage-rigidity created by these policies involved when the demand for freshly-dug and freshly-filled holes declines, as well as the demand for those products created by minimum-wage type jobs, right?

              • Josiah says:

                Both the proposed hole-digging projects and the increased minimum wage policies must address the concern that the workers’ wages will be higher than their expected DMVP?

                There generally isn’t much demand for digging a hole and then filling it up again, which is why you don’t see a lot of people doing it. Suppose, though, that I decide to hire a guy to dig holes and fill them up. In that case, the guy’s wage won’t be higher than DMVP, because if it was then I wouldn’t have hire him.

                So the cases aren’t at all similar. It sounds like Grane was just free associating.

              • Ben B says:

                “Suppose, though, that I DECIDE to hire a guy to dig holes and fill them up. In that case, the guy’s wage won’t be higher than DMVP, because if it was then I wouldn’t have hire him.”

                I DECIDE is different than the government deciding what to do with other people’s property. Using other people’s extorted incomes to hire factors in which they wouldn’t have purchased on their own seems to me to be necessarily paying these factors higher than their DMVPs.

                Obviously, digging-holes and filling them back up is an activity that even the government must realize produces zero wealth, but for all of its actual “job growth” and “economic stimulus” plans, it’s certainly paying workers higher than their DMVPs.

              • Josiah says:

                Ben,

                The entirety of Grane’s comment to me was “Dig a hole fill it back up. Dig a hole fill it back up…” Government wasn’t mentioned.

                If the government were to pay people to dig holes and fill them up, that would be a bad idea, but it would be a bad idea for the opposite reason of why a minimum wage is bad. I’ll leave it as an exercise for the reader to figure out why.

              • skylien says:

                “The entirety of Grane’s comment to me was “Dig a hole fill it back up. Dig a hole fill it back up…” Government wasn’t mentioned.”

                Josiah, the implication of government should be clear here, don’t you think?

              • Josiah says:

                Skylien,

                I’ve arguing with people on the Internet for the better part of two decades. For much of that time, when I encountered an inchoate comment, I would spend a lot of time trying to work out what they might have meant. What I’ve learned from long and painful experience is that this is usually counterproductive. So now I try to just deal with what people actually say. If a person can’t be bothered to spell out what he’s trying to say, I’m not going to do his work for him.

              • Ben B says:

                Josiah,

                Break some windows, break some windows….*hint* I’m not talking about private actors…

                “I’ll leave it as an exercise for the reader to figure out why.”

                Josiah, I’ve been arguing on the Internet for at least four years (and part time at that)….if a person can’t be bothered to spell out what he’s trying to say, I’m not going to do his work for him.

              • Ben B says:

                BTW, I will try to “figure out” what you might be arguing, just like I was trying to “figure out” what Grane might be arguing. I actually enjoy “cryptic” economic arguments; they help me excercise my brain.

              • sklyien says:

                “So now I try to just deal with what people actually say. If a person can’t be bothered to spell out what he’s trying to say, I’m not going to do his work for him.”

                Basically fair enough, but I think you take a step too far if you start to ignore obvious implications. It just leads the discussion in the wrong way if you engage. (Obvious implications are always part of the game)

              • skylien says:

                “So now I try to just deal with what people actually say. If a person can’t be bothered to spell out what he’s trying to say, I’m not going to do his work for him.”

                Basically fair enough, but I think you take a step too far if you start to ignore obvious implications. It just leads the discussion in the wrong way if you engage. (Obvious implications are always part of the game)

              • Grane Peer says:

                Josiah,

                In your two decades of internet arguments how often do you have to explain what you clearly stated to someone who refuses to understand you? Counterproductive arguments are the fault of the arguers as much as the arguments. It is fine that you didn’t pursue my initial statement but to harken back to it in the midst of your discussion with Ben B is a little cheap unless you think what Ben B said was another inchoate comment that you couldn’t expect to make any reasoned inferences from, in which case you haven’t learned any painful lessons in your many decades as internet comment impresario.

        • Brian says:

          Josiah,

          Most of the support for the minimum wage, whether by economists or the general public, is for the purpose of signaling. It’s a way of asserting that you care about the poor. It’s a way for people to feel good about themselves. But no one wants to engage in costly signaling, so they either need to send signals that have no effect or, in the case of the minimum wage, have a small enough effect (through a phase-in effect) that the negative outcomes can’t be blamed in the signal. Are they evil? No, of course not. They are just willing to delude themselves because they want to send the signal.

          • Josiah says:

            Most of the support for the minimum wage, whether by economists or the general public, is for the purpose of signaling.

            Are your political views based on signaling?

            • Brian says:

              Yes, some of my political choices, maybe even many, are based on signaling. Most of politics is about that as well. One of the reasons that government rarely gets smaller, even in the hands of small-government Republicans, is that using government to do stuff is a politician’s way of signaling that they are getting things done and deserving of the voter’s support.

              Even so, signaling is OK as long as the policies are also effective, and I work hard to align my preferred policies with reality. Most voters do not.

            • skylien says:

              So Josiah, what is your answer to my question?

              • Josiah says:

                So Josiah, what is your answer to my question?

                Sorry, which question?

              • Josiah says:

                If your question is why favor a minimum wage phase in if you don’t expect it to have ill-effects, you can find an answer here.

              • skylien says:

                Ok, thanks for the answer. I thought you just thought it is not worth it again..

                Well, so the answer is those economists don’t really trust their own evidence. Right that is as close as it gets to what I think.

                And especially they don’t want to be caught with their pants down. If there is one thing I learned meanwhile then it is people don’t want to be wrong.

                No matter if they are anonymously discussing in internet blogs, and especially not if their living depends on their reputation as an economist.

    • Silas Barta says:

      But but but *everyone* knows that “Why not $100/hour” automatically a strawman argument that no one is obligated to reply to or reconcile with their other arguments. The kewl kids said we don’t have to address it, so that’s that.

      • skylien says:

        So right!

        I guess I am just another complete nutjob to Josiah and Gene for asking for clarification on that.

  2. Josiah says:

    Dig a hole fill it back up. Dig a hole fill it back up…

    What we’ve got here is a failure to communicate.

  3. tkojejohngalt says:

    http://www.nber.org/papers/w20724.pdf

    “We investigate the effects of recent federal minimum wage increases on the employment and income trajectories of low-skilled workers. While the wage distribution of low-skilled workers shifts as intended, the estimated effects on employment, income, and income growth are negative. We infer from our employment estimates that minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point between December 2006 and December 2012. As noted above, this accounts for 14 percent of the national decline in the employment-to-population ratio over this period.

    We also present evidence of the minimum wage’s effects on low-skilled workers’ economic mobility. We find that binding minimum wage increases significantly reduced the likelihood that low-skilled workers rose to what we characterize as lower middle class earnings. This curtailment of transitions into lower middle class earnings began to emerge roughly one year following initial declines in low wage employment. Reductions in upward mobility thus appear to follow reductions in access to opportunities for accumulating work experience.”

  4. Tel says:

    Slightly off topic, but a fascinating “experiment” with real world results:

    http://www.abc.net.au/news/2015-05-29/unions-commission-awu-approve-deal-under-award-wages-cleaners/6506348

    So to understand the background here, Australia has a system of “awards” which are statutory minimum wage, but based on the type of work you are doing, the years you have been in the job, and a whole bunch of stuff. These “awards” also specify overtime rates and penalty payments for weekends, holidays, etc.. The “award system” is intricate, bureaucratic, confusing (especially for small businesses where the employer generally isn’t a legal expert), and I would guess that the “award system” is often honored in the breach, to a greater or lesser extent.

    It is, in a nutshell, government fixing the price of labor, or one of the core elements of Fascism.

    Anyhow, as the article explains:

    At the time, the award was up to $45 an hour on public holidays.

    That’s a fair bit to pay a cleaner, and since big events require cleaning and often happen out of business hours, that means a big chunk of money going to a group of people nowhere near market rates. Welcome to political connections. The Australian Labor Party is mostly run by unionists, with a smattering of genuine communists, “social justice” campaigners and an uneasy alliance with the Green movement.

    For example, Bill Shorten was National Secretary of the Australian Workers Union, then ended up as a senior figure in the recent Australian Commonwealth Government, now is opposition leader. You will note that it was the AWU that was involved in the union negotiations that actually negotiated DOWN the cleaners’ pay from a totally unrealistic $45 an hour down to $18 per hour. Still plenty of people willing to do cleaning at this lower rate, and not such a bad pay for people without other skills.

    So you have governments cranking up minimum wage awards to levels well above market rates, and you have unions negotiating them back down again in order to make it viable to employ people… and many senior people overlap both of those roles.

    • Josiah says:

      It is, in a nutshell, government fixing the price of labor, or one of the core elements of Fascism.

      And trains. Don’t forget the part about the trains!

      • Tel says:

        Trains in Australia are mostly government owned and usually structured around a “corporate clone” model, that is to say, something approximately resembling a corporation (owned and operated by government), but prices are usually politically determined, so is investment, so is land allocation. That’s perhaps a bit closer to a classic socialist model, sorry to disappoint.

        They work OK in the capital cities, so I’m told they consistently lose money, but I don’t know where all that money goes to because they are packed full in peak hour and not particularly cheap. Driving is actually cheaper, even with crappy traffic and extremely high tax on gasoline (translated to USD, we pay about five bucks a gallon). Parking on the other hand, is so expensive that many people still catch the train to work.

        The exception would be some of the mining trains shipping iron ore and coal out to China, those tend to be oriented around private investment and private ownership. I guess you could say the mining industry in Australia makes a profit, but you would have to look elsewhere for a breakdown of where transport fits into that.

  5. Tel says:

    You can’t show nuance in a situation like this, or concede that your opponents might be right at a city level. Once you start admitting unintended consequences–once it’s no longer a case of Good Workers vs. Evil Bosses–the political battle is over.

    In this case Noah has been fairly reasonable about showing nuance, more than in some other situations, more than many minimum wage activists.

    I don’t think we will ever see a perfect experiment… suppose employment in the minimum wage cities stays good or even improves, could be a lot more outsourcing is going on, and the mix of jobs is shifting. Business that needs cheap labor moves out of town, but sells the product of cheap labor back into town.

    I’m currently involved in negotiations to hire software engineers from Nepal (working over the Internet) and they aren’t quite as good as Australians, but at less than 1/3 of the price and much lower peripheral overheads (they come with their own tools, we don’t have to pay for office space) it does look a little bit attractive. Some of the effects of these things are subtle, difficult to know if the long run effect is good or bad.

    • Innocent says:

      Tel,

      I have hired people from Nepal and India and a slew of other places. The productivity you will get will be about a third of what you get from a Nepal programmer from what you will get from a local programmer. Now this is subject to fluctuations ( sometimes you get lucky with the people you hire ) but I have found that you spend much more time talking to people about what you want, find out that they got it wrong, have to relay out the entire thing ( again ) find out they got it wrong again. In the end I actually believe the cost is at if not slightly higher than simply having a more expensive programmer in house.

      There is almost always a cultural disconnect as well, which while it may not seem like much ends up costing a pretty penny as well.

      This is not to say do not do pursue it, but honestly I have stopped hiring outside the United States. One last thought, we actually had to hire people in the USA to fix the programming of people outside the USA. They created horrible recursive code, and a slew of other problems ( circular dependencies, etc ) it was a nightmare. So not only did it take longer for them to code the programs, take longer to get the ‘products’ finished, but we had to revamp the entire mounds of code once they delivered them, sort it through, and pray we could piece it together and not have the effort be an entire waste.

      We tried this on 4 different projects with about the same level of success each time.

      Now if the project is straight forward, the deliverable’s clear, and absolutely no feature creep… A situation I have NEVER as a programmer been in. I would say that it is worth doing, other than that, seriously, save yourself the headache and hire someone local.

      • Tel says:

        Interesting…

        I’ve heard good and bad stories about outsourcing, I’ve asked around wherever I get people chatting.

        From what I’ve found so far, micromanagement is necessary, and the sort of management style that would piss people off in other situations is a very good thing for these cases. Get the thing back onto the rails at the slightest deviation.

        Now if the project is straight forward, the deliverable’s clear, and absolutely no feature creep… A situation I have NEVER as a programmer been in. I would say that it is worth doing, other than that, seriously, save yourself the headache and hire someone local.

        None of the stuff is difficult, and I can do some of it myself if necessary. We aren’t running a nuclear reactor or launching a space shuttle. Feature creep always happens, but then again managing a sliding specification is unrelated to who you want to hire. If you write a specification so tight and detailed that it translates directly to code, then you should have spent that time writing code and skip the translation step, because the effort is about the same either way.

        Definitely the worst thing you can do is write a spec, push it across the table, wait 12 months and look at what comes back. Those sort of failures happen everywhere, even inhouse those type of projects are a guaranteed fail.

        I’ll tell you what happens, might not happen at this stage anyhow, see how the next round of talks goes.

  6. Kevin Erdmann says:

    Was there any MW proponent, back in 2008 and 2009, when we went ahead with planned MW hikes in the middle of a labor crisis, who publicly suggested that maybe it wasn’t a great time to force people to demand a 10-15% wage hike during a period that was so bad we had Extended Unemployment Insurance? If someone was concerned about MW workers, I would think they would have qualms about hiking the MW when unemployment was at 9%. I suppose some have to sacrifice for the big picture….

    A while back I did a post where I walked through the effects of MW hikes on firms in an industry. My conclusion was that, in the end, in the end, wages and employment could look like they are stable or growing in low wage industries, and that job & productivity losses are probably mostly outside those industries, across the wage spectrum, as a result of capital adjustment. I’d love to know if this is novel or cliché.

    http://idiosyncraticwhisk.blogspot.com/2014/02/you-cant-analyze-market-interventions.html

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