minimum wage

Minimum Wage Hikes Herald Our Robot Overlords

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2014-04-08 Robots

We’ve written critically about the proposal to raise the minimum wage here at Difficult Run before. (Quite a lot, in fact.) In one of the first pieces I wrote back in February I pointed out that there are basically three criticisms of the minimum wage hikes.

  1. By raising the cost of labor, they eliminate jobs.
  2. The benefits tend to go towards families that aren’t poor.
  3. There are much better alternatives (like the EITC).

The minimum wage is not the most evil policy in the history of the world, obviously, but I really loathe it because it’s so obviously a bad idea and therefore the only reason it gets advanced is either because politicians are negligent or are intentionally exploiting public ignorance about how bad of a policy it is. If we can’t stop a policy like minimum wage, what hope do we have of rational policy in general?

There’s one more aspect to the debate, however, and that is the fact that as the price of human labor raises, the likelihood of replacing their jobs with robots increases as well. That’s the gist of a new post from Nate Silver’s 538 website: The Shift From Low-Wage Worker to Robot Worker. The article covers recent research by economists trying to see which jobs are most vulnerable to being replaced by robots. The short version? Millions of low-wage jobs are incredibly vulnerable to being replaced by robots.

2014-04-08 Minimum Wage Jobs

These probabilities are estimated over a 20-year window, but the trend is clear: millions of American jobs are at risk of automation. In the long run, this is a good thing. In the long run, we don’t want anyone to have to do dull, repetitive, simple work just to put food on the table. In the long run, it would be great if all people worked relatively complex jobs that required minimal physical pain and injury and maximal creativity. The question is how we transition from where we are now. We need a gradual transition accompanied by ample educational opportunities. What we absolutely do not need is an artificial increase in the price of labor. Raising the minimum wage might be good politics, but it’s absolutely terrible policy. In addition to the three problems noted above, it can only serve to make the transition more rather than less gradual.

The CBO Report on Minimum Wage: What You’re Not Hearing

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2014-02-20 Minimum Wage Photoshoot
Applause for lost jobs and inefficient policy gimmicks!

Yesterday the CBO released an analysis of the President’s proposal to hike minimum wage to $10.10 by 2016, and it was more or less a political disaster for the Obama Administration. Why? Because the report indicated that approximately 500,000 jobs would likely be lost due to the impact of the minimum wage hike, leading to headlines like Minimum-wage hike would help alleviate poverty, but could kill jobs, CBO reports, truly bizarre defenses from Democrats that tried to spin job losses into a positive, and some furious push-back against the non-partisan CBO from the Obama Administration. The pushback is a problem in and of itself because the research the Obama Administration cites is primarily about (1) short run effects of (2) one-off minimum wage hikes. The proposed minimum wage hike would be tied to inflation and so the research on past hikes is probably not relevant even in the short-run, and then there’s the problem of longer-run effects…

But forget all that. Here’s the criticism the Obama Administration isn’t having to defend because the media has failed to bring it up even thought it’s right there in the report:

The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates. [emphasis added]

So, not only will the policy cost about a half-billion jobs, but only 20% of the additional earnings would go to families at or below the poverty line. A full 1/3 would go to families that already make at least 3x the poverty level. Current guidelines (for 2013) put the poverty level at $23,550 for a family of 4, so we’re talking about boosting the income for families that make at least $70,650. I’m not saying that’s a terrible idea or anything, but if this is President Obama’s idea of anti-poverty measure he needs a better one. Like, you know, the EITC which is (a) relatively popular with conservatives and (b) actually targeted at boosting the income of the working poor without costing jobs.

The only reasonable conclusion is that the push for minimum wage is a political gimmick rather than a sincere effort to improve the lot of America’s working poor. Better to pick a popular but stupid program than the GOP will oppose than a lesser known but smart program that the GOP would probably go along with. I guess if Americans have to suffer for the Democratic party to score political points, that’s just tough luck for them. Now that’s what I call empathy.

Economist Jeff Smith Won’t Sign Minimum Wage Petition

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I’ve written about my criticisms of minimum wage a couple of times already. (Walker has weighed in as well.) Here’s a good article, posted by Michigan economist Miles Kimball but quoting fellow professor Jeff Smith, on reasons why Jeff Smith refuses to sign a petition supporting a raise in the minimum wage. His concerns are:

1. It is poorly targeted relative to alternative policies such as the Earned Income Tax Credit (EITC). And, yes, I am familiar with the argument that the minimum wage and the EITC are complements; what is thin on the ground, so far as I am aware, is evidence of the empirical importance of this argument.

2. As pointed out recently by Greg Mankiw, it distributes the costs of the increased minimum wage in a less attractive way than alternative policies such as the EITC, which implicitly come out of general tax revenue.

3. Most importantly, raising the minimum wage fails to address the underlying issue, which is that many workers do not bring very much in the way of skills to the labor market. Rather than having a discussion about raising the minimum wage, we should be having a discussion about how to decrease the number of minimum wage workers by increasing skills at the low-skill end of the labor market. This would, of course, mean challenging important interest groups. It is also a bigger challenge more broadly because it is less obvious how to do it. But that is the discussion we should be having because that is the one that will really help the poor in the long run, in contrast to a policy that feels good in the short run but only speeds the pace of capital-labor substitution in the long run.

None of these arguments are novel, and I’ve cited all of them in the past, but they are worth repeating. Minimum wage: the best you can say is that it’s a really inept and obsolete policy.

Minimum Wage Hikes: Still (Possibly) Dumb

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Nathaniel recently argued that minimum wage hikes were dumb, largely due to the policy harming those it intends to help. New research (2012 working paper version here) examines turnover rates in relation to minimum wage increases. The researchers

find that when the minimum wage is higher, all low educated workers face jobs that are more stable (in the sense that they are less likely to end in a lay-off) but harder to get. This shifts the debate over the usefulness of minimum wages to the question of whether workers are better off with improved job stability or improved chances of finding a job when unemployed. It also means that minimum wages affect a much larger part of the labour market than is usually recognised and potentially raises the stakes in the policy debates…Thus, the policy debate should not just be about the employment rate effects of minimum wage increases but about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs. And the debate is relevant for all of the low educated labour market, not just teenagers.

More About How Dumb Minimum Wage Hikes Are

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Greg Mankiw tipped me off to a report by David R. Henderson about where the benefits of minimum wage go. Highlights?

  • Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.
  • A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.
  • Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.

At an aggregate level:

  • The net increase in wage income to households containing low-wage workers would be $4.03 billion per month.
  • The net increase in wages to poor households containing low-wage workers would be only $439 million per month.

Now here’s the tricky question: do middle class voters know that this policy is going to benefit them by a roughly 10:1 ratio? I’m skeptical that they are that well-informed, but you can’t argue that a program like the Earned Income Tax Credit would actually do a lot more good for the people who need it most, and yet President Obama chooses to go with minimum wages and all my gullible left-leaning friends go right on along with it.

I think the old rule probably applies, but I also have a hunch there’s got to be more to it. The middle class capture of welfare programs (to the detriment of their intended recipients) seems too comprehensive to be chalked up to random chance. Maybe the problem is simply that what you can understand enough to support you can also understand enough to co-opt? It’s depressing no matter how you look at it.

2014-01-18 Minimum Wage

Minimum Wage Hike: Help or Harm?

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Greg Mankiw points out that the President’s recent remarks about economics research into the impact of increasing minimum wage were somewhat misleading. The President said “there’s no solid evidence that a higher minimum wage costs jobs.” That makes it sound as though the concern is a mere ideological fabrication. In reality, however, it’s a hotly contested question even among economists and Mankiw pointed out a poll (of economists) that showed equal support from those who think that minimum wages help vs. hurt.

My own take is that minimum wages hurt, overall. I think the reason that this isn’t more obvious is that the effects take place over a long period of time. McDonald’s isn’t going to go out and fire all of the workers tomorrow because of a minimum wage hike because they’d have to replace them with computers and that’s an enormous, unplanned expenditure. But if McDonald’s believes minimum wages hikes are here to stay (e.g. if they are pegged to inflation as the President supposes), then they absolutely will gradually phase workers out and replace them with automated systems over time.

This isn’t just a pet theory I invented, the idea came from economist Miles Kimball blogging about Isaac Sorkin’s work. (Sorkin was in my PhD cohort at Michigan.) In the paper, Sorkin argues that we haven’t seen dramatic impacts from minimum wage policies in the US because they’ve always been temporary. President Obama’s proposal isn’t. So there’s very solid theoretical evidence and much less clear empirical evidence to suspect that the policy is going to be harmful for precisely the people it’s supposed to benefit.

At a minimum, folks should understand that when conservatives oppose minimum wage policies on humanitarian grounds, they are being sincere and reasonable.

Minimum Wage Follies

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2013-08-09 Fast Food Strike

One of the perennial conflicts between left and right in the United States is over minimum wage. The left insists that it’s a crime (at least morally) for companies to pay their employees less than a living wage and lauds companies that have business models based on paying workers well (or “fairly”, as those on the left might insist). The right, for its part, has the general attitude that if you’re expecting a living wage for a minimum wage job, there’s something wrong with you, not with the wage. Minimum wage jobs are for teenagers or retired folks looking for a little spending money or are a way for anyone who wants to work to have easy access to the bottom rung of the job ladder. 

Although I always think it’s nice when a company like Costco carves out a niche paying their employees well, I tend to sympathize with the right for simple economics. If you make it expensive for companies to hire employees, they will hire less employees. Thus the impact of minimum wage laws might be to boost salaries in the shot run, but in the long run it has the opposite effect. It reduces the salaries of large swathes of the populace to 0 by taking away their jobs completely.

This whole issue came to mind again when I heard a story about fast food workers striking for better pay. Really, guys?

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Bryan Caplan: Why Minimum Wage Is Still A Bad Idea

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2013 03 15 Bryan CaplanI’ve been a huge fan of Bryan Caplan since “The Myth of the Rational Voter” fundamentally changed the way I think about politics, voting, and democracies. I still haven’t read “Selfish Reasons to Have More Kids”, but I can’t wait to get started. In the meantime, however, here is an excellent article from Caplan about the conflict between theory and empiricial research when it comes to minimum wage laws. The article is great, but also a bit loaded with econ-jargon, so I’ll try to summarize.

Economic theory says that when you increase the cost of something people buy less of it. This is pretty fundamental. (Bryan Caplan calls it “a strong prior”, meaning an initial belief that is solidly held.) If that’s true, then when you implement a minimum wage (raising the price of hiring people), companies will buy less of it (hire fewer workers). Theroetically, this is open-shut: minimum wage laws take jobs away from people who would otherwise have them. It’s like a wealth-transfer from the very-poorest to the almost-as-poor.

Empirical evidence, however, has not found a strong relationship between minimum wage laws and unemployment. So there’s a conflict. Bryan’s piece argues that we should go with the theory instead of the evidence… sort of.

First, he points out the social science evidence is not up to the standard of, say, physics. There are no repeatable experiments, data is missing or hard to measure, and the relationship between cause and effect is often impossible to identify because we’re not talking about gas particles interacting, we’re talking about people interacting. This means everyone has a plan, everyone is guessing what everyone else is doing, and so people don’t necessarily react the way you’d think they would.

Second, and probably more persuasively for people who haven’t studied econometrics, he argues that a lot of evidence does support the idea that minimum wages lower employment. You just have to look at related fields. Caplan considers 4:

  1. Research on the impact of low-skilled immigration shows that lots of new workers (big increase in supply) leads to a small change in wages (small decrease in price). This relationship is called “highly elastic”, and it implies that if the government mandates small changes in price (minimum wage laws) there will be large changes in the supply (the number of people who get jobs).
  2. Research on European labor laws shows that lots of costly laws designed to protect workers create very high unemployment numbers. Increasing minimum wage is just one variety of the kinds of government regulation that increase labor costs, so its reasonable to have the same impact.
  3. Research on other kinds of price control (e.g. rent control) show the same kind of effect: if the government enforces price floors or price ceilings you can expect strong effects in the marketplace.
  4. Keynesian economists believe that one cause of unemployment is price-rigidity in wages. If a company needs to save money, it will usually lay of 10% of the company rather than give the entire company a 10% pay cut. This is an example of price-rigidity in wages: they just don’t go down very often. As a result, if the value of a workers input falls, usually their wages won’t fall. They will just lose their job. This is part of how Keynesian economics explains unemployment during recessions. But the same basic function is at play when minimum wages are hiked: the value of the workers input relative to their output falls. So, by their own logic, shouldn’t unemployment rise?

I also really like the conclusions Caplan draws from all of this:

From the standpoint of public policy, the minimum wage is a symbol of the view that “feel-good” policies are viable solutions to social ills: “Workers aren’t paid enough?  Pass a law so employers have to pay them more.  Problem solved.”  From the standpoint of social science, the minimum wage is a symbol of the myopic view that you can become an expert on X by reading nothing but the leading research that explicitly addresses X: “Does the minimum wage reduce employment?  Read the top papers on the minimum wage.  Problem solved.”

2013 03 15 Minimum Wage

Hiking the Minimum Wage

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President Obama made a surprise call to increase the national minimum wage to $9 per hour. Is that actually a good idea? Becker and Posner took the issue on directly. Becker writes in a measured, but skeptical tone:

The two main issues debated are the effects of a higher minimum on employment of the low skilled, and its effects on the degree of poverty. Both theory and evidence indicate that higher minimums reduce employment for teenagers and other workers with low productivity, and that it does little to alleviate poverty. Neither conclusion, however, is without controversy, especially the employment effect.

He adds at the end that since recipients of minimum wage are also the customers of companies that have to bear the brunt of paying their workers above market rate:  “low-income families are hit by two bullets: some of their members find it harder to get jobs, and they face a higher cost of the goods they consume.”

Posner weighs in with skepticism as well:

The proposal will not commend itself to most economists who study the economic consequences of minimum wages. They make three principal arguments: minimum wage laws reduce employment (and efficient resource allocation) by pricing labor above its market rate; the laws do not reduce poverty, because most beneficiaries of minimum wage laws are not poor; and as a means of reducing economic inequality, such laws are inferior to the Earned Income Tax Credit (i.e., the negative income tax). I will try to assess these arguments.

His conclusion is that,  since we know so little and the proposed increase is so large, we should start with a more modest increase. He also suggests that indexing to inflation is a bad idea:

And I don’t think indexing the minimum wage to inflation is a good idea; should inflation surge, which is always a possibility though not (it seems) an imminent one, an equal increase in the minimum wage might contribute to an inflationary spiral.

I actually found an interesting article by Michigan macro professor Miles Kimball which addresses the controversial employment effect. Kimball cites work by Isaac Sorkin (an incredibly brilliant grad student who started the PhD program at the same time that I did) who explained that the employment effect might be much greater than expected; it just takes a long time to go into effect. A lot of companies engineer their production around assumptions about wage, and when the wage assumptions change (e.g. minimum wage goes into effect), they only gradually move to less labor-intensive production because of adjustment costs. In other words: they don’t go out and buy brand new machines on day 1, they just gradually phase out machines and processes to shift towards using fewer employees. That’s more reason to suspect that a minimum wage hike will do more harm than good, and indexing it to inflation would compound the problem.

And then there’s Greg Mankiw (very respected macroeconomist, but also openly Republican) who asks the simple question: why $9? Mankiw’s point is that if minimum wage is a magic wand to increase the salaries of the poor, why wouldn’t you you jump all the way to $25 (equivalent to the current median income of $50,000 for 2,000 hours/year)? Some mysterious force suggest we shouldn’t go too high, but the President isn’t talking about it. What is it? Good question.

My own take is that it is socially useful to have jobs available that pay less than what a person could live off of, primarily for teenagers to gain initial job experience. You need to have a bottom rung of the ladder, a place where you can go, start a resume, and use it as a launching pad for better jobs. I got my first minimum wage job when I was 14, and I’ve worked ever since: janitor, file clerk, bus boy, dishwasher, etc. I didn’t life myself up  by my bootstraps, so a starter job is not enough. But it does help. Taking that away won’t help anyone. Fighting poverty and reducing income inequality are valid goals, but this is not a valid strategy to accomplish them.

2013 02 19 Minimum Wage