David Neumark - using minimum wages to fight inequality and poverty

From the School of Social Sciences at the University of California, Irvine comes this video in which Professor David Neumark talks about using minimum wages to fight inequality and poverty.

Glenn Loury interviews David Neumark about the minimum wage

From Bloggingheads.tv comes this interview of David Neumark by Glenn Loury about the effects of the minimum wage.

Who pays for the minimum wage?

This question is asked in a new article, Who Pays for the Minimum Wage?, in the latest issue (Vol. 109, No. 8, August 2019) of the American Economic Review.

The paper is by Peter Harasztosi and Attila Lindner and looks at the margins along which firms responded to a large and persistent minimum wage increase in Hungary. It finds that the employment elasticities are small, but negative.

The abstract reads,

This paper provides a comprehensive assessment of the margins along which firms responded to a large and persistent minimum wage increase in Hungary. We show that employment elasticities are negative but small even four years after the reform; that around 75 percent of the minimum wage increase was paid by consumers and 25 percent by firm owners; that firms responded to the minimum wage by substituting labor with capital; and that disemployment effects were greater in industries where passing the wage costs to consumers is more difficult. We estimate a model with monopolistic competition to explain these findings.

Bad economic justifications for minimum wage hikes

Ryan Bourne has authored a recent paper at the Cato Institute on Bad Economic Justifications for Minimum Wage Hikes.

The bad reasons he gives are,

• A solution to a market failure?
• To keep pace with productivity trends?
• Costs of living
• Poverty

His conclusion reads,

The metrics that $15 minimum wage advocates use to make the case for substantial minimum wage hikes are not, on their own, economically sensible benchmarks by which to set minimum wage rates.

Economy-wide productivity growth can be a poor guide to productivity trends for minimum wage workers and different localities, and it tells us little about whether firms have the power to set below-market wage levels.

Housing and childcare costs are unrelated to firms’ ability to pay or the value of the work minimum wage employees undertake. And comparing the income of someone working full-time at the federal minimum wage to existing poverty thresholds ignores the role of anti-poverty programs and the fact that many minimum wage earners are not poor.

Campaigners’ arguments often imply that minimum wages should be linked to productivity measures, living costs, or poverty thresholds. The evidence presented above suggests that translating these arguments into policy could produce damaging labor market outcomes.

Bernie Sanders and bad justifications for minimum wage hikes

This audio is from the Cato Daily Podcast.

The tiff between workers for the Bernie Sanders campaign and the campaign leadership illustrates some of the tradeoffs inherent in mandating wage floors. Ryan Bourne is author of a new paper on minimum wage hikes and bad justifications for them.

Making Sense of the minimum wage

Recently the Cato Institute put out a new Policy Analysis (No. 867) on Making Sense of the Minimum Wage: A Roadmap for Navigating Recent Research by Jeffrey Clemens. Clemens is an associate professor of economics at the University of California, San Diego.

Executive Summary:

The new conventional wisdom holds that a large increase in the minimum wage would be desirable policy. Advocates for this policy dismiss the traditional concern that such an increase would lower employment for many of the low-skilled workers that the increase is intended to help. Recent economic research, they claim, demonstrates that the disemployment effects of increasing minimum wages are small or nonexistent, while there are large social benefits to raising the wage floor.

This policy analysis discusses four ways in which the case for large minimum wage increases is either mistaken or overstated.

First, the new conventional wisdom misreads the totality of recent evidence for the negative effects of minimum wages. Several strands of research arrive regularly at the conclusion that high minimum wages reduce opportunities for disadvantaged individuals.

Second, the theoretical basis for minimum wage advocates’ claims is far more limited than they seem to realize. Advocates offer rationales for why current wage rates might be suppressed relative to their competitive market values. These arguments are reasonable to a point, but they are a weak basis for making claims about the effects of large minimum wage increases.

Third, economists’ empirical methods have blind spots. Notably, firms’ responses to minimum wage changes can occur in nuanced ways. I discuss why economists’ methods will predictably fail to capture firms’ responses in their totality.

Finally, the details of employees’ schedules, perks, fringe benefits, and the organization of the workplace are central to firms’ management of both their costs and productivity. Yet data on many aspects of workers’ relationships with their employers are incomplete, if not entirely lacking. Consequently, empirical evidence will tend to understate the minimum wage’s negative effects and overstate its benefits.

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.

Jacob Vigdor on the Seattle Minimum Wage

An interesting discussion of many of the issues to do with the effects of minimum wage increases and how to work them out and estimate how big they are. Well worth the hour to listen to.

Jacob Vigdor of the University of Washington talks with EconTalk host Russ Roberts about the impact of Seattle's minimum wage increases in recent years. Vigdor along with others from the Evans School of Public Policy and Governance have tried to measure the change in employment, hours worked, and wages for low-skilled workers in Seattle. He summarizes those results here arguing that while some workers earned higher wages, some or all of the gains were offset by reductions in hours worked and a reduction in the rate of job creation especially for low-skilled workers.

The employment effects of minimum wages

There is a new NBER working paper out on The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns by David Neumark.

The abstract reads:

I discuss the econometrics and the economics of past research on the effects of minimum wages on employment in the United States. My intent is to try to identify key questions raised in the recent literature, and some from the earlier literature, that I think hold the most promise for understanding the conflicting evidence and arriving at a more definitive answer about the employment effects of minimum wages. My secondary goal is to discuss how we can narrow the range of uncertainty about the likely effects of the large minimum wage increases becoming more prevalent in the United States. I discuss some insights from both theory and past evidence that may be informative about the effects of high minimum wages, although one might argue that we first need to do more to settle the question of the effects of past, smaller increases on which we have more evidence (hence my first goal). But I also try to emphasize what research can be done now and in the near future to provide useful evidence to policymakers on the results of the coming high minimum wage experiment, whether in the United States or in other countries.

Two minutes on the minimum wage

Professor David Neumark a very quick summary of the research into the effects of minimum wage policy.


To read Professor Neumark's 2018 Adam Smith Lecture on “How policymakers should think about the minimum wage” see here. Well worth the read.

Monopsony models and the minimum wage

In an interesting and provocative article at Bloomberg Noah Smith discusses recent empirical research that suggests that higher minimum wages do not have negative effects on employment. Smith argues that this work discredits the standard competitive model of labour markets He favours a model of monopsonistic markets where employers have market power. Smith writes,

Together with the evidence on minimum wage, this new evidence suggests that the competitive supply-and-demand model of labor markets is fundamentally broken. If employers have the power to set wages, then not just minimum wage, but other labor market policies -- for example, union-friendly laws -- can be expected to help workers a lot more than popular introductory economics textbooks now predict.

Textbook writers and instructors should respond by changing the baseline model of labor markets that gets taught in class. Students ought to start with a model of market power, in which a few companies set wages below levels found in a competitive market unless prevented from doing so. That model is about as easy to work with as the traditional supply-and-demand setup, but matches the data much better.

Perhaps not too surprisingly not all economists agree with him.

At the EconLog blog, Scott Sumner says he is not convinced by Smith's arguments. Sumner writes,

1. The replication crisis in the sciences, and the social sciences.

2. Conservative studies seem able to explain the very low levels of hours worked in Europe much better than progressive studies. And the studies that Smith cites are progressive studies. That doesn't mean progressives are wrong, but until progressives are able to explain Europe's labor market, I'll continue to have trouble taking them seriously.

3. Most importantly, Smith overlooks the fact that empirical research is just as unfriendly to the monopsony model of labor markets as it is to the competitive model of labor markets. AFAIK, almost all the empirical studies of the minimum wage suggest that higher minimum wages do not come out of profits, but rather are passed on in terms of higher prices. That result is 100% consistent with the competitive model of labor markets, and inconsistent with the monopsony model (which suggests that if employment doesn't fall then product prices do not rise.)

Thus empirical studies show that when a minimum wage increase forces grocery stores to pay higher wages, they pass on the increased costs in the form of higher prices.

Now I suppose that progressives could argue that demand curves don't slope downwards, and that the higher prices will not reduce sales. In that case, a higher minimum wage need not reduce employment. But as soon as you abandon downward sloping demand curves, you are faced with other dilemmas. For instance, why should progressives oppose "regressive" consumption taxes? After all, if demand curves don't slope downwards, then higher prices would not reduce consumption. And since living standards depend on consumption, regressive taxes would not reduce the living standards of the poor.

Of course we know that demand curves do slope downwards, and we know that regressive taxes tend to adversely impact the poor. What we need to figure out is whether higher minimum wages raise prices and reduce sales. So far, the empirical evidence suggests that they do.

To summarize, the empirical evidence on the effect on minimum wages on employment is mixed. The empirical evidence on the effect of minimum wages on prices is pretty clear---it raises prices. That means that, on balance, the empirical evidence is more supportive of the competitive labor market model than the monopsony model.

This doesn't mean that firms have no monopsony power---they almost certainly have some. The question is how much, and whether the short and long run labor demand elasticities differ.

At the Cafe Hayek blog, Don Boudreaux says,

First, as Jim Buchanan, Donald Dewey, and other economists have pointed out, as long as demand curves for outputs are downward sloping, monopsony power is only a necessary and not a sufficient condition for minimum wages not to reduce the employment prospects of low-skilled workers. For minimum wages not to reduce these workers’ employment prospects, employers with monopsony power must also have monopoly power (and not just the sort of such ‘power’ as is identified in models of monopolistic competition). That is, these employers must have the ability to keep the prices of the outputs they sell above average total costs. If they do not have this ability, then there are no excess profits, or rents, out of which the higher labor costs can be paid.

Second, empirical studies typically fail to examine all the many ways that employers and employees can adjust to minimum wages. The list of such possible adjustments other than reduced hours of employment includes reductions in formal fringe benefits (such as paid leave), reductions in informal fringe benefits (such as workplace safety higher than what is minimally required by legislation), and changes in the nature of the jobs such that workers are worked harder in order to produce more output per hour. To the extent that adjustments such as these occur, minimum-wage-induced reductions in employment will be fewer or lower, but the standard textbook model really still holds.

Third, because in the U.S. the national minimum wage has been in place now for 80 years and is at no risk of being repealed, employers have long ago adjusted their business plans – their capital-labor ratios – to the existence of minimum wages. And employers expect occasional minimum wage increases. Therefore, even the finest and most carefully controlled empirical study of a minimum-wage hike today will not detect the employment-reducing effects of the long-standing expectation of minimum-wage hikes. Because employers have already adjusted to the reality of minimum wages – and to the reality of minimum wages being increased from time to time – any study that correctly finds little or no negative employment effect from this or that minimum-wage hike today nevertheless misses the negative employment effects of minimum wages overall.

Fourth, about monopsony power: it’s more difficult to detect than, ironically, standard textbook models suggest. Suppose that Acme, Inc., competes for workers by offering unusually attractive fringe benefits and work conditions. And suppose that Acme, Inc., has a differential advantage over other employers at supplying to its workers such non-wage amenities, or that for Acme, Inc., the marginal cost of attracting X number of workers by supplying non-wage amenities is lower than is its cost of attracting X number of workers by increasing the wages it pays. Under such conditions, Acme, Inc., gains the power to lower its workers wages by some amount without losing all, or perhaps even any, of its workers.

An empirical study of this firm would conclude that Acme, Inc., has monopsony power. But this conclusion would be incorrect, for the ‘power’ that Acme, Inc., is detected to have over its workers is ‘power’ that Acme, Inc., purchased from its workers – workers who voluntarily agreed to Acme’s employment terms.

Put differently, if (as is not unreasonable for many employers) Acme, Inc., values a steady workforce, it can purchase – with non-wage amenities – from its workers the ability to cut their wages without their quitting. The textbook-bound economist, seeing only the reduced wages and no mass exodus of workers from Acme, leaps confidently to the conclusion that Acme has monopsony power. Yet clearly, in this example, that conclusion would be mistaken.

On Twitter, David Neumark, an economist who has spent many years studying minimum wages, wrote,

Strong mischaracterization of the evidence on the #minimumwage https://t.co/Xd5JUXp0ks

— David Neumark (@NeumarkDN) April 5, 2018

Thus, while Smith's position is certainly interesting, and could apply in some particular labour markets, I think he needs to do more to convince many of his fellow economists that the markets with monopsony power should be the standard model for labour markets.

Trade and minimum wages in general equilibrium

An new NBER working paper on the effects of minimum wages on trade.

Trade and Minimum Wages in General Equilibrium: Theory and Evidence
Xue Bai, Arpita Chatterjee, Kala Krishna, Hong Ma
NBER Working Paper No. 24456

Do minimum wages affect economic outcomes beyond low-skill employment? This paper develops a new model with heterogeneous firms under perfect competition in a Heckscher-Ohlin setting to show that a binding minimum wage raises product prices, encourages substitution away from labor, and creates unemployment. It reduces output and exports of the labor intensive good, despite higher prices and, less obviously, selection in the labor (capital) intensive sector becomes stricter (weaker). Exploiting rich regional variation in minimum wages across Chinese prefectures and using Chinese Customs data matched with firm level production data, we find robust evidence in support of causal effects of minimum wage consistent with our theoretical predictions.

Minimum wage increases, wages, and low-wage employment: evidence from Seattle

A new NBER working paper looks at the effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. The paper is

Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle
by
Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor and Hilary Wething
NBER Working Paper No. 23532. The absract reads,

This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies.

Mental experiment on the effects of minimum wages

This thought experiment is from Don Boudreaux at Cafe Hayek.

Imagine that you’re given the option of buying ten-dollar bills for $5 a piece. How many will you buy? The answer is obvious: as many as the sellers of these discount-priced ten-dollar bills will sell to you. Of course, in reality $10 bills are never available for sale at $5 a piece. Or are they?! In a very real way, reality does indeed sometimes offer such deals. If a worker that can produce $10 per hour worth of output is currently paid by his or her employer only $5 per hour, a competing employer can profit by hiring, at some wage higher than $5 per hour, that worker away from his or her current employer. Indeed, employers will compete for this worker until this worker’s hourly wage is bid up to $10. (If you doubt this outcome, the burden is on you to explain why this worker’s wage will stop rising at some amount less than $10 per hour. It’s a surprisingly difficult burden to meet.)

Now imagine that you’re offered the prospect of buying five-dollar bills for $10 a piece. How many $5 bills will you buy? The answer again is obvious: none. Even if you’re a billionaire, you have no incentive to spend $10 to buy a $5 bill. The fact that you can “afford” to do so is irrelevant. If someone is asked to predict how many $5 bills, say, billionaire Nick Hanauer will buy if each of these bills is priced at $10, that someone would surely say “none.” And that someone would surely be correct.

The minimum wage is economically identical to a scenario in which government prohibits the sale of Federal Reserve notes at any price below $10 each. No bill worth less than $10 would be purchased. No one will knowingly buy something worth only $5 for a price higher than $5.

The above example involving Federal Reserve notes is easy to grasp. Yet change the item for sale from “five-dollar bill” to “low-skilled worker who can produce on average no more than $5 worth of output per hour,” and many people – including even some economists – somehow mysteriously find reason to believe that people will pay for $5 bills some price greater than $5.

The economic consequences of labour market regulations

A recent working paper from the Penn Institute for Economic Research reviews the empirical evidence on the effects of a minimum wage on employment. And yes, they are still negative.

The paper is "The Economic Consequences of Labor Market Regulations"  (pdf) by Jesus Fernandez-Villaverde. The abstract reads,

What do we know about the economic consequences of labor market regulations? Few economic policy questions are as contentious as labor market regulations. The effects of minimum wages, collective bargaining provisions, and hiring/firing restrictions generate heated debates in the U.S. and other advanced economies. And yet, establishing empirical lessons about the consequences of these regulations is surprisingly difficult. In this paper, I explain some of the reasons why this is the case, and I critically review the recent findings regarding the effects of minimum wages on employment. Contrary to often asserted statements, the preponderance of the evidence still points toward a negative impact of permanently high minimum wages (Emphasis added).

The traditional view among economists of the effect of minimum wages is simple: if the minimum wage is set above the equilibrium wage you get unemployment. This core understanding of how the labour market functions has been attacked, most famously, by the publication of Card and Krueger (1994) and, three years later, by a companion book, Myth and Measurement (Card and Krueger, 1997). Card and Kruger looked a the case of an increase in the minimum wage that took place in New Jersey but not in the neighbouring state of Pennsylvania. On April 1, 1992, New Jersey increased the minimum hourly wage from $4.25 to $5.05. Pennsylvania, in contrast, kept the minimum wage at $4.25.

To most economists’ surprise, Card and Krueger documented a relative increase in employment in New Jersey of 2.75 full-time equivalent (FTE) employees per restaurant. In fact, there was even an absolute increase in employment in New Jersey and a drop in Pennsylvania (Card and Krueger, 1997, Table 2.2, p. 34). While, employment at the restaurants Card and Krueger surveyed in New Jersey went from 20.44 FTE employees per restaurant to 21.03, in Pennsylvania, it fell from 23.33 to 21.17

But as Fernandez-Villaverde notes the result has not aged well.

Card and Krueger’s results were sensational because they challenged a centuries-old understanding in economics. Also, their findings rationalized a policy intervention that has had strong political backing for almost as long. But sensational results invite close examination, and Card and Krueger’s findings have not held up to that torrent.

Refs.:

• Card, D., and A. B. Krueger (1994): “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review, 84(4), 772–93.
• Card, D., and A. B. Krueger (1997): Myth and Measurement. Princeton University Press.

Boudreaux on the minimum wage and free trade

Jacob Hornberger and Richard Ebeling discuss the economics of the minimum wage and free trade with Donald J. Boudreaux on the "Libertarian Angle" (from the Future of Freedom Foundation).

David Neumark discusses the effects of the minimum wage with Glenn Loury

In this video from Bloggingheads.tv Glenn Loury (Brown University) and David Neumark (University of California, Irvine) discuss the effects of the minimum wage.

Is California's $15 minimum wage law a good idea?

California has passed a law that will raise the state's minimum wage to $15/hr by 2022. Does this law make economic sense? Is it a sound policy in pursuit of social justice? Don Boudreaux, Professor of Economics at George Mason University, and Mike Konczal, fellow at the Roosevelt Institute debate the issue at an event sponsored by the University of San Diego's Center for Ethics, Economics, and Public Policy.

How not to analyse the effects of a minimum wage

From the National Employment Law Project comes this piece of "analysis" of the effects of the minimum wage: Raise Wages, Kill Jobs? Seven Decades of Historical Data Find No Correlation Between Minimum Wage Increases and Employment Levels by Paul K. Sonn and Yannet Lathrop.

At the end of the second paragraph of the Summary comes this analytical and policy gem,

Rather than an academic study that seeks to measure causal effects using techniques such as regression analysis, this report assesses opponents’ claims about raising the minimum wage on their own terms by examining simple indicators and job trends.

So they do not even try to sort out the actual effects, and causation, of having a minimum wage, they just look for a correlation, or lack of a correlation, and this will do.

And yes, stopping reading after the second paragraph is therefore optimal.

Don Boudreaux discusses the effects of minimum wages

In this video Don Boudreaux discusses the effects of the minimum wage with Reason’s Nick Gillespie.