The employment effects of minimum wages

A brief summary of the state of play.

First, the evidence on the disemployment effect of minimum wages is contested, and there clearly are studies that find no employment effect – both in the United States and in other countries. However, the preponderance of evidence indicates that minimum wages reduce employment of the least-skilled workers. Earlier estimates suggested an ‘elasticity’ of about -0.1 to -0.2. Many estimates are still in this range, some are closer to zero, and some are larger. To be clear, some researchers may have reason to put more store in the types of estimates that tend to find no employment effects – typically the research designs that I have labeled ‘close controls’. I have indicated reasons I am somewhat skeptical of these designs, but also indicated that the jury is still out. More definitively, though, it is indisputable that there is a body of evidence pointing to job losses from higher minimum wages. Characterizations of the literature as providing no evidence of job loss are simply inaccurate.

Second, there are two kinds of changes in minimum wages about which we know a lot less. The first change is the adoption of much higher minimum wages – as is happening in the United States with serious movement toward a $15 minimum. There is a great deal of uncertainty about the employment effects of a $15 minimum wage. One thing we do know is that it would impact far more workers than the current minimum wage, especially in lower-wage states and lower-wage areas of most states. More speculatively, my sense is that the costs of a much higher minimum wage are likely to be understated by simply scaling up the effects based on employment elasticities in the existing literature, because the much higher share of workers affected will reduce employers’ ability to partially offset minimum wage increases by changes in margins other than employment.

The second kind of change about which we know relatively little concerns the introduction of a new minimum wage – like in Germany. There is some evidence from the introduction of a new minimum wage in the United Kingdom. Some of this evidence points to job loss, but the evidence is mixed. And, of course, the institutional setting is not the same.

From "The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns" by David Neumark, German Economic Review, Forthcoming.

Coase and Plant on the market versus the firm

In a 1937 paper, "Centralise or decentralise" Arnold Plant writes,

"[...] centralisation is the means by which the collaborating enterprises secure the advantage of specialised services or equipment which would not otherwise be available to them on such favourable terms, if at all. If the service or merchandise in question is freely bought and sold on any scale in a well-organised market, there will be no need for centralisation of firms. It is the absence of a well-organised market which may justify firms in pooling their requirements".

He sees a clear trade-off between market provision and in-house production. When markets are available and relatively cheap their use makes sense. But when they are expensive, or unavailable, production in a firm makes sense. Today we would express this by saying when transaction costs are high we use the firm but when they are low we use the market.

Plant's line of argument has a somewhat modern, Coaseian, feel to it. The question this gives rise to is, For how long had Plant been thinking in this way? And did he discuss this line of reasoning in classes that Coase took? Or does the causation run in the opposite direction? Plant's paper was published in 1937 and we know that Coase's analysis of the firm was largely complete by 1932. Did Coase discuss his approach with his former teacher? Or did the two of them reach similar conclusions independently?

I'm not sure we know enough to answer these questions, but it does raise an interesting possibility about the development of Coase's ideas on the firm.

Ref.:

• Plant, Arnold (1974). 'Centralise or decentralise?'. In Arnold Plant, "Selected Economic Essays and Addresses (174-98), London: Routledge & Kegan Paul. First published in Arnold Plant (ed.), "Some Modern Business Problems: A Series of Studies", London: Longmans, Green and Co., 1937.