minimum wage

Over at the World Bank’s Development Impact blog, doctoral candidate Andrés Ham looks at the effects of minimum wage hikes in developing countries. “Minimum wages in developing countries tend to be set higher, are less likely to be rigorously enforced, and labor markets are often segmented into formal and informal sectors with minimum wage policy only covering formal workers,” he writes.

Given these differences and that most developing countries implement minimum wage policies, understanding their consequences on labor markets is critical for economic growth, developing effective labor policy, and poverty alleviation.
 
My job market paper studies the impact of minimum wage policy on labor market outcomes and poverty in Honduras from 2005-2012 using repeated cross-sections of household survey data. The attributes of Honduran minimum wage policy and its labor market are similar to many developing countries, so the resulting conclusions from this case study may extend beyond its borders.

His results?

I find that a 10 percent increase in minimum wages reduces employment rates by about 1 percent. Because this result lumps formal and informal sectors together, it disguises the real effect: a significant change in labor force composition. The same minimum wage hike lowers the likelihood of employment in the formal sector by about 8 percent and increases the probability of employment in the informal sector just over 5 percent. The data indicate that individuals substitute wage earning jobs for self-employment as a direct consequence of minimum wage hikes. Wages in the formal sector increase but the observed influx of workers towards the informal sector leads to a negative net effect on informal sector wages.

Since informal sector jobs tend to be lower-paid part-time positions, average earnings in this sector often lie below formal sector incomes. Hence, there may be an adverse effect on individual well-being from these observed changes in labor force composition. To approximate the welfare effect of minimum wages, I estimate whether minimum wage increases help workers escape from extreme poverty. I find that a 10 percent increase in minimum wages has a negative but statistically insignificant effect on the risk of extreme poverty for the formal labor force. The same minimum wage hike significantly raises the risk of extreme poverty for the informal workforce by around 4 percent. This result indicates that on balance, higher minimum wages increase poverty.

I also find evidence that more formal workers are being paid less than the minimum wage. This occurs despite formal employers’ legal obligation to comply with minimum wages. Some non-compliance has always been observed in developing countries, mostly in response to imperfect enforcement from regulators (Rani et al. 2013). In Honduras, about one in three formal workers earns sub-minimum wages. As minimum wages increase, so does the level of non-compliance. I estimate that about 36 percent more formal sector workers, who should be receiving minimum wages, are underpaid by their employers.[ref]As Nathaniel pointed out to me, this indicates that Ham’s findings underestimate the negative impact of the minimum wage. If minimum wage laws were strictly complied with, the negative effects would be even greater.[/ref]

Ham concludes, “My findings imply that the costs of minimum wage increases outweigh their benefits in developing countries. The policy implication is that setting high minimum wages has detrimental effects on labor markets, well-being, and compliance.”

GMU economist Don Boudreaux wrote an open letter to Bloomberg‘s Barry Ritholtz on his blog Cafe Hayek. It was in response to Ritholtz’s recent article on the minimum wage, which claims that “modest increases in minimum wages don’t lead to job losses.” This, in Ritholtz’s view, is “well-established” in the literature. Ritholtz certainly has studies that can backup his position. For example, a brand new study by the Council of Economic Advisers found “that employment in the [generally low-wage] leisure and hospitality industry follows virtually identical trends in states that did and did not raise their minimum wage.” It goes on to note that “[t]his finding is consistent with a well-established empirical literature in which minimum wage increases are often found to have no discernible impact on employment (Card and Krueger 2016, Belman and Wolfson 2014).”[ref]The report has been criticized by some economists, being described as “substantially to the left of where the economics mainstream has been for at least six decades.”[/ref] But Boudreaux points out that the empirical literature does find modest negative impacts on low-wage employment. He writes,

Here’s a list only of some of the more prominent, recent scholarly empirical studies whose authors that find that even modest hikes in minimum wages destroy some jobs:

– Jeffrey Clemens and Michael Wither, “The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers” (2014) (finding that “minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point”);[ref]The 2016 version can be found here.[/ref]

– Jeffrey Clemens, “The Minimum Wage and the Great Recession: Evidence from the Current Population Survey” (2015) (finding that minimum-wage increases during the Great Recession “reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points”);

– Jonathan Meer and Jeremy West, “Effects of the Minimum Wage on Employment Dynamics” (2013) (finding that “the minimum wage reduces job growth over a period of several years.  These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers”);

– David Neumark, J.M. Ian Salas, and William Wascher, “More on recent evidence on the effects of minimum wages in the United States” (2014) (finding that “the best evidence still points to job loss from minimum wages for very low-skilled workers – in particular, for teens”);

– Yusuf Soner Baskaya and Yona Rubinstein, “Using Federal Minimum Wages to Identify the Impact of Minimum Wages on Employment and Earnings across the U.S. States” (2012) (finding that “[m]inimum wage increases boost teenage wage rates and reduce teenage employment”).

Indeed, you can read a whole book on the matter by David Neumark and William Wascher, Minimum Wages (2008), published by the MIT Press, that concludes that minimum wages do indeed destroy some jobs.

You can dispute the accuracy of all of the above findings, but you cannot dispute that these findings, along with many others that reach similar conclusions, are part of the scholarly record – a record that belies your assertion that it is “well-established” that modest minimum-wage hikes destroy no jobs.

Interestingly enough, Ritholtz cites a University of Washington study on the Seattle minimum wage law and asserts that it “found little or no evidence of job losses[.]” Yet, the study quite clearly states that the minimum wage law led to “a 1.2 percentage point decrease in the employment rate for these low-wage workers. That is, we conclude that Seattle experienced improving employment for low-wage workers, but the minimum wage law somewhat held employment back from what it would have been in the absence of the law” (pg. 12). It later summarizes,

While the intended effect of the Minimum Wage Ordinance (i.e., raising low-wage workers’ wages) appears to have been successful, there appears to have been some negative impacts on these worker’s rates of employment and hours worked. As noted previously, the rate of employment of these workers increased by 2.6 percentage points. However, the comparison regions all experienced even better employment rate increases (3.8% for Synthetic Seattle, 3.9% for Synthetic Seattle Excluding King County, 3.5% for SKP and 2.9% for King County Excluding Seattle and SeaTac). Thus, it appears that the Minimum Wage Ordinance modestly held back Seattle’s employment of low-wage workers relative to the level we could have expected (pg. 22).

What about hours worked?

Hours worked shows a similar pattern. Among workers earning less than $11 per hour at baseline in Seattle, hours worked increased by 12.2 relative to business as usual. So, again, Seattle’s employment situation for low-wage workers improved after the Minimum Wage Ordinance was passed. Hours worked increased, however, by more in the comparison regions (16.4 for Synthetic Seattle, 13.0 for Synthetic Seattle Excluding King County, 21.5 for SKP and 22.5 for King County Excluding Seattle and SeaTac). Thus, on balance, it appears that the Minimum Wage Ordinance modestly lowered hours worked (e.g., 4.1 hours per quarter relative to Synthetic Seattle, or 19 minutes per week) (pg.22).

The study concludes that “[t]he effects of disemployment appear to be roughly offsetting the gain in hourly wage rates, leaving the earnings for the average low-wage worker unchanged.” In short, “for those who kept their job, the Ordinance appears to have improved wages and earnings, but decreased their likelihood of being employed in Seattle relative other parts of the state of Washington” (pg. 33).

I’ve written about the current state of minimum wage research before. I think there are good reasons to be skeptical about its ability to truly help reduce poverty. And as previous research has noted, the debate is more “about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs.”

Let’s try to keep the debate on track.

Time for yet another study on the minimum wage, this time by economist Charlene Marie Kalenkoski from March of this year. Do minimum wage laws have negative effects on youth employment and income?

Wait for it…

…

Yes. Yes they do.

Kalenkoski writes,

Policymakers often propose a minimum wage as a means of raising incomes and lifting workers out of poverty. However, improvements in some young workers’ incomes as a result of a minimum wage come at a cost to others. Minimum wages reduce employment opportunities for youths and create unemployment. Workers miss out on on-the-job training opportunities that would have been paid for by reduced wages upfront but would have resulted in higher wages later. Youths who cannot find jobs must be supported by their families or by the social welfare system. Delayed entry into the labor market reduces the lifetime income stream of young unskilled workers (pg. 1).

A few selections on employment:

There is a substantial body of empirical evidence on the effects of a minimum wage on youth employment. Most of the studies have found negative effects on youth employment. A 1992 study of youth employment in the US found that a 10% increase in the minimum wage led to a 1–2% decline in the employment of teenagers and a 1.5–2% decline in the employment of young adults. A 2014 study of youth employment in the US showed a decline of 1.5% for teenagers. Thus, the estimated negative effect of minimum wages on employment in the US has been fairly consistent over time. However, these estimates are national averages, which obscure regional effects. A 10% increase in the minimum wage has been found to reduce regional employment by as much as 7%. One study that looked at teenage unemployment rates in the US instead of employment found that minimum wages indeed increase teen unemployment rates, as the standard economic model predicts (pg. 3).

And income:

How might the imposition of a minimum wage affect whether grocery store employers offer on-the-job training? If the minimum wage were set at W1 in Figure 3, for example, grocery store employers would be unable to offer on-the-job training to their grocery bagger employees. Workers would find themselves on the horizontal age-earnings profile at W1 and would thus earn less income over a lifetime than they might have had they been able to receive on-the-job training (pgs. 6-7).

Kalenkoski concludes,

Rather than using a minimum wage to increase youths’ current incomes, policymakers should consider policies that improve the labor market opportunities of youths but do not increase the cost to employers of hiring young workers. Policies that would achieve both goals include providing cash welfare payments to youth if their earned income falls below some guaranteed level and providing in-kind support, such as food or housing assistance. Such policies create their own distortions (for example, causing some benefit recipients to choose not to work) but would not reduce the total number of jobs available or create unemployment (pg. 9).

Check out the full publication.

I was reading a Facebook thread recently in which a commenter was complaining about Walmart’s supposedly “evil” business practices and low wages compared to, say, Costco. This same commenter then advocated for the now-popular $15 minimum wage. Readers of Difficult Run are well aware that some of us here have little love for minimum wage laws. Setting aside the reasons Walmart and Costco might pay differently or the net positive effects of Walmart on the economy, I’m just going to point to two recent San Francisco Federal Reserve publications by UCI economist David Neumark. The first summarizes the current state of research on the employment effects of the minimum wage:

Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.

As for recent increases in the minimum wage, Neumark makes the following estimate:

Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession. This is a small drop in aggregate employment that should be weighed against increased earnings for still-employed workers because of higher minimum wages.

The second brief looks at the minimum wage’s effectiveness in reducing poverty and inequality. There are a couple complications:

One complication is research pointing to employment declines from minimum wage increases (see Neumark 2015), which means raising wages for some people must be weighed against potential job losses for others. In this case, whether a higher minimum wage on net helps poor and low-income families depends on the specific pattern of employment effects for different family types.

A second complication is that mandating higher wages for low-wage workers does not necessarily do a good job of delivering benefits to poor families. Of course, worker wages in low-income families are lower on average than in higher-income families. Nevertheless, the relationship between being a low-wage worker and being in a low-income family is fairly weak, for three reasons. First, 57% of poor families with heads of household ages 18–64 have no workers, based on 2014 data from the Current Population Survey (CPS). Second, some workers are poor not because of low wages but because of low hours; for example, CPS data show 46% of poor workers have hourly wages above $10.10, and 36% have hourly wages above $12. And third, many low-wage workers, such as teens, are not in poor families (Lundstrom forthcoming).

Considering these factors, simple calculations suggest that a sizable share of the benefits from raising the minimum wage would not go to poor families.

Both briefs are worth reading. Check them out. For me, it all goes back to what Thomas Sowell says: “There are no solutions; there are only trade-offs.”[ref]Sowell, The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy (New York: Basic Books, 1995), 142.[/ref]

The New Republic has an excellent article by a Stanford doctoral student in economics that argues against the fallacies of minimum wage proponents:

The first fallacy is that changes in the minimum wage do not affect the behavioral response among firms and individuals. The second fallacy is that higher wages will force companies to innovate in order to reduce costs. Both these arguments overlook some very basic, but informative, economic principles.

The first overlooks the fact that wages are designed to compensate workers for productivity. When wages are distorted, they affect the profit-maximizing decisions that businesses make. The textbook prediction, which is generally supported in the data, is that higher minimum wages reduce employment since companies restrict the number of workers they will hire. These adverse effects are especially likely given the pace of technological change and automation.

The second overlooks the fact that there are effective and ineffective ways to stimulate innovation among businesses. The idea that making hiring more costly will spur innovation is tantamount to requiring companies to reduce the size of their physical presence so they become more productive. While these types of distortions may prompt a small fraction of companies to innovate, misallocation more generally is a major factor behind cross-country differences in productivity.

Given that many advocates of a higher minimum wage do so in the name of equality, it’s notable that the author states, “My own ongoing research, which focuses on the link between such wage-setting mechanisms and company behavior, suggests labor-market distortions like raising the minimum wage can have other negative effects on workers, businesses and inequality beyond the overall impact on employment.” The reasons include reduced hours, reduced skill accumulation, and reduced investment in workers. Finally, the evidence suggests that “even in the best of worlds—where the minimum wage has no unintended side effects—it appears to only marginally reduce inequality.”

The whole thing is worth reading. Check it out.

My friend Chris Smith recently authored a piece over at Approaching Justice on how minimum wage opponents get it wrong on economics. As I commented elsewhere, providing nuance to the discussion by pointing out some studies that find no effect on employment or by discussing trade-offs is important. But I think it is quite a stretch to say that minimum wage opponents believe in an “oversimplified economic theory that is not borne out by empirical research.” It’s not just that “many studies” show an increase in unemployment among the least skilled and least educated. That’s what most studies over the last couple decades have shown (as Neumark’s MIT-published book from a few years ago demonstrates as well as his literature reviews) along with plenty of recent research. There is also a difference between low-wage workers and low-income families. Many low-wage workers are not the primary breadwinners and are simply bringing in extra money for middle-class families.

Other studies show that an increased minimum wage causes firms to incrementally move toward automation. Now, this too could be seen as a trade-off: automation and technological progress tend to make processes more efficient and therefore increase productivity (and eventually wages), raising living standards for consumers (which include the poor). Nonetheless, the point is that while unemployment in the short-term may be insignificant, the long-term effects could be much bigger. For example, one study finds that minimum wage hikes lead to lower rates of job growth: about 0.05 percentage points a year. That’s not much in a single year, but it accumulates over time and largely impacts the young and uneducated.

Princeton’s Thomas Leonard has looked at Progressive Era policies and found that the minimum wage was wielded by progressive economists as a form of economic eugenics; a way of ridding the labor force of those considered “unemployable” or “unfit” such as women, immigrants, and blacks. It was a matter of social control rather than social justice, but now it is heralded as the latter.

I was reminded of all this when I read David Neumark’s (mentioned above) new Wall Street Journal article on this very subject. He explains, “Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired.” He cites some of the same research I mention above. He addresses some of the recent research showing no effect on low-skill employment:

But as Ian Salas of Johns Hopkins, William Wascher and I pointed out in a 2014 paper, there are serious problems with the research designs and control groups of the Dube et al. study. When we let the data determine the appropriate control states, rather than just assuming—as Dube et al. do—that the bordering states are the best controls, it leads to lower teen employment. A new study by David Powell of Rand, taking the same approach but with more elegant solutions to some of the statistical challenges, yields similar results.

Another recent study by Shanshan Liu and Thomas Hyclak of Lehigh University, and Krishna Regmi of Georgia College & State University most directly mimics the Dube et al. approach. But crucially it only uses as control areas parts of states that are classified by the Bureau of Economic Analysis as subject to the same economic shocks as the areas where minimum wages have increased. The resulting estimates point to job loss for the least-skilled workers studied, as do a number of other recent studies that address the Dube et al. criticisms.

Overall, I think all of this is good evidence for a healthy skepticism toward the minimum wage. Future evidence may convince me otherwise (I’ve been known to change my mind), but as of now, I think my position is as empirically grounded as any.