We find that increases in the minimum wage significantly reduced the employment of low-skilled workers. By the second year following the $7.25 minimum wage’s implementation, we estimate that targeted individuals’ employment rates had fallen by 6.6 percentage points (9%) more in bound states than in unbound states. The implied elasticity of our target group’s employment with respect to the minimum wage is −1, which is large within the context of the existing literature.
We next estimate the effects of binding minimum wage increases on low-skilled workers’ incomes. The 2008 SIPP [Survey of Income and Program Participation] panel provides a unique opportunity to investigate such effects, as its individual-level panel extends for 3 years following the July 2009 increase in the federal minimum wage. We find that this period’s binding minimum wage increases reduced low-skilled individuals’ average monthly incomes. Relative to low-skilled workers in unbound states, targeted individuals’ average monthly incomes fell by $90 over the first year and by an additional $50 over the following 2 years. While surprising at first glance, we show that these estimates can be straightforwardly explained through our estimated effects on employment, the likelihood of working without pay, and subsequent lost wage growth associated with lost experience. We estimate, for example, that targeted workers experienced a 5 percentage point decline in their medium-run probability of reaching earnings greater than $1500 per month.
This is from Jeffrey Clemens and Michael Wither, “The minimum wage and the Great Recession: Evidence of effects on the employment and income trajectories of low-skilled workers,” Journal of Public Economics, Vol. 170, February 2019. The article is gated.
Clemens and Wither explain in the piece the difference between “bound” and “unbound” states. Bound states are states that had a minimum wage that was below $6.55 an hour on January 2008. Unbound states were states for which that was not true. The idea is that the closer the state’s minimum wage was to $7.25 before the federal minimum was raised from $5.15 to $7.25, the less binding was the law.
Here’s the ungated version.
HT2 Jeffrey Clemens.
READER COMMENTS
Kevin Erdmann
Mar 29 2019 at 4:54pm
Thanks for sharing this.
This frustrates me about the minimum wage debate. Whenever I hear people arguing that Econ 101 supply and demand misleads us here and that there are many complications in labor markets that mitigate the downsides, I suddenly see a large elephant walk in the room, which is the fact that the last time we hiked the minimum wage nationally was July 2009. Literally the worst time in decades to do such a thing. And, for all the debate about complications and idiosyncracies in the labor market, there seems to be very little concern about the actual law that was actually passed at a time that was swirling with negative idiosyncracies.
David Henderson
Mar 29 2019 at 9:24pm
You’re welcome, Kevin.
Yes, I think I posted on it in early 2009. It was supremely bad timing for a minimum wage increase, not that there is ever good timing.
Matthias Görgens
Mar 29 2019 at 9:29pm
I guess time of high inflation would be the least bad ones?
David Henderson
Mar 29 2019 at 9:41pm
Exactly.
Thaomas
Mar 30 2019 at 8:21am
While it is obvious that increasing the EITC is a much better way to increase incomes of low wage workers than increasing the minimum wage, it’s too bad the study did not (at least the abstract did not) estimate the income loss to the income gains of those who did not lose hours of employment. Was the total wage bill lower?
Mark Z
Mar 31 2019 at 10:37pm
EITC and minimum wage don’t really seem like substitutes to me. If EITC is a good policy, it’s good regardless of whether there’s a minimum wage, and if minimum wage is a bad policy, it’s bad regardless of whether we have EITC. I’d rather policies be treated atomistically, in part because I don’t think, say, insisting on one policy or the other (e.g., insisting on raising the minimum wage in the absence of more EITC, as a sort of negative hostage, only agreeing to retract one policy in exchange for the implementation of the other) is a productive approach to policy. I suspect it’d provoke a tit-for-tat game of each side implementing bad policies just to annoy their opponents.
Thaomas
Apr 1 2019 at 4:54pm
I see the two as alternatives (except when a minimum wage is being crafted to address a specific monopsony problem) as alternatives because the both seek to raise the incomes of low income workers. (In the monopsony case it removes a growth-reducing distortion.)
The minimum wage is basically a tax on wages that is rebated to the wage earners who retain employment, notwithstanding the tax. It suffers the standard objection to all narrow taxes: it is arbitrary (why pick on employers of low-wage workers to be taxed?) and it has a greater dead weight loss (wealth destroying behavior changes are incentivized) than general taxation that funds an EITC.
Don Boudreaux
Mar 30 2019 at 12:01pm
Thaomas:
You here again assume that the question of the validity of minimum-wage legislation is one that can, or should, be settled by naive cost-benefit analysis: count the dollars gained by workers whose monetary incomes rise because of the legislation against the dollars lost to workers whose monetary incomes fall because of the legislation.
With respect, while this approach seems on its face to be very scientific and objective, in reality it is neither. Below are four of the many problems that I believe are evident with your approach.
First, your approach ignores non-monetary losses and gains unleashed by minimum wages. Such losses are likely far greater than any such gains. The biggest such loss that is missed by your method is the value of the work experience that workers who lose jobs are denied. The loss of current incomes for many of these workers is likely not the most serious cost; the most serious cost is the inability to get job experience and, thus, being cursed to remain longer in the pool of least-skilled workers.
In principle, an omniscient being could attach an accurate monetary value to these losses, but in reality no human being can reliably do so.
Second, your approach ignores minimum-wage-induced changes in jobs’ non-wage characteristics. Many workers whose monetary incomes rise as a result of minimum wages will find that their jobs have become more demanding – their supervisors less tolerant of activities such as personal texting – their employers more reluctant to offer improved workplace amenities such as cleaner break rooms and less harsh workplace lighting. It is practically impossible for third-party observers even to document all such changes in the nature of jobs, and even more difficult to attach to each of these changes a monetary value that must then be subtracted from the higher monetary incomes in order to arrive at a figure useful for accurate cost-benefit analysis.
Third – and least importantly (but it nevertheless warrants mention) – your approach ignores subjective-value differences. Would a suburban teenager’s extra $35 in weekly take-home pay be worth achieving if it comes at the expense of a fall of $30 in the weekly take-home pay of a single inner-city mom?
Fourth, if your cost-benefit method is to be used to determine if minimum-wage statutes (or instances of minimum-wage hikes) are or are not justified, why stop there? Why not agree to let the government, say, attempt to raise the pay of cardiologists by imposing a minimum wage for cardiologists? Some cardiologists, as a result of such government intervention, will see their incomes rise while others will see their incomes fall as they are obliged to pursue some other occupation (which might or might not be in the field of medicine). If the government imposes such a minimum wage for cardiologists and the results are that the total pay of cardiologists rises, would you conclude that a policy of setting a minimum wage for cardiologists is justified?
Or suppose that the government sets a minimum price for the sale of garden hoses, with the empirical result being that the total revenue earned by sellers of garden hoses increases. Would you conclude that this garden-hose policy passes a cost-benefit test?
Saying that ‘we must be scientific and objective and compare the costs of a policy to its benefits’ is much easier than actually carrying out such a comparison. Sometimes such a comparison in real-world instances of policy changes is possible to do in a useful way, but not always. It is not remotely possible for analyzing minimum wages.
Thaomas
Mar 30 2019 at 7:09pm
I suggest that a minimum wage increase is better examined by a “naive” cost benefit analysis than one that looks — even more naively in my point of view — at costs only.
Don Boudreaux
Mar 31 2019 at 7:03am
Thaomas:
Of course no policy should be evaluated exclusively by either its costs or by its benefits, but how does your response here to my comment in any way address the points I there make?
Philip Hand
Mar 31 2019 at 10:25pm
I think I can answer that:
Thaomas suggested a cost-benefit analysis in some terms that we can measure.
You responded that there may be other costs, and claimed not to be able to measure them.
That doesn’t seem like a good counter! If economists genuinely can’t measure things like the costs of being out of the workforce, then I don’t see why any policymaker should listen to their faith-based claims about those costs. If economists *can* measure or estimate them, then they should continue to do so!
But Thaomas’s basic point is obviously correct: any full argument must consider both the costs and the benefits of a policy. In your post you talk only about costs, and explicitly tell us that you can’t measure them. That’s (a) a bad argument because it only addresses one side; and (b) a bad economist’s argument, because measuring these effects is precisely one of the things that economists are good for.
Mark Z
Mar 31 2019 at 10:48pm
I think you’re right, but I think there’s an obvious counter, which is that, as a general rule, the state is inferior at setting prices and determining production levels relative to the market, because market prices aggregate far more information than the state has access to (referring to the socialist calculation debate). For that reason, when the state, using its available measurements, estimates something is overpriced or underpriced on the market, it is more likely than not a false positive, and intervention will turn out to have been distortionary of what were in fact valid market prices.
So, the argument is: what does one estimate is the prior probability that a central planner’s identification of an underpriced or overpriced good is ‘accurate?’ How good does one think – a priori – the state is at aggregating relevant information compared to the market?
Thaomas
Apr 1 2019 at 5:00pm
I think that looking at both costs (employment hours lost, fall in output) and benefits (income increases of some of the low income workers) of a policy is better than looking at only the costs.
Warren Platts
Mar 30 2019 at 4:51pm
Minimum wage hikes are harmless when they are superfluous. Does Minot, North Dakota need a minimum wage hike? Raising the MW to $15/hr doesn’t make much difference when convenience store clerks are getting $20/hr.
If you want to give low-wage workers a raise, don’t hand out bandaids that only treat the symptom of low wages. Address the root cause: systematic crony capitalist government policies that were designed to undermine wages.
Free trade reduces the demand for low-skilled labor. Mass immigration increases the supply of low-skilled labor.
The solution is obvious: end free trade, and end mass immigration. Then wages will go up naturally. There will be no need for minimum wages.
Thaomas
Mar 30 2019 at 7:18pm
Both “mass” immigration (if we ever have it) and freer trade raise the incomes of US residents in the aggregate. It is theoretically possible (what is not? :)) that this increase could be so distributed as not to increase the incomes of low income workers. This can be remedied by a higher EITC or ameliorated, if a higher EITC is politically out of the question, higher minimum wages provided that the overall price elasticity of labor is pretty small, as it appears to be.
Mark Z
Mar 31 2019 at 10:54pm
Isn’t the question of whether minimum wage increases are ameliorative or not precisely what’s in dispute? Moreover, the overall price elasticity of labor isn’t what determines that; the elasticity of demand for labor affected by minimum wage increases is what matters (I would add that the affect of minimum wage increases on prices matter too; if raising minimum wages actually does increases wages of Walmart employees without causing disemployment because the costs are passed on to Walmart customers – also disproportionately poor – the question may still be a wash or worse for poor people).
Referring to Philip Hand’s comment above and my response: it isn’t enough to measure just the cost. That’s a double edged sword though: it isn’t enough to show a lack of disemployment effects to vindicate minimum wage increases; one also has to show that workers accrue gains not cancelled out by price increases, loss of benefits, etc.
Benjamin Cole
Mar 31 2019 at 3:40am
Yes, minimum wages studies. It seems to work like this: We cite the minimum wage studies that affirm our biases.
So, Alan Krueger does a study and finds the minimum wage has no effect on unemployment. The two fellows cited above find an effect.
Same story on Seattle—dueling studies (in a city rapidly transforming from a middle-class city to an upper-class bastion, in a growth economy. Commercial rents in some districts have tripled, and residential rents rising sharply). No matter! Cite the study that confirms your bias!
Beyond that, I am against the minimum wage—as soon as we banish property zoning and decriminalize push-cate, motorcycle-sidecar ad truck-vending.
In every US city I have seen, every effort is made to precent people with little capital from starting up their own businesses, and doing the one thing many people can do: retail. You want to sell hamburgers?–sorry, only in a retail space zoned for it.
Libertarians wear a badge on their sleeve regarding food trucks—but why not anything small that can be sold from the back of a pick-up? And end property zoning, free up people to run business from their homes, front years, garages wherever.
Then we have a Federal Reserve, that as matter of explicit policy targeted nearly a 5% unemployment rate, until recently.
So, no minimum wage and the federal central bank wants one out of 20 who want a job to be unemployed. Let’s see…so, with no minimum wage the labor markets clear…and the Fed is horrified, and tries to loosen up labor markets to get back to 5% unemployment. If you think this is a joke, read the last several years of Beige Books and the incessant wailing about “worker shortages.”
And yes, as a practical matter, there must be border controls on the flow of labor into the US.
An eternal Niagara of cheap labor may be nirvana to some, but it is the fastest way to put AOC in the White House that I can imagine.
vikingvista
Mar 31 2019 at 3:08pm
You know any libertarians who don’t support those things?
Benjamin Cole
Mar 31 2019 at 8:57pm
VV–
I have not heard a prominent libertarian posit that before we eliminate the minimum wage, we should eliminate property zoning and the routine criminalization of push-cart, motorcycle side-car, or truck vending.
I would say “end property-zoning” gets about 1% of the ink (pixels) that the minimum wage, rent control or “completely open borders” gets, in libertarian circles. Probably much less. You can Google Econlog and verify this.
There are prominent libertarians, such as Bryan Caplan, who have made completely “open borders” their signature issue.
I know of no prominent libertarian who has made “complete legalization of push-cart vending” his or her signature issue.
By the way, many cities in India recognize the right of street vendors to exist, and estimates are that 2% of citizens earn a living by street vending—and providing very useful and low-cost services and products to residents.
In a way, I cannot blame libertarians, after all. “Discretion is the better part of valor.”
Besides, who wants a 20-story condo, with ground-floor retail, a 24-hour bar, a 7-11 and a massage parlor, to open up across the street from their single-family detached home?
robc
Mar 31 2019 at 9:35pm
as I have pointed out multiple times, you are wrong. For some definition of prominent.
And as to your last point, I have said the reason I oppose zoning is that I want a pub on my street.
Benjamin Cole
Mar 31 2019 at 11:38pm
I will hoist a beer to you in your pub.
But Google around—I am not wrong.
Hazel Meade
Apr 3 2019 at 12:00pm
So does ending property zoning need to come after or before ending the welfare state? Because I am told THAT has to happen before liberalizing immigration laws. We have to get the order correct people!
MarkW
Apr 1 2019 at 6:04pm
Beyond that, I am against the minimum wage—as soon as we banish property zoning and decriminalize push-cart, motorcycle-sidecar ad truck-vending.
I really don’t see the dependency. High minimum wages and bans on informal retail both have the unfortunate effect of making low-skill, low-wage work harder to find. I would like to see both eliminated, but getting rid of either would be a step in the right direction — there’s no reason to tie them together. Similarly, I’d like to get rid of zoning and other rules that make things like tiny house communities illegal and raise living costs for low-income people (and, as you can see, other libertarians agree):
https://reason.com/reasontv/2014/08/07/jay-austins-beautiful-illegal-tiny-house
Phil H
Mar 31 2019 at 10:14pm
I think the key mistake here is the uncritical assumption that less low-paid employment is a bad thing.
I certainly understand the arguments for this – that employment tends to improve people’s quality of life and provide them with better future prospects.
However, there are some counterarguments to consider. (1) Minimum wages could boost technology investment by reducing reliance on cheap labour. (2) Minimum wages may be taking the place of the depleted labour movement – now that unions lack the power they used to have, regulation is the first line of defence against exploitative employers. (3) Minimum wages may be a way of reducing local inequality, as a way of boosting human dignity. (Anecdotal: I live in southern China, where third-world-style poor people often live and work in very close proximity to first-world-style rich people, and the effects can be quite disturbing.)
None of these are knock-down arguments, by any means. But the simple statement “Minimum wages meant that fewer people had (crappy low-paid) jobs” does not constitute a full argument in itself.
Mark Z
Mar 31 2019 at 11:10pm
The substitution of technology for cheap labor is not inherently good. If you have to force up wages in order to make a technology cost-efficient, then that’s a pretty clear sign that that technology is not more cost-efficient than the labor for which it’s being substituted.
You’re begging the question. If employers are ‘exploitative’, e.g., paying them below their marginal productivity because the market isn’t competitive, then minimum wage increases won’t cause disemployment; if minimum wages cause disemployment, this suggests markets are competitive and employers aren’t exploiting their workers, but simply paying them the market rate, and could not pay them more while staying competitive.
How is being unemployed and earning $0 an hour less undignified or less causative of local inequality than earning a low wage? If anything, things probably go in the opposite direction: unemployment doesn’t just reduce your current wages, it reduces your future wages by reducing your work experience. Allowing low wage labor also allows for the accretion of work experience toward higher wage labor in the future; in the long run, if minimum wage laws reduce employment, they probably exacerbate inequality.
Mark Z
Mar 31 2019 at 11:12pm
Well, I numbered the paragraphs 1, 2, and 3, and the numbers disappeared. That’s kind of vexing.
Phil H
Apr 2 2019 at 3:58am
Sure, all of those are valid responses. I don’t think any of them should determine the argument. But nor do I think “low wage employment went down” should determine the argument.
Technology – blind investment in technology isn’t good, but an awful lot of technologies seem to have been more expensive than labour when they were first introduced (think spinning Jennies, railroads, and all that government-funded physics that happened in the 20th century and made today’s world possible). If a market is *perfectly* competitive, and a new technology causes a short term increase in cost, no new technologies would ever be introduced.
Exploitative companies – they’re designed to be exploitative. This is just the literal truth about companies: Their goal is to extract as much surplus value from their workers as possible. It’s not an insult, it’s just how the capitalist market economy works.
Radical inequality – Sure, as I noted, there is a cost to unemployment. But I think there’s also a social cost to radical inequality. Only looking at one of those costs does not constitute an argument.
Comments are closed.