Monday, April 8, 2019

Meer On Minimum Wage

David Henderson posts a thoughtful draft op-ed by Jonathan Meer on minimum wages. Two talents of  great economists are to recognize that averages hide big differences among people, and to imagine all the avenues of substitution and unintended effects of a regulation. The oped excels:

Substitution:
when the minimum wage is raised, employers offset increased labor costs by reducing benefits like the generosity of health insurance. Other benefits, like free parking or flexibility in scheduling, are more difficult to measure but are also likely to be cut back. Employers will likely expect more work effort when they are forced to pay more, changing the nature of jobs. And in the longer run, economists have found that employers shift towards automation and expecting customers to do more things themselves– reducing job growth in ways that aren’t always obvious. This damage takes time to be seen, which is one reason minimum wage hikes, like rent control, often seem appealing. 
Who gets jobs?
When debate focuses on the total number of jobs lost or gained, it hides this potentially nasty distribution of the benefits: a recent college graduate with a barista job may get a few more dollars an hour, but the high school dropout finds it harder to get and keep a job. ...
The teenage children of well-off families, earning money to buy video games, are treated the same as single moms struggling to get by. When wages are set at an artificially high rate, why should an employer take a risk on the single mother who needs the occasional shift off to take her kids to the doctor? The kid from a disadvantaged background who needs some direction on how to treat customers appropriately? Or the recently released felon trying to work his way back into the community? Why should employers bother with them when there are plenty of lower-risk people who are willing to work at those artificially high wages? 
Assorted comments, especially to dispel the usual you-just-don't-care-you-want-profits-for-big-business calumnies:
It will get much worse in the next recession...Those at the margins of the workforce will be left further behind. Low-wage jobs aren’t easy, don’t pay well, and are rarely fun. But not being able to find work at all is far worse.
Despite the lowest unemployment rates in decades, only 39% of adults without a high school degree had a full-time job in 2018 – and among young African-Americans dropouts, it’s a shocking 26%. It’s hard to believe that the best way to help them find work and start climbing the job ladder is to put the first rung out of reach, making it difficult for them to find work and driving them to illegal employment with few protections.
 We should never minimize the struggles of low-income families to get ahead. But good intentions are no substitute for good policy. Minimum wage proponents mean well, but the unintended consequences hurt the worst-off the most.
Jonathan isn't just making this up as us bloggers tend to do. He points to "The Minimum Wage, Fringe Benefits, and Worker Welfare, with Jeffrey Clemens and Lisa B. Kahn
...state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations, 
and Dropouts Need Not Apply: The Minimum Wage and Skill Upgrading
workers employed in low-paying jobs are older and less likely to be high school dropouts following a minimum wage hike.... job ads in low-wage occupations are more likely to require a high school diploma following a minimum wage hike,
Related, Zachary S. Fone, Joseph J. Sabia, Resul Cesur find exactly the predicted substitution into criminal activity
find that raising the minimum wage increases property crime arrests among those ages 16-to-24, with an estimated elasticity of 0.2. This result is strongest in counties with over 100,000 residents and persists when we use longitudinal data to isolate workers for whom minimum wages bind. Our estimates suggest that a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion. 
Hat tip to David Henderson, who posted the draft oped and a link to the excellent Jonathan Meer - James Galbraith debate, and to the indefatigable Marginal Revolution. I saw an early draft of the oped, and hoped Meer would be able to publish it, at least somewhere like WSJ. It's not too late!

Update: 

Jonathan passed on this tidbit from Obenauer & von der Nienburg, “Effect of Minimum-Wage Determinations in Oregon,” July 1915, yes 1915
“The belief was very prevalent among store women that the minimum wage had wrought only harm to them as a whole. The experienced women contended that formerly they had gotten through the day without any hurry or strain. If it was necessary to work a few minutes overtime, they did so willingly. Now, they said, they are under constant pressure from their supervisors to work harder; they are told the sales of their departments must increase to make up for the extra amount the firm must pay in wages.”
Plus ├ža change...

Overall, it's a shame that economists have bought the popular discourse that all that matters are "jobs," as if it were 1933, not the vast range of the terms of employment -- how hard you have to work, hours, tasks, flexibility, side benefits, overtime, and so forth.


13 comments:

  1. It is interesting to ponder the Federal Reserve's 4.65% minimum unemployment rate target in conjunction with no minimum wage. As someone skilled in math and logic, I am sure John Cochrane knows the ramifications of those two policies matched together.

    Nevertheless, it probably is a good idea to get rid of the minimum wage, as soon as we get rid of property zoning, and the routine criminalization of push-cart, motorcycle-sidecar, and truck-vending.

    It also seems to me that if the national policy became no minimum wage, the Federal Reserve would have to have a minimum unemployment rate target of 0%.

    As a practical matter, I think a marriage of no minimum wage laws and open borders for labor will put AOC in the White House in 2028.

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  2. Add on:

    This is from the Fed:

    "Many estimates suggest that the long-run normal level of the unemployment rate--the level that the unemployment rate would be expected to converge to in the next 5 to 6 years in the absence of shocks to the economy--is in a range between 4 percent and 5 percent."

    The Fed has been squawking loudly that the present unemployment rate is "too low" and there are "worker shortages." The Fed recently posited the "natural" unemployment rate is 4.65%.

    How would such a "natural" unemployment-rate target work in conjunction with no minimum wage laws?

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    Replies
    1. As an intend follower of the FED (it's my job), I don't agree with your interpretation. The FED does not consider unemployment 'too low' at all (IT NEVER DOES! the fed is not evil (in that regard, anyway)!). They are surprised that despite the very low unemployment, wage inflation is not picking up/going through the roof.

      In their models, such a low unemployment should raise inflation so much that it would require higher interest rates to keep wages balanced.

      Delete
  3. I think you have the wrong link for their first paper as it goes to their 2nd paper that you mentioned. Try this:

    https://cheps.sdsu.edu/docs/seminar/Clemens_MW%20&%20Fringe%20Benefits%20--%20CHEPS.pdf

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  4. Dear Professor Cochrane and Folks,

    My thanks to Professor Cochrane for publishing this post. It has all the standard arguments against increasing the minimum wage in one spot and so is useful on those grounds alone.

    Having become somewhat acclimated to stirring up nests of hornets a little while ago, when I got stung for doing so, I just want to make a few comments from the other side of the fence. Please do not label me a supporter of the $15 minimum wage, which is likely to pass in Maryland, for doing so. It seems more complicated to me than that, and I am not in favor of this large an increase.

    Three points seem relevant. One is ceteris paribus - if we are going to discuss the minimum wage, we have to hold everything else constant to get the standard responses. In reality, everything else isn't constant. So the negative effects of the rise would be vulnerable to how much everything else is changing. Whether this completely explains the Card-Krueger results is a good question, but clearly aggregate expansion elsewhere was important.

    Two, we may like artisanal or particular establishments more than we like fast-food chains, and thus support the usual Neumark-style arguments. To support these establishments, which might charge more but might produce healthier results, we may be willing to live with the minimum wage. So there may be a small externality.

    Three, the real effect of the minimum wage would seem highly dependent on the elasticities involved. If the recipients of the increase in the minimum wage have a very high income elasticity of demand, and spend like crazy, while those who make losses basically save everything, and investment opportunities for the banks are limited, then the total effect of the minimum wage would depend on the price elasticity of demand for the labor effected. If you are starting from a very low price elasticity, the income effect might outweigh the price effect. You can't go to this well forever, but as an occasional measure of relief, it would seem you might get positive results from the change.

    Julian Silk

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  5. Are there minimum wage jobs that also have healthcare, let along any other benefits?

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    Replies
    1. You are thinking very narrow about what the term benefits entails.

      An employer may pay for uniforms, provide a free meal at each shift, give employee appreciation events, allow a family discount, or give birthday presents, and as mentioned in the article, free parking or flexible hours. These are all benefits, just not for healthcare.

      Plenty of jobs try to compete on all these different dimensions. Partially because the tax advantages, but also because some people see these as valuable and the employee no as much, so it is more beneficial than a cash payment.

      When prices are fixed, firms will compete in other dimensions.

      Delete
    2. "An employer may pay for uniforms, provide a free meal at each shift, give employee appreciation events, allow a family discount, or give birthday presents, and as mentioned in the article, free parking or flexible hours. These are all benefits, just not for healthcare."

      And if you were to take the sum total of either the value employees derive from these "benefits" or what employers are paying, they wouldn't come close to even a marginal increase in the minimum wage. That and "flexible hours" for jobs paying at or close to the minimum wage is probably not what you think it means...

      Delete
  6. Butterfly effect; sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state. I suspect minimum wage laws not only affect dropouts, who need not apply today, but affect their progeny in the future. The negative effects of minimum wage laws observed today, will be greatly exaggerated in the future.

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  7. An alternative read of what the Meer et al. paper is saying:

    http://econospeak.blogspot.com/2019/04/does-cochrane-really-understand-latest.html

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  8. two things that are missing from the analysis:

    One: general equilibrium effects. All the papers cited in the piece are partial equilibrium effects. There is certainly job creation at the margin from higher income to those who are not displaced. General equilibrium effects are more likely the reason for the empirical results that NATIONAL minimum wage hikes have little effect on employment.

    Two: confirmation bias. There are plenty of papers that provide evidence on the benefits of minimum wage hikes. And some that highlight the costs. The former were ignored in the op-ed. Here is my take: effects of MW changes on social welfare are extremely context-dependent (local vs national, too high vs too low, etc etc). It is easy to find evidence against it or for it if we want to just confirm our priors. But I find most political discussions of MW lacking: those who are in favor tout just the results they want and those against (present case?) focus on just the results that bring costs.

    Some references, new and old, without citing just the best known results:
    Freeman, R. B. (1996). The minimum wage as a redistributive tool. The Economic Journal, 106 (436): 639-649.
    Draca, M., Machin, S. and Van Reenen, J. (2011). Minimum wages and firm profitability. American Economic Journal: Applied Economics, 3(1): 129-51.
    Gasparini, L., and Lustig, N. (2011). The rise and fall of income inequality in Latin America. In Ocampo, J. A. and Ros, J. (Eds.), The Oxford Handbook of Latin American Economics, 691-714.
    Ni, J., Wang, G., and Yao, X. (2011). Impact of minimum wages on employment. Chinese Economy, 44(1): 18-38.
    Khamis, M. (2013). Does the minimum wage have a higher impact on the informal than on the formal labour market? Evidence from quasi-experiments. Applied Economics, 45(4): 477-495.
    Schmitt, J. (2013). Why does the minimum wage have no discernible effect on employment? CEPR Reports and Issue Briefs, 2013-04.
    Poncet, S., Mayneris, F., and Zhang, T. (2014). The cleansing effect of minimum wage: Minimum wage rules, firm dynamics and aggregate productivity in China. CEPII Working Paper, 2014-16.
    Fang, T., and Lin, C. (2013). Minimum wages and employment in China. IZA Discussion Paper, No 7813.

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  9. Minimum wage in Australia (2018) is about 13 USD per hour (17.70 AUD). Current unemployment rate is about 4%. Oh, and they have universal health care there. It is called Medicare :) John's post is trying to convince you that they are fools down under. Or perhaps the laws of economics are different there.

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  10. Great post. Shared it in my current labor econ class. Ha.

    Best,
    M

    ReplyDelete

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