50 Years of Research on the Minimum Wage

Joint Economic Committee Republicans
February 15, 1995

Introduction

For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify. Were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour.

Historically, defenders of the minimum wage have not disputed the disemployment effects of the minimum wage, but argued that on balance the working poor were better off. In other words, the higher incomes of those with jobs offset the lower incomes of those without jobs, as a result of the minimum wage [See, for example, Levitan and Belous, (1979)].

Now, the Clinton Administration is advancing the novel economic theory that modest increases in the minimum wage will have no impact whatsoever on employment. This proposition is based entirely on the work of three economists: David Card and Alan Krueger of Princeton, and Lawrence Katz of Harvard. Their studies of increases in the minimum wage in California, Texas and New Jersey apparently found no loss of jobs among fast food restaurants that were surveyed before and after the increase [See Card (1992b), Card and Krueger (1994), and Katz and Krueger (1992)].

While it is not yet clear why Card, Katz and Krueger got the results that they did, it is clear that their findings are directly contrary to virtually every empirical study ever done on the minimum wage. These studies were exhaustively surveyed by the Minimum Wage Study Commission, which concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%.

The following survey of the academic research on the minimum wage is designed to give nonspecialists a sense of just how isolated the Card, Krueger and Katz studies are. It will also indicate that the minimum wage has wide-ranging negative effects that go beyond unemployment. For example, higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income. For many workers this is a very bad trade-off, but one for which the law provides no alternative.

Exposing the ‘blessings of the minimum wage’ fallacy – AEI

Source: Exposing the ‘blessings of the minimum wage’ fallacy – AEI

As a result of a federal law mandating all workers get paid a minimum of $15 an hour, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant would make $310 in additional income every week (ignoring taxes). Alex would spend that additional weekly income of $310 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $310 from Alex’s additional spending now have additional income and profits every week, and they can spend some of that additional income and profits on goods and services. Alex’s additional weekly income therefore ripples through the local economy with an amazing multiplier effect that almost magically increases spending and income throughout the local economy. The pro-minimum wage crowd points to these many positive income effects from the $15 minimum wage and Alex’s additional income, and many might even suggest that a minimum wage above $15 an hour would create even greater and more positive benefits for workers like Alex and the local merchants who would be the beneficiaries of an even higher minimum wage like $20 or $25 an hour.

But let us take another and closer look at the situation. The minimum wage crowd is at least right in its first conclusion about Alex’s spending. The public policy of artificially raising wages through government fiat will mean more business and greater sales revenues for some local merchants. The local merchants will be no more unhappy to learn of the magical spending from a $15 an hour minimum wage law than an undertaker to learn of a death.

However, we haven’t yet considered the situation now facing Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant where Alex works. As a result of Alex’s good fortune to receive $310 in extra income every week as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $310 less every week because she has to pay Alex out of her own income or profits. The Johnson family now has to cut back on their household spending by $310 every week that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $310 each week comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. If we consider that Alex and the Johnson family are a part of the local community, the community’s income hasn’t changed – rather, there’s only been a transfer of income from the Johnson family to Alex; but no net gain in community income, wealth, or prosperity has been achieved.

Debunking Minimum Wage Myths — Radical Capitalist

In the United States, I have noticed increasing amounts of local municipalities instituting minimum wage laws. This is happening in many states across America, with many people supporting it in the hopes of bettering workers’ wages. Unfortunately, minimum wage is economically dysfunctional and unethical, yet so many people who lack economic or ethical knowledge are […]

via Debunking Minimum Wage Myths — Radical Capitalist

Conflicting Visions – Walter E. Williams

Source: Conflicting Visions – Walter E. Williams

Let’s look at a policy pushed by advocacy groups, politicians and poorly trained, perhaps dishonest, economists — mandated increases in the minimum wage. Nobel Prize-winning economist Paul Krugman claimed in a 2014 interview with Business Insider that there is actually not much risk of significantly higher wages hurting workers. He argued that low-wage workers are in non-tradable industries for which production cannot be moved overseas and are in industries in which labor cannot be easily replaced by technology. Krugman’s vision is one that my George Mason University colleagues and I try to correct.

Those who argue that the price of something can be raised without people having a response to it have what economists call a zero-elasticity vision of the world. For them, labor prices can rise and employers will employ just as much labor after the price increase as before. There is no evidence anywhere that people have no response to the change in price of anything. Plus, the longer a price change remains in effect the greater the response to it.

Let’s examine Krugman’s assertion that low-skilled labor cannot be easily replaced by technology. Momentum Machines has built a robot that can “slice toppings like tomatoes and pickles immediately before it places the slice onto your burger, giving you the freshest burger possible.” The robot is “more consistent, more sanitary, and can produce about 360 hamburgers per hour.” Let’s Pizza is a pizza-making vending machine from Europe that can make four different kinds of pizza in about 2 1/2 minutes.

Kay S. Hymowitz’s recent article “The Mother of All Disruptions,” in a special issue of City Journal, gives numerous examples of jobs loss through technology. According to The New York Times, 89,000 workers in general merchandise lost their jobs between the beginning of November 2016 and the end of March. And it’s not just the U.S. where robots are replacing labor. Foxconn’s iPhone-making facility in China has replaced 60,000 workers with robots.

The economic phenomenon that people who call for higher minimum wages ignore is that when the price of anything rises, people seek substitutes. We see it with anything. When the price of oil rose, people sought ways to use less of it through purchasing more insulation for their homes and fuel-efficient cars. When the price of beef rose, people sought cheaper substitutes such as pork and chicken. The substitution effect of price changes is omnipresent, but do-gooders and politicians seem to suggest that labor markets are an exception. It’s bad enough when do-gooders and politicians have that vision, but it is utterly disgusting and inexcusable for a trained economist to buy into that zero-elasticity vision.

Seattle’s $15 Minimum Wage May Hurt Mentally Disabled

Source: Seattle’s $15 Minimum Wage May Hurt Mentally Disabled

Let’s be clear for a moment — many disabled workers will be unaffected. Physical disabilities may require accommodations, but many of those workers are making well above minimum wage as it is. Those that aren’t do have the potential to learn valuable skills that would make them employable otherwise.

No, this pretty much impacts only the mentally disabled.

At $15 per hour, employers are going to require more from their workers, especially with it being such a huge jump in wages. They’re going to expect people to take on more tasks than those normally associated with minimum wage work.

“But the Americans With Disabilities Act says … “

Doesn’t matter. If the work requires ability that mentally disabled workers can’t provide, the ADA doesn’t mean squat. The ADA calls for “reasonable accommodations” for disabled workers, but if the job requires something that the worker can’t do and there’s no accommodation possible, the ADA allows the person to not be hired.

Seattle thinks it’s doing wonderful things for all workers by refusing to permit employers to dip below the mandated minimum wage. But now the mentally disabled who only want to work, who only want a sense of independence, are out of luck.

‘Free lunches’ like the $15 minimum wage may hurt the people they’re meant to help – The Washington Post

Source: ‘Free lunches’ like the $15 minimum wage may hurt the people they’re meant to help – The Washington Post

On this and other labor issues, says Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, “We need to be debating whether a cost-benefit test is passed, something on which reasonable people can disagree.” Instead, Strain says, a lot of thoughtful, well-meaning people on the left seem to be looking for a free lunch — that is, for policies with all winners, no losers and no costs. (Kinda like the right’s attitude toward tax cuts, I might add.)

Here I confess that I’ve been guilty of this. I’m often drawn to studies and stories about pro-labor policies that “pay for themselves.” And while there often is a pro-business or macroeconomic case to be made for policies that help workers, I pledge to be more mindful about potential unintended costs as well.

Readers, I hope you’ll hold me to this. And anyone else peddling free lunches, too.

Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research

Source: Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research

So, for my friend who claims that the vast bulk of the research shows benefits from increasing the minimum wage, here’s the abstract:

We review the burgeoning literature on the employment effects of minimum wages – in the United States and other countries – that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few – if any – studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.

Sorry, Advocates, The Minimum Wage Debate Is Not Over

Source: Sorry, Advocates, The Minimum Wage Debate Is Not Over

Advocates on both sides of the fence like to imagine that the empirical debate over minimum wage impacts is over. Unfortunately for them, the academic debate over the evidence is still very much alive. The latest entry comes from Jeffrey Clemens, who defends his earlier research with follow-up work. In particular, he makes the case that focusing on within-region variation is a worse approach and that if anything, states affected more by the minimum wage had bigger Great Recession shocks than others. There is also research from Jonathan Meer and Jeremy West, and the Seattle study has showed that the small wage hikes (no, it’s not a $15 minimum wage hike yet, it’s only begun to be phased in) concluded “Seattle’s low-wage workers show some preliminary signs of lagging behind similar workers in comparison regions”.

On the other side of the aisle, you find people who seem to believe that it is impossible that small to modest minimum wage increases do not decrease employment. As someone who is critical of the minimum wage and believes it should be zero, let me tell you this is incorrect. It is entirely possible that small minimum wage hikes in some places in some times can have no effect on employment, and it would not overturn everything we know about economics.This is absolutely an empirical question.

First off, however likely or unlikely it is that monopsony power is a widespread economic phenomenon, firm market power surely exists in some places and at some times. Quasi rents and relatively fixed ratios of capital to labor may also exist. Employers may be willing to give up a piece of their quasi rents without really figuring out how to run their restaurant with fewer workers. Firms may also take away certain work perks, which could be something as qualitative as pushing management to make sure workers aren’t slacking, or being generous with overtime pay and breaks. What’s more, small minimum wage hikes often effect very few workers, and so you may only need a few of these other mechanisms to operate in very small ways to offset the effects.

But accepting the possibility of such mechanisms, or the possibility that small hikes do not appear to hurt employment, does not mean you have to agree the minimum wage is a good idea. So those who don’t like the minimum wage should not be afraid to admit this.

For on thing, the minimum wage can be bad for reasons other than it leading to job losses in the area that it is implemented. For example, both the Seattle study and another new study showed that minimum wage hikes lead to low-skilled workers looking for work outside of the affected area, either by moving or commuting. What could be happening is that forced to offer higher wages, skilled workers from outside the area move in to compete in the lower skilled labor market. For example, someone with a bachelor degree moves into a city with a minimum wage hike to be a barista, crowding out low skilled workers who must then commute or move out of the city. Notice there is no net employment effect in the affected area, yet low-skilled workers are left worse off.

You also might object to the minimum wage because it reduces the employment boosting effects of the EITC, and you favor an EITC and no minimum wage as the optimal way to help low-skilled workers.

Finally, you might place the minimum wage research in the wider context of labor demand research. It is not anti-empiricism to say that the minimum wage specific research is the only empirical evidence that matters. People who seem to be making “faith based appeals” to Econ 101 may instead be considering the wider empirical literature on labor demand. Personally, I find the minimum wage literature to be informative, and on net leaning towards showing job losses. But the wider labor demand literature is not irrelevant. It’s important though for those who think this to not simply make faith based appeals to downward sloping labor demand. How much it slopes downward, and at what wages, is an empirical issue. If you are basing this on a wider literature, lets discuss that wider literature.

So this is what I would implore to both sides of the debate. Minimum wage proponents, including some economists, vastly overstate their case when they say there is absolutely no evidence the minimum wage leads to job loss. I entirely respect the opinion of people who look at the evidence and decide that on balance it shows small to no job losses at the minimum wages we have seen. Some labor economists much smarter than me hold this belief, and some labor economists much smarter than me disagree. There is room for reasonable disagreement. But there is not “no evidence”.

On the other side, you should admit that it is possible that the small minimum wage hikes we have seen have not reduced employment in the affected areas and that this is an empirical question. If you are unpersuaded by the existing empirical literature and are appealing to the wider literature on labor demand, then tell us that and don’t simply appeal to basic supply and demand, and then talk about that literature and why you find it persuasive. Econ 101 tells us supply and demand curves exist, but it doesn’t tell us what their slopes are.

Overall, both sides need more humility. The debate is not over.