22 Jul 2015

A Helpful Mnemonic in the Minimum Wage Debate

Daniel Kuehn, Krugman, Minimum wage 48 Comments

I am working on a paper for the Fraser Institute on the minimum wage debate. Both Krugman and Daniel Kuehn stressed the importance of picking a “treatment” versus a “control” group, in order to see that the minimum wage really doesn’t have much impact on employment (at least for modest hikes). Of course the pioneering study in this tradition is the famous Card-Krueger paper, which argued that the 1992 minimum wage hike in New Jersey didn’t affect fast-food employment relative to the control group in neighboring Pennsylvania, where the minimum wage wasn’t raised.

Now I’ve been immersed (again) in this literature for weeks, and what you need to realize is that the prima facie regression results almost all show that yes, making unskilled labor more expensive causes employers to hire fewer unskilled workers. It’s only when you add sufficient “controls” that the result disappears.

In that light, on a hunch I decided to take 5 minutes and check FRED. Why look at this:

So, if you ever forget the year when New Jersey raised its minimum wage and thus gave the “natural experiment” for the famous Card-Krueger study, you can just look up to find the first time in over a decade when New Jersey’s unemployment rate surpassed Pennsylvania’s.

I know, I know, I couldn’t get this published in Econometrica. But this literature is chock FULL of misleading coincidences just like this, ones which all make it LOOK LIKE employers cut back on hiring when workers get more expensive, even though we have been told the empirical debate is settled.

(Also, less sarcastically, I realize there is a distinction between the unemployment rate and the level of employment. However, as I explain in this EconLib article, I don’t think we should so casually toss aside the welfare implications of rising unemployment.)

48 Responses to “A Helpful Mnemonic in the Minimum Wage Debate”

  1. E. Harding says:

    The unemployment rate in New Jersey seems to have surpassed that in PA in February, before the April minimum wage hike.

    • Tel says:

      When was it announced then?

      Presumably most business plans ahead to the best of their ability.

  2. skylien says:

    Card and Krueger even had partly found positive effects, would be nice if you can elaborate on those as well. I mean if you find positive effects this really starts to look somewhat fishy, doesn’t it? Or have we turned low skilled workers into Giffen Goods due to MW hikes?

  3. Daniel Kuehn says:

    skylien – so a simple Micro 101 monopsony model will give you a positive employment effect. Undergrad stuff. Very not fishy. Whether it’s *true* is a different question. I don’t think many people think you’re likely to get a positive effect, simply because that doesn’t pop up often. Maybe in New Jersey’s case, though, who knows. It’s a high wage region and minimum wages tend to be less burdensome there so it’s possible you might hit that sweet spot I guess.

    Somebody ought to run the unemployment rates for, say, Mercer and Buck county for this period. Unless Bob thinks sticking with border counties is recklessly throwing in more controls, and that we’re better off with Pittsburgh in the mix.

    • skylien says:

      Monopsony is hardly uncontroversial, and at best just an ad hoc explanation which you cannot prove anyway for this instance.

      If I find a study that says replacing oil with sand in a gearbox was partly found to have a positive effect on the life time of the gear box, then this should put up a red flag naturally. I don’t see a problem with questioning that.

      • Daniel Kuehn says:

        I’m just responding to your point that it looks fishy. It doesn’t. Very straightforward ideas explain it.

        I don’t think you’re using “ad hoc” correctly.

        I don’t know what you mean by “this instance”. Do you mean “given the data available for this particular paper”? Because there’s lots of empirical work identifying whether a labor market is monopsonistic or not.

        Your conclusion about the alternative study makes sense to me but I have no idea why you think it has anything to do with the minimum wage and monopsony.

        • skylien says:

          Well, I am sorry if I offended you with the word “fishy”, maybe I should have used “extremely unlikely to impossible”, so also the rest of the study should be doubted as well.

          With “ad hoc” I mean that “monopsony” is just used as an opportune explanation no matter if you have any prove if it is true or not for those specific data points (instances) at which Card and Krueger said it was even positive, although the very fact that they found positive effects could be just as well flashing signals that something with the data or interpretation of the data is wrong (wrong controls and/or swamped by other factors).

          Did Card and Krueger at least prove in your sense that whenever they found positive effects in their study it was due to monopsony? And does e.g. Bob accept the “empirical work identifying whether a labor market is monopolistic or not” as true that first monopsony is real and is having exactly the effects you ascribe to it? I guess not.

          • skylien says:

            Strange, I am sure I did make copy and paste, but now instead of “monopsonistic” I have “monopolistic” in the text I quoted from you. I guess that was due to autocorrection…

          • Daniel Kuehn says:

            Wait what is offensive about it?

            My point is just that it’s not fishy (and I seem to mean what you mean by fishy). There’s very reasonable, standard explanations. They might not be right explanations but that doesn’t make it fishy.

            • skylien says:

              I thought that you thought that I wanted to imply bad intent by using that word..

              Well, maybe for you it is not but for me it is a fishy result for exactly the same reason as it would be in my gearbox example. I don’t accept monopsony as an “ad hoc” explanation.

    • Josiah says:

      Somebody ought to run the unemployment rates for, say, Mercer and Buck county for this period.

      The FRED unemployment rate data for Buck and Mercer counties only goes back to 1990, so I couldn’t replicate the same time period. However, when I looked at the data for the 1990s the same swap occurs, albeit not as pronounced.

    • khodge says:

      Card and Krueger kind of, sort of make their study a monopsony model by using only the fast food industry. When you look at the economy, rather than cherry picking industries, a monopsony model in a state, or in a populous county, isn’t a very useful model.

    • E. Harding says:

      “skylien – so a simple Micro 101 monopsony model will give you a positive employment effect.”
      -As well as a positive unemployment effect.

      • skylien says:

        “Monopsony is hardly uncontroversial, and at best just an ad hoc explanation which you cannot prove anyway for this instance.”

        “…the very fact that they found positive effects could be just as well flashing signals that something with the data or interpretation of the data is wrong (wrong controls and/or swamped by other factors).”

      • skylien says:


        You know to answer this just with monopsony is like you find a man in his 30s lying on a park bench not moving and then you call the doctor and he determines without actually examining the person „Oh he is dead and died because of a stroke, would be perfectly possible according to Med 101, case closed“.

        With the quite important difference that at least a stroke actually is a really uncontroversial cause of death. And even then it is obviously not a satisfying answer, the men could just be sleeping.

      • skylien says:


        Sorry, I realize that I misinterpreted your comment..

  4. Daniel Kuehn says:

    I remember the days when you had and used a “Daniel Kuehn” tag. What’s happened to us Bob?

  5. Tel says:

    Interesting issue regarding the positive effect of minimum wage on employment, and the “backward bending” supply curve of labour.


    Gibson told KIRO 7 she saw a sudden reaction from workers when Seattle’s phased minimum-wage ordinance took effect in April, bringing minimum wage to $11 an hour. She said anecdotally, some people feared they would lose their subsidized units but still not be able to afford market-rate rents.

    For example, she said last week, five employees at one of her organization’s 24-hour care facilities for Alzheimer’s patients asked to reduce their hours in order to remain eligible for subsidies. They now earn at least $13 an hour, after they increased wages at all levels in April, Gibson said.

    So there’s a number of key points here:

    * price controls: magical thresholds for access to government wealth transfer implicitly involve a price control

    * employment metrics: all of the commonly announced statistics ignore changes in number of hours, but pay great attention to changes in number of employees.

    * backward bending supply: it can happen for surprising reasons (more than just one reason).

    • Garrett M. Petersen says:

      Ah, the old “we tried to raise low-skilled workers’ wages but made them worse off because they actually face a greater-than-100-percent implicit marginal tax rate” problem. This is what happens when you apply every intervention someone ever thought was a good idea all at once.

      • Tel says:

        Not so fast. You presume there’s a “problem” here, but if we instead look at it as government optimising policy to the statistics that get reported, then they are doing exactly what the incentive would suggest they should do.

        More “employed” people (working 1 hour per week still counts as employed) means lower unemployment. When workers have an incentive to reduce the hours they work, employers must hire someone else to fill in the difference, even for just a shift here and there. The minimum wage just created a job.

    • Levi Russell says:

      Fantastic theoretical paper on the income effect and backward bending supply curves.


  6. Nobody says:

    What is mean’t by “doesn’t have much impact on employment?” Didn’t the CBO run a study which showed that a wage increase to $10.10 would cause around 500,000 job losses? Is that considered modest? Also, didn’t Neumark and a collegue do a survey of the MW literature and conclude that 2/3 of the studies show disemployment effects? That would seem to indicate that the empirical record is anything but settled.

  7. Levi Russell says:

    Don Boudreaux has a good post on this topic: http://cafehayek.com/2015/07/pooling-the-effects-over-time.html

    The idea that monopsony can explain the real-world effects of the minimum wage is problematic. In the market process view (i.e. the more realistic view), the presence of monopsony creates a profit opportunity. Whether or not that opportunity is exploited depends on whether or not other state action inhibits (or prohibits) it.

    Besides that, the US has had a federal minimum wage policy for several decades. It’s absurd to think employers don’t expect continual increases in the minimum wage every few years.

  8. Major.Freedom says:

    Any minimum wage law that causes just a single person to lose their jobs, is a just as totally unacceptable and immoral action to take, as would if many people lost their jobs.

    If the cost of living keeps increasing too much for the poor, then the solution is more liberty, not less.

  9. Andrew_M_Garland says:

    Excess Teen Unemployment
    02/16/13 – AEI Ideas by Mark Perry [edited]
    ( http://www.aei-ideas.org/2013/02/lets-review-the-adverse-effects-of-raising-the-minimum-wage-on-teenagers-when-it-increased-41-between-2007-and-2009/ )
    === ===
    The minimum wage rose 41% in three stages between 2007 and 2009. This had a disastrous effect on teenagers. The jobless rate for ages 16-19 increased from about 16% to more than 26% (10 percentage points). The overall US jobless rate also increased from about 5% to 10%.

    The graph attempts to isolate the effect on teenagers by plotting “excess teen unemployment” the difference between the teenage and overall jobless rates.
    === ===

    See the graph at the link. Excess teen unemployment closely traced increases in the minimum wage. Teens are a measurable segment of all people of low experience, knowledge, and productivity.

    Nearly all economic models predict that the higher minimum wage reduces teenage employment, even beyond what you would expect in a recession

    WSJ: “Studies confirm that when teens work during summer months or after school they have higher lifetime earnings than those who don’t work. Raising the minimum wage may inadvertently reduce lifetime earnings.”

    Defenders of the minimum wage say it accomplishes a social good without much harm. They are wrong. The worst effect applies to people of low ability who may never earn more. They are thrown out of work or receive fewer non-wage benefits and accomodations until inflation lowers the real burden of the minimum wage.

    Proposals to index the minimum wage to inflation would permanently unemploy people of low ability or who now benefit from non-wage accomodations which lower their productivity.

    We should oppose the minimum wage on behalf of the low skilled, whether or not they are later able to learn more and advance in productivity.

    • Andrew_FL says:

      I did something similar to what Perry did, but took a more conservative approach: a regression using the inflation adjusted minimum wage all the way back to 1948 (when the unemployment series begin) and prime age (25-54) unemployment. I tried various approaches: deflate using the consumer price index (which is probably inappropriate, labor is not a consumer good) a kind of pseudo gdp deflator (more or less the consumer price index, multiplied by the ratio of the gdp deflator to cpi (this is not exactly what I did, but what exactly I did would take too long to explain. On a timescale greater than 3 months, this is essentially what I did)) I also tried removing the means of all series first, though this didn’t make any real difference. In each case I confirmed that a higher real minimum wage correlates with higher youth unemployment. The effect I found was smaller than Perry suggests here, but I’m probably underestimating the effect because: A) by using prime age unemployment as a separate explanatory variable, I effectively assume prime age unemployment is not effected by the minimum wage, which is probably not true and B) Unlike Perry, I am assuming that the higher volatility of youth unemployment over the business cycle is not itself a consequence of the minimum wage, especially the strong tendency to increase it during recessions. These are conservative assumptions. However it appears that even with these assumptions: a one dollar increase in the real minimum wage (ie one “current” dollar) increases youth unemployment by about 1.2% points. Again I think this is a conservative estimate. If anyone’s interested I can send more details.

      • Levi Russell says:


        Did you try estimating it in logs? I’d be interested in seeing results from different combinations of log and linear specifications.

        • Andrew_FL says:

          The Excel plugin I’m using does linear regressions but not log regressions. If you want to play around with the data, I’ve uploaded the spreadsheet with some comments that explain what I did:


          • Tel says:

            Can’t you just create a column of log values and then do the linear regression on that? Get the results and apply an exponential to bring them back again.

            I sense that you never grew up with a slide rule around the house?

            • Andrew_FL says:

              You caught me, I am of the Texas Instruments generation.

              Also thanks for the tip, I did actually think that might be the correct way to do it but wasn’t sure.

              A quick shot at it appears to produce similar results: the coefficient on the natural log of the prime age rate is about 0.626 and on the simulated gdp deflator deflated minimum wage is about 0.516-This translates to an effect of basically the same magnitude.

  10. Harold says:

    The conservative UK Govt recently announced a significant increase in minimum wage over the next few years – from £6.50 now to £9 by 2020. They have out-done Labour, who promosed £8/hour by 2020 in the election campaign. The cost in jobs is estimated at 60,000. Tories do not usually support minimum wages, bit here there is something we could call the “benefit interaction effect”. Welfare payments subsidise employers who can pay lower wages that hey otherwise would. The answer may be to cut welfare – they are doing that as well. Maybe they think that the increased minimum wage is just anticipating the natural wage rise that would follow welfare reduction.

    • skylien says:

      “Maybe they think that the increased minimum wage is just anticipating the natural wage rise that would follow welfare reduction.”

      If they think that then the only reason they do this is to gain votes at the next elections, else there is no reason to prescribe something via law if you expect it to happen anyway. In short they would be grubering the public.

    • Andrew_FL says:

      Actually, it’s because they hate legal immigrants.

  11. Harold says:

    To Gruber is now a verb.

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