Here at Difficult Run, we just can’t get enough of the minimum wage. Yet, that seems to be because there is so much good stuff to post about it. The Economist, for example, has a recent article that looks at three different studies regarding the long-term effects of the minimum wage:
In the first Isaac Sorkin of the University of Michigan argues that firms may well substitute machines for people in response to minimum wages, but slowly…Mr Sorkin crunches the numbers, using a model of the American restaurant industry in which companies choose between employees and machines. He investigates the effect of a permanent (ie, inflation-linked) increase in the minimum wage and shows that the tiny short-run effects on employment normally seen are fully consistent with a long-run response over 100 times larger. The lack of evidence for a big impact on employment in the short term does not rule out a much larger long-term effect.
In a second paper, written with Daniel Aaronson of the Federal Reserve Bank of Chicago and Eric French of University College London, Mr Sorkin goes further, offering empirical evidence that higher minimum wages nudge firms away from people and towards machines. The authors look at the type of restaurants that close down and start up after a minimum-wage rise. An increase in the minimum wage seems to push some restaurants out of business. The eateries that replace them are more likely to be chains, which are more reliant on machines (and therefore offer fewer jobs) than the independent outlets they replace. This effect has not been picked up before because the restaurants which continue to operate do not change their employment levels, so the jobs total does not shift much in the short run.
The third cautionary paper is from Jonathan Meer of Texas A&M University and Jeremy West of the Massachusetts Institute of Technology…Their results suggest that a 10% increase in the minimum wage, made permanent by linking it to inflation, could cut job growth by 0.3 percentage points a year. Over a long period, this could amount to a very large difference indeed, though the authors stress that such long-run extrapolations are difficult given the limited experience of such permanent changes. Worryingly, the effects on jobs growth they see are concentrated among people under 25, and those without a degree. These are vulnerable groups who risk being locked out of the labour force for good.
Results of Google Image search for “minimum wage political cartoon.”
Conservatives are heartless. Everyone knows this. Working poor can’t afford to put food on the table, but conservatives still oppose increases to the minimum wage. Why? Either because they are rich and want to keep their profits, or because they are not rich but they are being manipulated by rich conservatives who play on their fears like Rick Wakeman plays a keyboard.
That’s one of the reasons the minimum wage issue frustrates me so much, and it’s why we write about it so often at Difficult Run. Some conservatives oppose the minimum wage because they care about the poor. Another response–probably a more common one–is to make sure that you are not confused for those backwards, bigoted, Bible-thumping conservatives by establishing yourself as someone who is conservative economically but doesn’t share their weird religious hangups. For example: Bleeding Heart Libertarians or the Secular Right.
But, in this post, I just want to explain one more reason why conservatives can appear heartless to their liberal friends and families: hoaxes and hysteria.
Not long ago, you may have seen the story of the woman who received a letter from a neighbor that her yard was “relentlessly gay” because she has rainbow-colored lamps in it. This kind of thing validates all your fears about those bigoted conservatives and their intolerant ways, and it was shared widely. Conservatives like me, however, were a bit skeptical. Especially when the article was linked to a crowdfunding campaign to make her yard even more gay Well, it turns out that conservatives were probably right to be skeptical:
Anti-hoax consumer activists raised suspicions as soon as the fundraiser began, because Baker’s own idiosyncratic capitalization and punctuation matched the style of the alleged letter from her neighbor. Quoth LaCapria: “…Although Baker had stated the previous day that police were “satisfied” with her claim, the detective to whom we spoke said that Baker was either unwilling or unable to produce the letter in question, and that she had maintained it was no longer in her possession. The detective also indicated that he had attempted to meet with Baker in person the previous day but was unable to do so.”
This isn’t an isolated incident. In another example, I saw all kinds of liberal friends on Facebook react with horror to the story of how a gay Utah pizzeria worker had been viciously assaulted for being gay. It turns out that this attack was also staged:
A man who reported someone beat him and carved a homophobic slur into his arm staged the attacks, authorities in rural Utah said Tuesday. Millard County Sheriff Robert Dekker said Rick Jones, 21, could face charges after officers investigating the series of reported attacks found inconsistencies in the evidence. The Delta man eventually acknowledged faking the harassment, Dekker said.
His lawyer says it was “a cry for help,” and that seems reasonable to me. My heart goes out to someone who, for whatever reason, thought that this might be something that would make their life better. I’m not mad at the people who shared the story either, because I know they were acting out of a desire to do good by showing solidarity for (as they thought) a victim of a hate crime. But I am saddened (thought not surprised) that the news that the attack was staged will not make the rounds as the news of the initial assault did. I wonder, what percent of people who saw the initial story will miss seeing this followup?
Here is just one more example. You may have heard of Sir Tim Hunt, the Nobel laureate biologist who was fired within days of apparently making sexist remarks such as:
Let me tell you about my trouble with girls. Three things happen when they are in the lab. You fall in love with them, they fall in love with you, and when you criticise them, they cry.
It really was hilarious, but my mirth was tinged with sadness. First, because I was pretty sure that a man smart enough to be a knight and a Nobel prize winner probably wasn’t dumb enough to say something that absurdly sexist even if it reflected his true beliefs, and secondly because it’s depressing to think that so many people live in a world where they think that kind of rampant misogyny is common and unsurprising.
Well, it turns out that the critical account of Hunt’s words came from a single source, and that source has a track record of lying and dissembling, primarily by either falsifying her CV or just claiming things that sound way more impressive than they actually are:
Elsewhere in the six-page CV is a section devoted to ‘Qualification and Training’. In it, St Louis trumpets the fact that she is ‘a member of the Royal Institution’.
Again, very prestigious. Or so it seems, until a spokesman for the Royal Institution told me: ‘Anyone can be a member. It’s simply a service you pay for which entitles you to free tickets to visit us and gives you a discount in our cafe.
‘It’s like having membership of your local cinema or gym.’
Why would someone include such a thing on their CV?
‘Actually, that’s a bit of a problem,’ the spokesman added. ‘We have heard of a few people using membership on their CV to imply that they have some sort of professional recognition or qualification. But it means nothing of the sort. It’s very, very odd to see this on a CV.’
This woman’s uncorroborated (and now, contradicted) testimony is all that it took to trash a successful scientist’s 50-year career.
As far as I understand it, the primary reason that social liberals don’t talk about these hoaxes very much is that they are concerned that admitting to the prevalence of hoaxes will erode their position and make people apathetic about racism and sexism. The problem is that refusing to talk about the hoaxes actually does the same thing, but the effect is even stronger. It gives conservatives the impression that social liberals are either intentionally using false events for political gain or, at a minimum, are reckless in their handling of the truth.
At the same time, however, the fears of liberals are not unfounded. There is a very real chance that conservatives tend to dismiss the real costs of inequality and prejudice because this parade of hoaxes (these three articles are all from just one week) creates a festering cynicism.
So what should we do? Well, I’d like to see more data-centric articles to tell the truth. I’m really tired of breathless, sensationalist reporting that rushes to judgment and completely fails to take any context into account. For example, there are numerous articles out these days about spate of fires in predominantly black churches. How bad is this problem? Is it a new trend? How many of the fires are definitely arson? None of the articles I have seen go into that, which seems bizarre given how incredibly important this story is.
Something else I’d love to see: a little more generosity in how we evaluate each other’s motives. Here’s a great example of how not to do it: Amanda Marcotte’s Talking Points Memo piece The Real Reason Why Conservatives Like Ross Douthat Oppose The Gay Marriage Ruling. The article Marcotte is referring to is Gay Conservatism and Straight Liberation in which Douthat argues that “the gay rights movement has won twice over. Its conservative wing won the right to normalcy for gay couples, while rapid cultural change has made the definition of normalcy less binding than the gay left once feared.”
Clearly Douthat is a conservative, and so I would hardly expect for Marcotte to agree with him. But her article is breathtaking in its vicious assumptions about his motives and not just his arguments. According to her, Douthat “declines to spell out exactly what parts of traditional marriage he would like to keep.” That’s absurd: the parts he wants to keep are: monogamy, permanence, and an orientation towards procreation. This is the same for all conservatives. But by pretending that Douthat is unclear, she gives herself license to put words in his mouth, noting that “the human past is one where women were treated as chattel to be passed from father to husband, legally and socially regarded merely as extensions of their husbands instead of people in their own right” (which is true) and alleging that Douthat is pining for precisely that ancient misogyny (which is absurd). She concludes that Douthat–and all conservatives–oppose gay marriage because “it redefines marriage as an institution of love instead of oppression.”
This is hysterical nonsense that exists on the same level as Dinesh D’Souza’s conspiracy theories about President Obama dedicating his entire life to becoming President of the United States so that he could intentionally destroy the country from within to honor his absent father’s anti-colonial ideology and thereby win his ghostly approval. Or something.
Please, America, just walk away from this stuff. There are monsters out there, that is true, but most of your neighbors are not monsters. Your conservative neighbors don’t hate gays and your liberal neighbors don’t hate America. When you see another article making the rounds on Facebook that says something else, either speak up against it or just let it go without a like or a comment or a share.
I’m not saying that both sides are equal. I have chosen a side. I am a conservative. I’m not hiding that. I’m not pretending that I think all views are equally correct. But it really is time to back away from the crazy brinkmanship and hysteria.
If you read Difficult Run with any frequency, you know that we really, really don’t like the minimum wage. There are lots of reasons for this, but one of the biggest is that there’s a better solution to the problem that the minimum wage is supposed to tackle, which is helping the working poor. It’s better because it gets more money into the hands of those who need it without either (1) eradicating low-income jobs (which are better than no jobs) or (2) uselessly funneling extra money into the hands of middle class teenagers working summer jobs (or whatever).
I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.
The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.
In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.
Given the existence of the EITC, it is inexcusable for anyone who genuinely cares about this issue to keep shouting for an increase in the minimum wage.
In a perfect world if I got to restructure our whole tax / welfare system from scratch I might make other choices than an EITC (like maybe an Universal Base Income), but in the world we live today the EITC is a smart, simple program that is already in place and just needs to be augmented in order to give targeted, sound support to the working power. In this case the smart thing and the right thing are the same: so let’s increase the EITC.
Economist Mark Perry has an interesting blog post summing up the Bureau of Labor Statistics report “Characteristics of Minimum Wage Workers, 2014.” The following provides the percentages of different groups earning the minimum wage or less:
Age: 16-19 (15.3%), 25+ (2.5%).
Education: Less than high school (7.3%), High school graduates (3.5%), Associate’s degree (2.2%), Bachelor’s degree (less than 2%).
Marital Status: Never married (6.7%), Married (1.9%).
Hours Worked: Part-time (9.5%), Full-time (1.8%).
Perry summarizes,
Four important factors that will help workers earn a wage above the federal minimum wage are: 1) age (experience), 2) education, 3) marital status and 4) hours worked. Only 1-in-40 workers age 25 and above make the minimum wage, only 1-in-45 workers with an associate’s degree or higher makes the minimum wage, only 1-in-53 married workers earns the minimum wage, and only 1-in-56 workers working full-time earns the minimum wage. The evidence seems clear that the minimum wage applies only to a very small group of young, inexperienced, single, part-time workers, with a lack of education.
Check out the full report. In debates over the minimum wage, we should consider these demographics and take into consideration how much life experience–including work, education, marriage–plays into economic mobility.
At least that’s what Reason‘s science writer Ronald Bailey has concluded based on various studies. “For example,” Bailey writes,
according to a study comparing outcomes in all U.S. states in the January 2014 issue of Contemporary Economic Policy by Illinois State University economist Oguzhan Dincer and his colleagues finds that reducing economic freedom actually tends to increase inequality. “On average, as the size and scope of government increases, so does income inequality,” Dincer tells Reason.
The authors go on to establish “Granger causality.” Simplistically stated, this means they show a causal feedback loop, in which economic intervention produces economic inequality, which in turn leads to more economic intervention. Politicians often react to rising inequality with policies that, on average, end up making inequality worse—say, by increasing the minimum wage. (That is not to say that some policies, such as raising the top marginal tax rate, could decrease inequality. But taken as a whole, the effect moves in the other direction.)
…A 2013 study in The Journal of Regional Analysis and Policy by economists at Ohio University and Florida State University bolsters Dincer’s findings. That study, also using Fraser state economic freedom index data, identified a Kuznets curve relationship between increasing economic freedom and trends in income inequality.Their analysis “suggests that beginning from a low level of economic freedom, increases initially generate more inequality as the upper part of the income distribution benefits relatively more than the lower part; however, as enhancements of economic freedom continue, this reverses and the lower part of the distribution experiences larger relative income gains.”
In their study, Dincer and his colleagues report that their results “support previous studies which find a positive relationship between economic freedom and per capita income.” Last November, a National Bureau of Economic Research study by the Mississippi State University economist Travis Wiseman found, all things being equal, that a one-point increase on the Fraser Economic Freedom of North America index is associated with about an $8,156 increase in real average market incomes.
Check out the whole article and the studies in full.
Nathaniel recently pointed to a new study that reported the drop in unemployment benefit duration in 2014 led to an increase in job creation. An NBER study toward the end of 2014 on minimum wage hikes complements this research.
The abstract reads as follows.
We estimate the minimum wage’s effects on low-skilled workers’ employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a “target” group, whose baseline wage rates were directly affected, and a “within-state control” group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation. Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage’s effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.
As shown above, the study found that minimum wage hikes “significantly reduced the employment of low-skill workers” as well as their “average monthly incomes.” Furthermore, low-skilled workers (especially those without a college degree) experienced “significant declines in economic mobility” over time. As entry-level jobs decreased, so did the chance for low-skill workers to gain the work experience and skills to move up the economic ladder. As economist Arthur Brooks put it, there are no dead-end jobs: each one brings more experience, more skills, and consequently, more economic mobility. We should stop promoting policies that make entry into the job market that much harder.
The above chart has been a talking point for the past couple years. Economic theory posits that an increase in capital per worker leads to increase output per worker which leads to increased income per worker. However, there has been a supposed wedge between productivity and worker compensation since the 1970s. Yet the Manhattan Institute’s Scott Winship argues otherwise. He lists 6 keys to properly analyzing production and wages:
Look at hourly pay, not annual household or family income.
Look at hourly compensation, not hourly wages.
Look at the mean, not the median.
Compare the pay and productivity of the same group of workers.
Use the same price adjustment for productivity and for compensation.
Exclude forms of income that obscure the fundamental question of whether workers receive higher pay when they produce more value.
Number four is especially important:
[The chart above] compares the compensation of production and nonsupervisory workers in the private sector to productivity in the overall economy. The twenty percent of the workforce that falls outside “production and nonsupervisory workers” are excluded from the compensation trend—a group that includes supervisors, who are higher-paid than non-supervisors. Meanwhile, the productivity trend includes them. If productivity has increased primarily among supervisory workers, then we wouldn’t expect compensation among other workers to track productivity growth.
In number six, he states, “Technically, if one is interested in whether workers are being fairly compensated, it probably makes the most sense to compare the growth of compensation to the growth of compensation plus profits. More broadly, one might be interested in whether compensation is growing in line with the income going to owners of capital generally (including those who receive rent or interest).”
He produces a new chart that looks at “hourly compensation and compare[s] it to “net” productivity (excluding depreciation and also proprietors’ income). Both apply to the “nonfarm business sector,” which excludes the parts of GDP produced from the farm, government, non-profit, and housing sectors, thereby avoiding the issues of homeowners renting to themselves and of indirect taxes (along with other measurement issues in the government sector).” Furthermore, it “use[s] the same price adjustment for both compensation and productivity.” Finally, it excludes proprietors’ income (income from one’s business), “as it is not at all clear how to allocate that category into income from labor and income from capital”:
Winship clarifies that ““labor” includes extremely well-paid executives as well as minimum-wage workers, so the fact that labor’s piece of the pie hasn’t shrunk does not mean that inequality between workers hasn’t grown. But it does complicate unified theories of rising inequality.”
For years, [David] Neumark has battled claims by other economists, such as University of Massachusetts professor Arindrajit Dube, that minimum wage hikes have no effect on employment. This latest paper offers more evidence that employment prospects for teenagers are diminished most by the minimum wage.
Even though teenagers are generally not relying on minimum wage income for living expenses, jobs give teenagers their first opportunity for work experience that is crucial for becoming a productive worker later in life. For disadvantaged teenagers, a minimum wage job can develop skills that provide an opportunity to move out of the lower-class.
While state and local minimum wage increases deprive some of jobs, even more young people would be out of work if the federal government increased the minimum wage nationwide. Income levels and cost of living vary widely between states. The hourly median wage varies from a high of $37.59 in Los Alamos County, New Mexico, to a low of $10.81 in Brownsville-Harlingen, Texas. The federal minimum wage is an attempt to impose an oversimplified, cure-all prescription to the complex and diverse causes of poverty.
…Neumark’s new paper shows once again that flashy sound bites such as “Raise the Wage” make for quick political slogans, but raising the minimum wage will continue to price teens out of jobs.
The minimum wage, like other price controls, has unintended consequences.
I saw the image above on a friend’s Facebook profile on Tuesday. Well, not exactly. You can probably tell what parts I added to it. Don’t get me wrong, minimum wage isn’t the only thing I take issue with on that list, but it’s just the one that is just objectively dumb. We’ve written about exactly why the minimum wage is foolish here at DR many times already, but life handed me a fresh example, so here goes. The WSJ reports that (1) McDonald’s profits were down 30% in Q3 2014 and that (2):
By the third quarter of next year, McDonald’s plans to introduce new technology in some markets “to make it easier for customers to order and pay for food digitally and to give people the ability to customize their orders,” reports the Journal.
In other words: the Golden Arches are losing money and plan to economize by replacing workers with machines. Is it any coincidence that this announcement comes just after CEO Don Thompson signed endorsed President Obama’s call to raise the minimum wage? No, it isn’t. It’s politics. Ignorant people call for hiking the minimum wage without realizing that they’re going to cannibalize jobs. Astute CEO gives up on trying to be reasonable and just goes with the flow, knowing full well that if/when the minimum wage rises, his company will be able to survive through automation.
There are much, much better policies to fight poverty. Why is no one rallying around making the efficient and effective Earned Income Tax Credit even more powerful? Politics. Calling for minimum wage hikes is like having the village pressure the one doctor into bleeding the patient to save his life. “But this won’t make the patient better,” the doctor cries. “What,” says the rabble rouser, “Are you saying you want the patient to die! Apply the leeches!” It’s a great way to make the doctor look heartless. It’s not a good way to help the patient get better.
We’ve written a lot about minimum wage hikes here at Difficult Run. Here’s another to add to the list: economist David Neumark (who has published extensively on minimum wage) has an op-ed in The Wall Street Journal arguing that minimum hikes may indeed go to low-wageworkers, this very different from saying they go to low-income families. “One might think that low-wage workers and low-income families are the same,” Neumark writes. “But data from the U.S. Census Bureau show that there is only a weak relationship between being a low-wage worker and being poor, for three reasons” (reasons that are “descriptive evidence” and “not disputed by economists”):
“[M]any low-wage workers are in higher-income families—workers who are not the primary breadwinners and often contribute a small share of their family’s income.”
“[S]ome workers in poor families earn higher wages but don’t work enough hours.”
“[A]bout half of poor families have no workers, in which case a higher minimum wage does no good.”
The amount of low-wage workers from poor families dropped from 85% in 1939 to 17% by the early 2000s due to changes in social safety nets and family structure. Evidence indicates that only 18% of the benefits of a national minimum wage of $10.10 would go to poor families, while 29% would “go to families with incomes three times the poverty level or higher.” The benefits for poor families decline to 12% at 15 dollars, while benefits for the well-off would increase to 36 percent. Neumark further explains that “most studies…fail to find any solid evidence that higher minimum wages reduce poverty.”
He concludes, “The desire to help poor and low-income families is understandable. But increasing the minimum wage is a misguided way to do it.”
Here at Difficult Run, we just can’t get enough of the minimum wage. Yet, that seems to be because there is so much good stuff to post about it. The Economist, for example, has a recent article that looks at three different studies regarding the long-term effects of the minimum wage:
Economist Mark Perry has an interesting 
…A 2013 study in The Journal of Regional Analysis and Policy by economists at Ohio University and Florida State University 
