Tuesday, May 21, 2019

Clemens on minimum wage

Jeff Clemens offers a "roadmap for navigating recent research" on minimum wages in a nice CATO policy analysis.  A review and a doubt.

He discusses the recent claims that minimum wages don't hurt low-skilled people. This is an impressive and readable account of a vast literature. It's not as easy as it seems to evaluate cause and effect in economics.  Evidence from small increases in the minimum wage over short time intervals in some locations in good economic times may not tell you the effects of large increases over longer time intervals in all locations in bad economic times.

The "new conventional wisdom," of small effects, Jeff reports, ignores a lot of the more recent work, and especially work that  uses "data from individual-level administrative records" rather than "aggregate data and survey data," work that runs "experiments whenever possible," and work that "transparently analyzes compact historical episodes in the U.S. experience" (P. 8)


(The "transparency" issue is one that Jeff only touches superficially but I sense an important detailed critique that needs to be written.)

Economics has become more empirical lately, and that's a good thing. But "facts without logic" pose a conundrum. Either the facts or the logic are wrong. Good for science, but one might want vast public policies with the possibility of unintended consequences to ruin a lot of people's lives to wait for facts and logic to be reconciled. Jeff runs through the arguments why large permanent increases in the minimum wage might not hurt, and finds them wanting.

An under-appreciated point: work is far more than just I work, you pay me:
"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. "
Employers can react to a minimum wage not by cutting back workers, but by selecting better workers, denying fringe benefits, making you pay for uniforms, insisting on schedules that are inconvenient for you but convenient for them, insisting you be on call at all times for example, and so forth. Since we don't have data on these adjustments,
 empirical evidence will tend to understate the minimum wage’s negative effects and overstate its benefits.
Jeff, p. 9
Work hours can be at the convenience of the worker or at the convenience of the firm. The pace of work can be fast or slow, safer or riskier, and can require more or less mental energy. Compensation can either include or exclude health insurance, retirement contributions, and other benefits. A job’s location can be more or less preferable, and opportunities for advancement (within or outside the firm) can be more or less ample.
A second effect, which Jeff doesn't mention: Which workers get the jobs will change. Workers who can adapt to inflexible schedules, don't need benefits, are well trained, get the jobs. Economic policy discussion too often takes the average as example and assumes each person is just like the average. The economy is all about how people jobs and businesses are different - "heterogeneity" and "selection" in economic parlance.

A doubt

But let me express a doubt. Why do we discuss minimum wages so much? I think they irritate free-market economists because they are such a clear, simple, and paradigmatic stupid idea. The first insight of your Econ 101 class is that price controls destroy markets:


We see it over and over again, in centuries of experience boiled down to this simple graph. Price controls, rent controls, wage controls all have led over and over again to the same sorry story. And when supply is greater than demand, who gets the good, apartment, or job gets all screwed up.  Don't try to transfer income by screwing up prices. Along with tariffs and disincentives of 100% marginal tax rates, there isn't much more essential to the basic canon of economics.

So, if you're a young ambitious economist, and you want to attract a lot of attention, what could be better than empirical work showing magic: Wait, minimum wages don't hurt employment! Hooray, all the old fogies are wrong! If you are an activist, annoyed by the neoliberal orthodoxy, it's catnip. Hooray, the government can go ahead and control prices and thereby transfer incomes!

And if you're a regular economist, nothing could be more annoying.

So we pay a lot of attention and generate a lot of controversy.

But here is my doubt. Let us line up a list of economic circumstances and government policies that are potentially hurting disadvantaged Americans:

  • Minimum wages. Sure.
  • The rest of the massive set of labor laws, regulations, and taxes, all of which reduce  employment, especially of less skilled workers. 
  • A rotten education system, beholden to teachers unions.
  • Criminal justice pathology, including drug laws, life-destroying treatment of innocents, lack of education and training, and laws and rules against hiring people with criminal records.
  • Zoning and building restrictions, resulting in no housing near jobs.
  • Occupational licensing ridiculousness. A thousand hours and a big test to open a nail salon. 
  • The death by a thousand cuts of restrictions on low-price low-income entrepreneurship. Business licenses, zoning that disallows businesses in residential areas, laws that make it hard to hire people -- all of which sends low income people to the illegal economy, which is a poor way to transition to the legal economy. A tiny one: permits for and bans on repeated garage sales (I just found out about this). 
  • Disincentives of social programs and subsidies, leading to 100% marginal tax rates for many.
  • Disincentives of "affordable" or other subsidized housing.
  • Social background: Many people grow up in neighborhoods where there are no two-parent families, few adults with permanent jobs, widespread crime, no business. Government actions bear a lot of the blame for this. 
I could go on. I'll allow "wave of cheap imports from China and floods of low skilled immigrants," from the right, and perhaps "growing monopoly of the huge companies" from the left, even though I think both are silly. Add all the travails facing the kind of people affected by minimum wages you can think of.

What I would like to see, then, is some sense of priorities. Which of these is really hurting people the most? As you can tell I have a hunch that minimum wages are a problem, sure, a particularly clear pathology, sure, a particularly annoying piece of economic ignorance, sure, but that by focusing on them we really aren't focusing on the biggest problems holding many Americans back. We all want to help Americans with low skills and (currently) low incomes to get ahead. (It would be nice if the left acknowledged that occasionally.) But I'm not sure that allowing them to keep working at $9 an hour is the most important step in that direction, or that a $15 per hour minimum (legal!) wage will be the greatest sin of the many things our government does to hold people back.

Update: Jonathan Meer points me to a lovely essay by Tom Leonard, making this point more eloquently than I. No idea is genuinely new I guess! It's not a fight about how to help poor people. It's a fight about economics and the poor people are (as usual) the sorry victims of intellectual warfare:
Minimum-wage effects, at least for current U.S. magnitudes, are small potatoes. Of several more important policy concerns—entitlement reform, health insurance, CPI calculation, for example—none has generated anything like the vituperation that has characterized the minimum-wage controversy. But if the minimum-wage controversy is not especially important to the economy, it is very important to economics, and, thereby, to the status of economics as a policy science. 
The reason, I want to argue, is that the core of modern economics— neoclassical price theory—is seen to be at stake. In particular, minimum- wage research has come to be seen as a test of the applicability of neoclassical price theory to the determination of wages and employment. The modern minimum-wage controversy is not just a technical quarrel over the sign and magnitude of wage-elasticity coefficients; it is the latest chapter in a longstanding methodological dispute over whether and in what domains neoclassical price theory can be said to properly apply.
His footnotes are even great
1. In the wake of Card and Krueger 1995, one Nobel laureate intoned, “I tremble for my profession” (Miller 1996). Another made reference to “camp-following whores” (Buchanan 1996). A third eminence called Card and Krueger’s main interlocutors, David Neumark and William Wascher, “heroes” (Barro 1996). 
This is the kind of history of economic ideas I wish we had more of.


14 comments:

  1. Minimum wages chase poor people out, which would raise property values, improve business climate, and increase employment. A min wage advocate who does not understand this could look around, see that his neighborhood looks better after imposition of a min wage, and pat himself on the back for, among other things, helping the very people that the min wage chased away.

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  2. What do you think of models which suggest that the data can actually match a theory of industrial organization with monopolistic competition in product markets and monopsonistic competition in labor markets?

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  3. "Minimum wage effects are small potatoes" may be true on average of past minimum wage policy consequences. It is not an argument of principle: Why raise to a mere $15 per hour? Why not $150? Where does one stop?

    Please do a $150 experiment nationally so that we don't have too much emigration from individual states messing up the experiment.

    Anyway, maybe the small potatoes mostly affects young black males who have been subjected to marvelous education systems, making the small potatoes pretty damned big for them.

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  4. The death by a thousand cuts of restrictions on low-price low-income entrepreneurship. Business licenses, zoning...----JC

    I wish you had mentioned the routine criminalization of pushcart vending, or motorcycle-sidecar vending, or truck vending.

    In addition to providing lower-cost Goods to the exalted consumer, such forms of vending would open up business to people who have only a small amount of capital. Perhaps voters would feel minimum wage laws are not necessary if they had the ability to open up their own business.

    Now, if we can only convince the Federal Reserve that an unemployment rate of 5%, as measured by U3, is not the Goldilocks zone but rather a disaster.

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  5. Neoclassical price theory has always been a "model" and empirical testing often has to be explained-away by contextual considerations (e.g. Stigler's article about "demand curves sloping upwards). The key is the elasticity, and it is hardly a single statistic; obviously greater in the long run, but always location specific. It is difficult to demonstrate a general principle empirically, much less "to test it," when every situation is new and different.

    I stand with the neoclassical claim: Demanders will pay what they think the marginal contribution of a specific laborer is, and less if they can get away with it. With a price control, the pool of "good workers" to select from - and discharge if not - will be larger with a fixed wage floor above what a "good worker" would require. Such a worker, if alert, could also move along down the job listings in 2 weeks if the job were less than satisfying, regardless of the wage. A tight labor market is far better than silly price fixing schemes.

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  6. How can economists possibly convince the policymakers that some other policy is beneficial or harmful if they can't even convince them of (or indeed present consensual position on) harms of a price floor

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  7. Retailers clearly prefer customers who earn and spend very little money, because...

    Government will borrow from central banks money created out of thin air and give it to workers so workers can pay high rentts to emplooyers paying wages too low to buy all that is produced at high profit?

    Call the debt funded welfare a tax cut named EITC to trick conservatives into enthusiastically embracing a welfare state.

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  8. "Why do we discuss minimum wages so much? I think they irritate free-market economists because they are such a clear, simple, and paradigmatic stupid idea."

    No, they are a (paradigmatic?) example of a second best policy for raising incomes. It's hard to take seriously a criticism of minimum wages that treats it as some out of the blue "stupid" idea without pointing out how wage subsidies or a higher EITC could achieve the same benefits w/o the costs.

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  9. It could be much better but...
    A rotten education system, beholden to teachers unions.

    Schooling in the developed world all seems to be at a similar level. I think there are and insignificant number of bad schools in the developed world.

    A Rational Argument Could Made that the USA has Best Education in the World and Florida has the Best Education in the USA

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  10. The reason we focus so much attention on the minimum wage is because it's such an easy thing to fix, and easy to understand. Rotten education system? Entitlement reform? Zoning laws? All of these are massively complicated, hard-to-solve, relatively hard-to-explain, politically entrenched problems.

    Inflation is a similar example. The welfare cost of moderate inflation is pretty low. But it gets a lot of attention because it's easy to understand, and should be easy to avoid.

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  11. It's interesting how businesses have reduced services as minimum wages have increase. Some of it may be inevitable technological progress and unrelated to minimum wages, but it is still interesting to me.

    For example, back thirty years ago supermarkets had youngsters working at the end of the checkout lane, bagging your groceries as the checkout person rang them up. At the supermarket I worked at, we even carried the groceries out for you and loaded your trunk. Nowadays, there are no more dedicated baggers, and the checkout people give you dirty looks if you expect them to bag your groceries rather than you doing it yourself. More recently, most groceries have installed self-checkout lanes and expect you to scan, bag, and pay for your groceries without any assistance.

    In fast-food restaurants, rather than a kid behind the counter taking your order, you're expected to enter the order yourself using a touchscreen.

    What really worries me as the minimum wage increases is where youngsters are supposed to learn the simple job skills like being polite to customers, providing assistance, etc. With higher wages, most businesses can no longer afford to hire teenagers. Paper routes before or after school are no longer a thing, and boys who want to spend the summer mowing lawns are having to compete with full-time landscapers.

    What really worries me is how are kids supposed to learn how to work now that all the jobs they used to do no longer exist. Now we're stuck with Gen Z kids entering the workforce full time after college with absolutely none of the soft skills you learn by actually working.

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  12. "Why do we discuss minimum wages so much?"

    That much is easy:

    (1) The minimum wage is a contentious MORAL issue;
    (2) A large (and ever increasing) portion of society is uncomfortable debating government policy in moral terms;
    (3) Economists are able to provide a rich/useful substitute for moral debate; and,
    (4) Economists cannot resist the urge of increasing supply to satisfy unmet demand.

    So sure, the minimum wage is not very interesting as a matter of pure economics. But people nevertheless want to debate the minimum wage, and economists have the unique skill to create a framework that allows them to do so constructively.

    In this sense economists are providing a useful service. Sure the purists who want the profession to become more "science" and less "social science" are greatly dismayed, but that is a trade-off for being useful in this particular circumstance.

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  13. The advent of zero hour contracts in the UK fits into the proposed possible responses to the minimum wage legislation, i.e. paying the minimum wage rate per hour, and not having employees present and paid during down time, hence paying the same pay over the week.

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  14. I realize this post is a few days old but, after reading some of the literature provided by the links in the main post and by the other commenters and then coming back to the article, I've been looking at John's notional supply-demand plot and, though I'm not an economist, shouldn't the dotted red line for the price control be to the right of the blue equilibrium dot? That would indicate higher supply in response to fixed higher prices but lower demand for the higher price. Or is the plot indicating the effect of the higher minimum wage (price) so there are more job-seekers (supply) but lower demand (fewer jobs) at the higher price?

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