Sunday, March 17, 2019

Minimum Wage Debate: Meer Versus Galbraith

If you want to see two economists debate the minimum wage, this debate between Jonathan Meer and James Galbraith is one of the best you could find. That's not to say it's an even debate. I think Meer just trounces Galbraith, whose strategy appears to be "Look extremely (unduly) confident to a room full of starry-eyed undergraduates who will credulously swallow whatever an authority figure tells them. Make ridiculous claims in a folksy 'of course, we all agree to this' tone of voice, and hope nobody checks." Galbraith's performance here is a good example of what it looks like when you're trying to "win a debate" without actually bothering to discuss the material. I'll comment on some of the arguments both men make in the video.

Galbraith goes first in giving his opening statement. He is advocating for a $15/hour minimum wage at the national level. What's very frustrating is that he really gives no accounting of how his advocacy changed from $12/hour a few years ago to $15/hour now. He mentions the change. He acknowledges that he was plugging for $12/hour previously, but changed to $15. Like I've argued before, those numbers have to come from somewhere. It must be the solution to some kind of complex optimization problem. There needs to be a reason why the right number is $15, and not $5 or $50. It can't simply be, "Meh, we picked this number because it's a nice, roundish number and it's politically feasible." Listening to his discussion of how he got to $15, it's pretty clear Galbraith came to it by the flippant approach, not the mathematical one. It's disappointing that an economist would take this approach and basically ditch the learnings of the rest of his field. Listen to the entire debate; Galbraith employs very little in the way of economic reasoning, and when he does he gets it wrong.

A few specific claims. Around the 10 minute mark, he starts describing who the "benefits" will accrue to...but this assumes there will be benefits. The Seattle studies imply that low-wage workers lose income on net when you raise the minimum wage to $13/hour; cuts in working hours more than offset the gain in wages. Presumably this becomes more acute if you go all the way to $15/hour (and more so in lower-income areas not currently experiencing an economic boom, unlike Seattle). Around the 13 minute mark he claims that McDonalds is "highly capitalized" and thus unlikely to lose workers. Okay, but what about low-capitalization non-chain restaurants? Is the goal of this policy to drive those out of business and drive the workers to places like McDonalds? At about the 14 minute mark he discusses how low-wage workers are often on various forms of welfare. He wrongly describes this as a "subsidy" to the employers, as if the employers would simply pay the difference if the government stopped paying these people. This has always been a bad argument. If you make "not working" a more attractive option, it means employers need to pay even higher wages to attract workers. Increasing a business's labor costs isn't a subsidy, it's a tax. Galbraith even gives a number; supposedly raising the minimum wage would save $40 billion in welfare costs. Once again, this must be assuming that the minimum wage actually increases earnings; if it doesn't, if it in fact throws more people out of work or results in cutting their working hours, those people will earn less and require more welfare. I don't know how the $40 billion number was arrived at, but it must be making heroic assumptions about how the minimum wage actually works.

At 13:30 he gives an incredibly crude summary of the empirical literature on minimum wages: that there's "no effect" on employment. No effect? No matter how high we raise it? As I've said before, this goes well beyond what even most pro-minimum wage economists claim. Arin Dube says to target half the median wage, which is well under $15/hour in every state. This is the same crude summary of the empirical work employed by politicians and other policy advocates. It's a shame to see an actual economist doing it.

At 15:30 he discusses how a minimum wage incentivizes "better business practices." This is another silly argument that assumes business people will only do what's best for them if we force their hand. If these better business practices are there for the taking, business owners will already be discovering and implementing them. Necessity can be the mother of invention, for sure, but imposing economic duress on companies unless they implement "better business practices" means some of those companies will go out of business. At some point in the debate, you catch Galbraith admitting that (paraphrasing, not quoting here) "Sure, you'll see some disruption. The whole point is to change the structure of the labor market." It just seems incredibly reckless. He flippantly admits that, sure, some of those nasty consequences might show up, but then assumes it will magically work out for the best.

At ~16:20 he argues that if we raise the minimum wage, those jobs that are currently done by immigrant laborers will instead be done by Americans. That seems extremely unlikely. Some of those jobs will disappear or be replaced by capital. Galbraith makes the argument that "unit prices" can increase by a small amount to absorb the cost of labor increase. This commonly repeated argument seems 1) wrong and 2) beside the point. It's wrong, because increasing the unit price could mean losing a lot of customers. I don't get the impression that Galbraith has a sophisticated price-elasticity calculation in mind. It's beside the point because raising the unit price doesn't fundamentally increase the marginal product of an employee. Raising the unit price might mean that the business now technically has enough to pay a higher minimum wage, but it still might not make sense to hire, say, an inexperienced dishwasher at $15/hour. Prices don't work like that. Raising the unit price doesn't proportionally raise everyone's marginal product. It can still make sense to lay off low-skilled workers and replace them with capital or skilled workers.

Meer starts around the 18-minute mark. He describes the minimum wage advocacy, particularly the "fight for $15" variety, as self-congratulatory hashtag slactivism. (This might have been the first place I heard that term. I like it!) He makes the extremely valid point that the minimum wage is an incredibly blunt instrument. He gives some useful figures here. Just 14% of those earning the minimum wage are living below the poverty line. He describes the results of a CBO study: at a $10 minimum wage, for every dollar that accrues to a low-income family, $6 accrues to non-low-income families. If this were a direct cash transfer program, those results would be shameful. It's no less so because the transfer happens off the government's official books. If the goal is to actually help poor people, there are far better tools for that.

Around 22:30 he discusses his own research, which shows that the minimum wage has a subtler impact than what most studies look for. They work by slowing the rate of job growth (which Meer's research was able to detect), rather than instantaneously casting people into unemployment (which is what traditional studies attempt to detect). This is important, because it casts doubt on a lot of previous research on the minimum wage showing "no effect" on employment.

Meer gives a great analogy. He describes throwing bricks into a pool and attempting to measure the water level. The measurer can't detect the tiny difference in the water level after throwing in a single brick. His measuring stick isn't precise enough, there are too many waves, and so on. The measurer keeps trying to measure the impact of each single brick (not all the bricks together, just one at a time) and determines that bricks don't displace water. Then, having "discovered" this scientific principle, says, "Okay, let's throw in a boulder, because rock simply does not displace water." He's making the point that people are making a mistake when they place too much faith in the empirical work on the minimum wage, particularly when they extrapolate those "lessons" well beyond anything that's actually been tested. He's also making the point that empirical work measures the effect of small differences in the minimum wage; it generally does not measure the full effect, with the counterfactual of "no minimum wage" as the comparison group. So we simply have no idea how much harm it's currently doing.

He points out that the true "minimum per-hour labor cost" is more like $20/hour when factoring in unemployment insurance and other costs. An employee costs more than his hourly pay, for sure. He criticizes the "phase-in" of minimum wages as a way of trying to disguise the true cost. I think he has a good point. If all these wonderful things would happen when we raise the minimum, why not have those things happen now? I think Bryan Caplan nailed this a few years ago. The phase-in makes the job losses less blatant and harder to detect. Phase-ins are a cynical ploy to hide the cost of government policy.

Meer points out that some unions are trying to legislate exceptions for their members in places where the minimum wage is too high. That's a wonderful way of eliminating the competition! It's also an implicit admission by the advocates themselves that the minimum wage makes it harder to find work, assuming you raise it high enough. He points out that only 6% of young black men (not in prison or the military) have a full-time job. And he mentions some groups that work with prisoners to try to get them employment; these people are begging for an exemption from the minimum wage, because they know no employers will give ex-cons a chance at $15 an hour (even at $7.25 an hour).

Galbraith responds. He makes the stunning argument that voters will accept a minimum wage increase but will not accept higher taxes to pay for a welfare state. He says something about how voters work hard for their money, and they resent having that hard-earned money taken from them. I was really taken aback by this argument. He's basically admitting that voters will reject a policy when you make them confront the true costs. This bites a huge bullet. He's admitting that he's trying to hide the unpalatable costs of his pet policy from an unobservant public. Answering the argument that "it's everyone's responsibility to help the poor; we can't just heap the responsibility on employers", he responds by saying "that's McDonalds' problem" if it's costly to pay someone a higher wage. A minimum wage would be "self-enforcing", and "It's not the government's problem" to worry about the higher costs to employers. I actually think this is a truly dishonest way to conduct government programs. Contra Galbraith, I think all welfare programs should be explicitly on-budget. The government should be directly taxing citizens to cut checks to other needier citizens. Various labor laws (like the minimum wage and various mandatory benefits laws) attempt to do this transfer off the books, the dishonest way. Make it transparent, so the voters know what they're actually paying. A transfer that happens off the books is still a transfer. It still represents a cost to taxpayers (possibly with an offsetting benefit, possibly not...naturally there are winners and losers), it just doesn't happen to show up on the tax bill. Galbraith also makes the bizarre point that welfare states require an expensive bureaucracy. But we already have such a bureaucracy, which keeps track of people's earnings over time and makes payments that are conditional on past contributions. There's no additional expense to do something like Meer is proposing. In fact, we could easily make the existing welfare state less expensive and more well-target to helping the poor if we made it more contingent upon actual needs (rather than being an entitlement for old people). The bureaucratic expense point is a whopping non sequitur.

There is a theme here that I've seen elsewhere with Galbraith's arguments. In an Econtalk interview, Russ Roberts challenges Galbraith's support for Social Security. Galbraith claims that the system is very fair and reasonable, which is why it's so popular. Roberts asks Galbraith what percentage of the U.S. workforce believes (incorrectly) that their contributions are being set aside for them. His point is that the popularity of the program is built on a lie. Those contributions aren't being set aside for each worker's later retirement. The federal government is spending that revenue immediately. Galbraith totally dodges the point. ("That's a polling question; I'm not a pollster.") This is a shameful evasion. If Galbraith wants to claim a program is popular, he should acknowledge that its popularity is built on a misconception (perhaps a deliberate lie). I think he's doing the same thing with the minimum wage argument. It's actually pretty brazen of him to admit that voters wouldn't accept the minimum wage if it were converted to some kind of direct tax-and-transfer program. Apparently he's okay with keeping the public in the dark if it gets him the policies he want. That's fine. If that were the only way to get my favored policies, I'd be very tempted to plug my nose and do the same. But he shouldn't be appealing to the popularity of these programs if they're sold in such a dishonest way.

Galbraith makes the absurd "multiplier" argument around the 1 minute mark. Put money into the hands of low-income people, the thinking goes, they go to stores and spend it, and there is thus more money that businesses can spend on workers' wages. When he gets a chance to respond, Meer lampoons this as a "perpetual motion machine." He points out that this argument doesn't have any kind of internal solution. That is (once again) there's no reason why this works for $15/hour, but not $50 or $1,000. (Galbraith cuts Meer off when he makes this perfectly valid point, saying "No, that's not true..." but then trails off and makes a completely different point.)

Galbraith attempts a response to Meer's question about "Why throw the bricks in one at a time? Why not all at once?" Galbraith absurdly claims "Because I'm a moderate. Because in many ways, I'm actually a conservative." He says that doing a slow phase-in would give people time to adjust and give policy makers a chance to reverse course if it turns out they'd made a mistake. I wish he would state more clearly what kind of real world evidence might convince him he'd made a mistake. He should pre-commit to some kind of test that proves the minimum wage isn't working. (After saying the phase-in gives us time to reconsider, he is quick to point out that he doesn't think raising the minimum wage is a mistake.)

Around the 35:50 mark, Meer mentions Arin Dube's recommendation of setting the minimum to half the median wage. Once again, $15/hour is well above the median in any state. Galbraith is simply going way beyond what any sensible economist, even pro-minimum wage economist, has proposed.

Around the 40 minute mark, Meer points out the weirdness of the living wage argument. This  "needs-based" theory of wages implies that an employer is responsible for paying a worker more if, say, a spouse loses his job or dies. I pointed this out in a recent post: it's a terrible idea to treat employers as all-purpose social insurers like this, with an open-ended obligation to meet the needs of their employees. (Should they be subject to the kind of reserve regulations of actual insurance companies? Should they be able to charge their employees a premium, like real insurers do?) Even forgetting for a moment how thoroughly this would screw up the labor market, it just seems absurd on its face.

Galbraith misrepresents the empirical work on the minimum wage around the 46 minute mark and claims that Meer's very novel research is "just one study." This is pretty obtuse, because several other studies had duplicated his work by then. Also, it misses the basic point, which is that Meer's work shows that the dominant paradigm for picking up disemployment effects inherently misses the main effect (slower job growth, rather than instantaneously increasing unemployment rates).

The question-and-answer period starts around the 51-minute mark. I can't hear the original question, but Galbraith's response is incredibly arrogant. "The premise that you state is incorrect. Businesses hire whom they need in order to make the sales they expect to make." I'm just rolling my eyes at this, because Galbraith has completely ditched the economic way of thinking for...something else. Oh, really? There's no accounting for labor costs? No business owner every decided against a venture because the underlying expenses made the profit margins to narrow? There's no way that increasing labor costs (usually the highest or second highest expense for a business) can turn a profitable venture into a loss? He again appeals to the ridiculous "multiplier" argument. He then seems to backtrack and says "I'm not saying nothing would change. We're making major changes in the wage structure of the economy." Okay, so we're overhauling the low-skilled labor market, and some places will go out of business while others expand, but we can be totally sure that this won't affect net employment in any substantial way?

At 56 minutes, Galbraith straw-mans Meer's paper as a "Simple economic model with a downward-sloping demand curve and upward-sloping supply curve." When Meer gets a chance to respond, he points out that his paper actually goes beyond the simple econ 101 model and discusses long-term growth in jobs. It allows for the kinds of frictions that simple economic models might assume away. It builds in the possibility that adjustments can take time. Galbraith has simply not grasped this or decided not to address it.

Around the 58-minute mark there is a discussion about Greece. Apparently 24-year-olds are exempt from the minimum wage, which kicks in in full force promptly at age 25. Meer references a paper that demonstrated a significant jump in unemployment at age 25. Galbraith, after an emotional and totally unempirical recounting of the Greece story, seems to agree with Meer. "Oh, sure. That absolutely happens. When they turn 25, they sack them." Okay. But weren't you just telling us that there are enough jobs to go around for everybody? The economy can somehow sustain keeping everyone employed when you subject them all to the same minimum wage, but suddenly has less demand for total workers when you exempt some of them? This contradicts his earlier story, where employers just "decide" how many people they want to hire to meet the sales targets they want to hit. Maybe Galbraith could justify this with some weird assumptions about the demand curves for low-wage labor, but the onus is on him. (What happens when you subject everyone to the minimum wage, but then you exempt one person? Ten people? One percent of people? How does this cast people out of work, when exempting nobody leads to full employment?)

There is an exchange starting around 71:30. Meer points out that transfer programs tend to have phase-outs, which result in very high marginal tax rates for low-income workers. (This piece by John Cochran at his blog The Grumpy Economist is probably the best discussion I have ever seen of this topic.) He is reiterating that welfare is not a subsidy to employers of low-wage workers. "Employers have to pay more, not less, to get people to work" under these welfare schemes. Once again, the "subsidy" argument is exactly backwards. Galbraith misses the point: "As far as the rest of his point, well if you followed it, you have a more subtle mind than I do." It's weird, because Meer's argument is not at all hard to understand. Galbraith is just being dense, hoping that some people in the audience will side with him. He offers a quote by Keynes about logicians tying themselves into knots, lacking the common sense to cut through their own casuistry. It's unfortunate that he doesn't even try to respond to the point in any substantive way. Very poor form on Galbraith's part.

There is more, but I think I've picked out the highlights and major themes of the debate. Why should I bother with this? So an old man made some bad arguments about the minimum wage once, so what? Actually, I think the way Galbraith makes his argument is similar to the way most politicians and other policy advocates make their arguments: a near total absence of economic reasoning, a distortion of the empirical record on the minimum wage, an extrapolation of empirical results far beyond what's appropriate (a $15/hour minimum is a much larger change than almost anything found in the empirical literature), assurances that everything will work out, moral scorn heaped on employers of low-wage earners. I criticized Dube's written testimony in a recent post, but I can at least see the hand of a competent economist in that document. Galbraith seems to be denying the usefulness of economic reasoning altogether, and he winds up saying things that don't make any sense. I've seen good and bad versions of this kind of argument, which challenges or outright denies the usefulness of economics as a science. The good version offers a kind of specific critique of economics, challenging some assumption on empirical or logical grounds and suggesting an alternative theory. The bad version just jettisons economic thinking in general and uses the now thoroughly unconstrained space of ideas to just say anything. Unfortunately, Galbraith does the latter.

If you think I'm being unfair, I encourage you to watch the entire debate. If there's a more charitable interpretation of what Galbraith is doing, I'm open to hearing it.

Thursday, March 7, 2019

What Pro-Minimum Wage Economists Say

I recently came across this excellent document by Arindrajit Dube. I was curious about what pro-minimum wage economists actually think. How do they sell a policy that seems so at odds with a straightforward application of economic theory? The document is Dube's written testimony to the U.S. Senate Committee On Health, Education, Labor, and Pensions. For me, it serves a dual purpose. It is 1) a brief literature review on the empirical effects of the minimum wage and 2) the arguments that pro-minimum wage economists present to politicians. Number 2) is important because presumably this is what politicians are referring to when they say "minimum wages don't cost any jobs" or that it puts money into the hands of poor people. When politicians say such things, I like to know where they are getting it from so I can somehow respond. (It's hard to respond to a claim that's made up on the spot, pulled out of thin air.) In the future, I'll refer to this document as the presumed justification for such claims.

[For example, Illinois recently passed a minimum wage bill, and state representative Will Guzzardi said in justification: “Raising the minimum wage has no net effect on employment, it doesn’t drive jobs out of the state...All it does is put money in people’s pockets who need it." We will see that this is not a fair representation of the research, and it's not even what pro-minimum wage economists say.]

There's no substitute for reading the Dube document in full, but you should know that there are meta-studies that reach the opposite conclusion. I recommend the book Minimum Wages by Neumark and Wascher. Here is a long paper by the same pair of authors, if you don't want to shell out for the actual book. And here is a summary of their conclusions in a final chapter of Minimum Wages:

This is a contentious field. There seems to always be someone reading the same set of papers and coming to the opposite conclusion. Read the Dube document and the Neumark/Wascher meta-analyses with some skepticism.

What follows are my reactions to the Dube testimony.

Section I.A: Rising Inequality

The first section past the introduction starts with: "The minimum wage has failed to keep pace with productivity, while top pay and corporate profitability have grown rapidly." This is a statement about how inflation has lowered the real minimum wage; keeping the real minimum wage high would require indexing it to inflation. It strikes me as incredibly loaded language. The word "failed" implies that there is some natural law or some inherent justice in keeping the real minimum wage fixed. Dube attempts to argue this further along in the document, but to open with this line is to admit to the author's bias. And the comparison to top pay and corporate profitability is irrelevant. The appropriate prevailing wage in the low-skilled labor market shouldn't necessarily move in tandem with rising pay of top-executives. The former could be relatively flat, while the latter could be increasing because of increasing firm size or the increasing importance of top executives.

Dube admits as much a couple pages down (page 5):
It is quite remarkable that had the minimum wage kept up with overall productivity, it would have been $22 per hour in 2011. Had it kept up with the growth in income going to the top 1 percent, it would have been even higher, at $24 per hour; and the wage would have exceeded $33/hour at its peak in 2007.
This evidence does not suggest that the minimum wage should be increased to $22 or $24 per hour.
Emphasis mine. The first paragraph is unfortunate, because it suggests that the minimum wage should be raised very high. Many readers will read this without the important qualifiers in the next paragraph. Politicians will use the first part as intellectual firepower to implement a higher minimum wage without necessarily disclosing the second part.

There is some discussion of the minimum wage "decreasing inequality." This seems quite implausible given the small number of people for whom the minimum wage is actually binding. The Bureau of Labor Statistics reports that it's only about 2.3% of workers. Notably, this is down from the previous year, and down from 13.4% in 1979; this jives with Figure 3 in Dube's testimony, which shows the real minimum wage declining over this period. Presumably, the real minimum wage becomes less and less binding as it decreases. A minimum wage that is binding on more workers means wages should be higher for those workers than otherwise, but it also means that those workers will work fewer hours (assuming they keep their jobs), and the loss of hours could completely offset the wage increase (as happened in Seattle recently). It's not clear a priori what effect this would have on the income distribution. Dube cites some literature that attempts to measure effects on income inequality. There is lower tail inequality, measuring the ratio of the 50th percentile to the 10th, and upper-tail inequality, measuring the ratio of the 90th percentile to the 50th. Dube is citing literature that shows that the 50/10 inequality "improves" with a higher minimum wage. He concludes this section by saying,
To sum up, while there is some scholarly disagreement about the exact magnitudes of the impact of minimum wages on inequality, we know that the decline in the real minimum has played an important role in increasing inequality in the bottom half of the wage distribution, especially for women.
Um, no. This is an open question, and Dube is overstating the consensus. See the table above from Minimum Wages, particularly the part about the income distribution. Neumark and Wascher reach the opposite conclusion. Apparently many studies in this vein fail a falsification exercise:
That is, if theory predicts an effect of x (the minimum wage) on y (lower-tail inequality), and such evidence is found, researchers often also explore whether there is an effect of x on another variable, z (upper-tail inequality), which is conceptually related to y but for which theory does not predict an effect on z.
In other words,
"My statistical model says that minimum wages decrease inequality!"
"Yeah. You're statistical model says all kinds of crazy things. Shall we take them all together? Or shall we pick and choose?" 
In fairness to Dube, Minimum Wages was published in 2008 and Dube cites a study from 2011 in that section. I am always very conscious about dates, because it seems that most of the compelling papers were written in very recent years.

Section I.B: Minimum Wages Have Not Kept Up with Cost of Living

The next section is about the minimum wage and the cost of living.
Over the last three decades, the minimum wage has failed to keep up with cost of living.
This is a whopping non sequitur. The minimum wage is a very poorly targeted anti-poverty program. Most minimum wage earners are not the fabled "single parent with a full-time minimum wage job raising a family." These are mostly secondary or tertiary earners in a household, and most of them are working part time. I think Dube is trying to build on the earlier section, where he thinks he's demonstrated that minimum wages help poor people (by decreasing inequality). Insofar as he hasn't actually done so convincingly, nothing from Section B of the document actually follows. He ends this section saying, of indexing the minimum wage to inflation:
This is why even some economists who are skeptical about minimum wage policies nonetheless support indexation.
Notice that he says "some" and not "most". In fact, I think most economists who are skeptical about or hostile to the minimum wage think that inflation is an excellent natural sunset clause for a bad policy. It means that if we made a mistake, we don't get stuck with it forever. In fact, I remember Walter Block describing his disappointment with Gary Becker's moderation, because Block wanted to abolish the minimum wage outright while Becker wanted to see inflation gradually kill it off. I think many business owners, while doing long-term planning, recon that they can "ride out" a minimum wage increase because inflation will gradually take the bit out of it after a few years. Indexing to inflation locks a bad policy in place. It also takes away a source of variation by which to judge the impact of the minimum wage. If the real minimum wage were the same in all times and all places (as a federally imposed minimum wage indexed to inflation would do), then there is no "control group" by which to judge the policy. If we're going to have social planners impose economic policy on us, let's at least have an escape hatch and local experimentation so we can know which policies are harmful and quantify the harm.

Section I.C: Minimum Wages Have Fallen Behind Median Wages

This next section is interesting, and I think it catches the pro-minimum wage economists in a contradiction.
When analyzing the strength of minimum wage policies, economists typically use the ratio of the minimum to the median wage, also known as the Kaitz index. There are three reasons to pay attention to this measure. First, a comparison of the minimum wage to the median offers us a guide to how binding a particular minimum wage increase is likely to be, and what type of wage the labor market can bear.
Emphasis mine. What does it mean that the "labor market can bear" a minimum wage? Presumably Dube thinks that the labor market cannot bear a minimum wage that is too high, because he implicitly knows that demand curves slope downwards. Raise the price, and people buy less.  He should be more clear to his readers that this effect is real. He just doesn't know at what wage level it starts to be "unbearable." Also presumably, though Dube might argue with this, those same economic forces are present at lower levels of the minimum wage, they are just weaker and harder to measure. It's easier for employers to make adjustments other than actually laying off workers. I think Dube should admit that there are giant question-marks about the actual effects of the minimum wage, and that some of the harm is not obviously captured in government statistics.
Second, a comparison also provides us with a natural benchmark for judging how high or low a minimum wage is across time periods or across countries that vary in terms of their labor markets and wage distributions.
Like I said, wouldn't indexing to inflation destroy this variation and make it hard to form a comparison group?
Third, the median wage also provides a natural reference group for judging how reasonable a minimum wage level is: most people would not think fairness concerns dictate that the minimum wage should be set equal to the median wage, but they may find it objectionable if it is much lower (say a fourth or a fifth as large). 
What do people's feelings of "fairness" have to do with anything? Is this an economist's summary of the literature, a "positive analysis", or are we pandering to vague feelings of fairness, a "normative analysis"? The document is a mix of both kinds. I think people have very bad intuitions about "fairness". Economics often points out that popular policies have terrible negative consequences. It might seem "unfair" to let landlords increase rents to whatever they like, but the alternative (rent control) leads to horrific decay of the housing stock. Oh yeah, and "unfair" behavior by landlords, like discrimination and failure to do basic maintenance. It's the job of an economist to fight this kind of populism. Maybe I'm being unfair here and Dube is simply acknowledging that this is a reality; there is a realpolitik constraint on how low the minimum wage might be set. But given the thrust of the document, it seems like he's willing to indulge the public's bad intuition.
A natural target is to set the minimum wage to half of the median wage.
This. Let's have the politicians and activists calling for $15/hour read this sentence, over and over again. Dube, who is perhaps the most esteemed pro-minimum wage economist, is telling us that there is a limit to how high we can set it. He's not saying "The empirical literature shows that the minimum wage has no effect whatsoever, no matter how high we raise it," which is how some politicians and even some economists have summarized the literature. Dube is picking a finite value, which is relatively low compared to what some agitators are asking for, because he realizes that Econ 101 will start to bite at a higher wage. No state has a median wage that would justify a $15/hour minimum wage by Dube's criteria, and in fact some states have median wages less than $15/hour.

What follows in that section is a comparison of the United States to the rest of OECD, with us being near the low end.  I don't care for this kind of argument, because it implies that the average of a bunch of other countries' policies must be right. Maybe they're all victims of the same kind of voter populism that gives us so much bad economic policy, and we're the only one's actually getting it sort of right. The international consensus is often wrong.

Section II of the document is titled "How are Increases in the Minimum Wage Absorbed?"

Section II.A: Employment Effects

This section starts with this very subjective summary of the literature:
For the range of minimum wage increases we have seen in the U.S. over the past two decades, recent evidence based on credible methodologies do not find job losses of any sizable magnitude.
 Again, read the Neumark and Wascher meta-analyses. They come to a very different conclusion. Don't let Dube convince you he's speaking for the entire profession here. This is still very much an open question. And new groundbreaking papers written since Dube's testimony (given in 2013) have found large disemployment effects.
Studies comparing similar neighboring areas right across the border account for these problems and find no impact on jobs either for sectors like restaurant and retail or groups like teens.
Dube obviously has a fetish for these cross-borders comparisons. I've seen it in many of his other public statements and critiques of various papers. I think the best evidence we have here is from Seattle, and this favors the use of synthetic controls rather than cross-border comparisons.  (My write-up here, and the working paper here.) Dube has this graphic in his testimony, which suggests using border counties as natural treatment-control groups for comparison:


The first paper by Jardim et. al. from the Seattle studies has this figure:

Jardim et. al. argue that using the surrounding region as the control group (represented by the two panels on the left) fails a falsification test. Look at the lower left graph. If this is a proper control group, it sure looks like the minimum wage is "causing" the increases in earnings above, say, $27/hour, where no reasonable person would expect to find an effect. The panels on the right are the synthetic controls, which don't show any obvious effect of the minimum wage at these much higher wages, where you wouldn't expect any effect. (Interestingly, the Economic Policy Institute takes Jardim et. al. to task saying that their synthetic controls actually do not pass the falsification test. If you pool the effects at higher wages instead of looking at them one-by-one, it becomes "statistically significant." I wrote about that here. Dube and the EPI folks should get in a room and decide whether they like falsification exercises or not.)

Maybe Seattle is a special unique snowflake, but my take-away from this (contra Dube) is that the synthetic controls are the better methodology. Dube's written testimony is from 2013, so obviously he didn't have access to the papers by Jardim et. al. which were only published in the past couple of years. If he's revised his opinion in light of this new information I haven't seen statements by him to that effect (but good on him if he has!). (There is a footnote at the bottom of page 13 of Dube's testimony that I think neatly summarizes the academic disagreement over synthetic vs. cross-border controls. Read that if you're curious about the details.)

This was an interesting passage:
Over the past two decades, the variation in minimum wages has been highly regionally selective: the states that have seen greater increases in the minimum wage— typically in the northeast and the west—have tended to be those with lower underlying growth in demand for low-wage workers.
Here is my take on this. Politicians intuit that a minimum wage has real disemployment effects, so they only implement an increase if they think the economy can handle it. Unscientific and self-confirming maybe, but it's hard to deny that something like this happens. To take an extreme example, the first minimum wages were only a few cents an hour; nobody was asking for $15/hour. Everyone rightly intuited that there was such a thing as "too high"; and everyone waited until it became feasible (not to say sensible) to start asking for $15. If this political will is idiosyncratic enough, not necessarily correlating with measurable economic variables, that would mean that studies of minimum wages in places that implement them understate what the effects would be in places that decline to implement them.

There is a section about the changing attitudes an opinions of the profession. Of surveys of economists asking whether minimum wages led to unemployment, Dube says,
Surveys of AEA members in 2000 found 46% agreeing with a similar proposition, while surveys concluded in 1992 and 1978 revealed 79% and 90% of economists agreeing with similar statements.
He makes much use of an IGM Forum that found no clear majority on either side. (See Don Boudreaux's post about it here, particularly the part at the bottom about one economist's answer with the comment that perhaps the Fed would accommodate. (In the IGM Forum, economists can leave comments explaining their answer, and these are sometimes revealing.) This is amusing. It's kind of admitting that the minimum wage has real disemployment effects, and that the Fed would bring about some inflation to accommodate it if this effect was taking too much of a bite. This basically assumes that we're in Econ 101 world, and furthermore that other economists all mutually understand that we are in Econ 101 world, and that this understanding is deep enough that we can fiddle with various policy levers to undue a minimum wage increase that is too large. If we all share these Econ 101 intuitions, let's say so.)

Dube tries to make the point that "weighted by confidence" the IGM forum comes out much more strongly in favor of minimum wage increases. I actually take it the other way around. Economists who are appropriately humble about their ability to engineer society are naturally more willing to admit uncertainty. Interventionists will have a bias toward overconfidence. This is evidence of hubris, not consensus.
The third of the panel that expected job losses were split on their support for the policy, while the third that were sure that there would not be job losses were unanimous in their support.
Again, this is more a sign of overconfidence and crassly politicized thinking than of academic consensus.

Section II.B: Turnover and Job Flows

This section discusses how job turnover falls when the minimum wage increases. I don't think there's much disagreement on the fact of this point, but there is some disagreement about whether it's a good thing or not. Pro-minimum wage economists tend to emphasize the cost savings of low turnover, a very real effect for sure. If you don't have to keep re-training new staff, that saves your business some money and headache. But perhaps the lower turnover is actually a bad sign. Low-wage workers know that jobs have become more scarce, so they desperately cling to any job they can get. This isn't necessarily a good thing. There is much wage mobility, particularly for low-wage workers who have a lot more space to move upward than downward. If these workers are clinging too long to a job rather than taking other opportunities, it could be a sign of a sclerotic labor market. Besides, employers know about their turnover costs. If the savings are truly valuable, they would pay higher wages without being forced to do so. This is a common theme in pro-minimum wage arguments. Some "benefit" is proposed without any explanation as to why the business owners aren't already trying to capture it. By all means, let's count this in our ledger of total costs and benefits to society, but let's not pretend we're doing business owners a favor by forcing them to do something that they could do without our "help".
Models with search frictions in the labor market— which have become increasingly popular—can help explain this pattern of small effect on employment coupled with larger effect on turnover. Of course this cannot be true at all levels of the minimum wage—with a sufficiently large increase, employment levels will most likely fall as well.
Emphasis mine. Once again, Dube is acknowledging that the disemployment effects are very real. It's just that we don't know where they start to kick in. I wish Dube would place more emphasis on this uncertainty. The "benefits" of minimum wage are highly questionable and poorly targeted, and the costs, which even he acknowledges must exist, are highly uncertain.
Finally, there are other channels through which minimum wages may positively impact employment. A higher minimum wage can spur those who are unemployed to search more intensely for jobs, as the value of a job rises.
 This passage was very jarring for me. In my economics education, this effect is counted as a cost, while Dube seems to be counting it as a benefit (as implied by the language "positively impact employment.") See the diagram from this post.
This is a standard treatment of the economics of minimum wages, as it was first presented to me by Steven Landsburg's excellent Price Theory text. The intense searching by minimum wage workers (represented by the rectangle in pink) is a cost, not a benefit. If employees are investing in more intense signalling (credentials and other resume boosters that have little to do with actual productivity), or if they're competing to curry favor with employers in hopes of obtaining a now-scarce job, this activity represents a cost imposed on the worker that does not get recouped by society as a whole. Bizarrely, Dube is treating this as some kind of offsetting benefit.

Dube goes on:
Generally speaking, workers’ bargaining power may be insufficiently low for the purposes of efficiency. By increasing workers’ pay, a minimum wage policy can improve the functioning of the low wage labor market.
Emphasis mine. Bargaining power? This seems backwards. Increasing the minimum wage decreases their bargaining power. For most low-skilled workers, the only bargaining chip they have is "Okay. If you won't hire me at that price, you can pay me less. Deal?" Once they've bumped up against a minimum wage, there's nowhere else to go. Granted, there are times when tying your own hands improves your bargaining position. Stephen Pinker gives the example in his book How the Mind Works of two people playing the game of chicken, in which one of them locks and removes the steering column, waving it for the other player to see. "Sorry, I can't possibly budge." The other player has to swerve. It is far less clear if this kind of hand-tying benefits workers. As even Dube acknowledges, there is a wage that's high enough that employers no longer wish to pay it. ("Oops, turns out I'd already locked my own steering column. Guess you'll have to unlock yours in a hurry.")
Dube, Freeman and Reich (2010) finds that replacement costs are around 8% of annual salaries, and are sizable even for blue collar and service workers. Reduced turnover can, therefore, increase productivity through reducing recruitment and training expenses.
These additional channels of adjustment can help explain why moderate increases in minimum wage seem to have small employment effects.
Once again, companies know about turnover costs. Presumably they're already setting wages to optimize the trade-off between turnover costs and payroll. (It reminds me of this post by Alex Tabarrok on efficiency wages.) This entire section strikes me as an attempt to recast costs as benefits. Carelessly and clumsily describing these topics in plain English allows for this kind of casuistry.  A little bit of Econ 101 clarifies what is happening, what is a cost, what is a benefit, and how these things play out for society at large.

Section II.C: Prices, Inflation, and Indexation

I have no disagreements with Dube here. He makes the point that minimum wages do not cause general inflation. There are cost pass-throughs (acknowledged in this written testimony), but they are unlikely to cause a general increase in price levels. This lay-person argument against the minimum wage, that the increasing prices will "inflate away" the benefit, is a fallacy. No argument there.

Section III. The Minimum Wage, Poverty, and the EITC

This section starts with:
Minimum wages tend to increase income going to working class and poor families. However, the anti-poverty aspect of minimum wage is limited by the fact that many families under the poverty line do not have substantial attachment to the labor force.
The first sentence seems to conflict with the table at the top of this post from Minimum Wages. And the second sentence seems to contradict the first. If most families below the poverty line don't have a strong attachment to the labor market, then presumably they aren't working a lot of hours. Raising the minimum wage is a very poor way of helping these people, compared to (for example) giving them direct transfers of cash or other benefits. To put it into simple mathematical terms: the fewer hours these households work, the less the wage level affects their income. Also, the more binding the minimum wage, the more likely these folks are to see their hours reduced. Once again, see the Seattle studies, where a reduction of hours-worked offset the wage increase. Finally, many minimum wage earners aren't in poverty-line households at all. If we're trying to target poverty, minimum wages are the wrong policy tool.

I'm scratching my head about some parts of this document, because Dube seems to be saying that the minimum wage complements the earned income tax credit. The thinking goes, if you raise the earned income tax credit, employers can afford to pay their employees less, because they know those employees are getting a subsidy. (Imagine if your employer knew that some philanthropist were paying you $1 million to stay employed at your current job; they'd be slightly less inclined to cut you a bonus. The argument about the EITC is this same intuition on a smaller scale.) I thought that Steven Landsburg debunked this argument, here and here. Granted, these posts were written after Dube's written testimony, but they're employing basic Econ 101. Any other thoughtful economist could have worked this out prior to Landsburg's blog posts. This gets back to the big pink rectangle in the diagram above. If there is intense, wasteful competition for those now-scarce minimum wage jobs, there will be a big deadweight loss as low skilled workers attempt to out-do each other. The benefits of the EITC are competed away, more so than if there wasn't a minimum wage. If the competition for jobs isn't a big deal after all, then it's possible Dube is right.

This was a useful exercise. I'm left with a feeling that I understand the pro-minimum wage economists arguments much better, assuming Dube is speaking for them as a group. I think they are too cavalier about dismissing the negative effects of the minimum wage. They take "p > 0.05" to mean "there is no effect" rather than (more appropriately) "there is too much noise to signal". I think that the politicians and political agitators who "cite" them are missing the important caveats and qualifiers, and these economists have fallen down on the job of correcting them when they misstep. I also think that they are just wrong about what the literature says. They tend to understate or explain away or leave undisclosed those studies that do find large disemployment effects. I don't know any good way to settle this other than sitting down with the original studies and deciding for yourself which ones are convincing. But, just to be clear, pro-minimum wage economists tend to admit that the disemployment effects are real and will show up if we raise the statutory minimum high enough. If Dube is serious about targeting half the median as the appropriate minimum wage level, then he's a lot closer to Neumark and Wascher than he is to the "Fight for Fifteen" crowd. I wish he'd say so more clearly.

Sunday, March 3, 2019

Recent Minimum Wage Activism: Where Does the Number 15 Come From?

Where does the number 15 come from? Why not zero? Why not 50? Ideally there would be some kind of reason why the number isn't higher or lower. Is "15" the answer to a complex optimization problem? Did someone commission a study, inputting assumptions about the elasticity of labor demand, distributions of wages, trade-offs between wage-compensation and non-wage compensation, welfare/psychological consequences of long bouts of unemployment, foregone services, and so on? Did somebody throw these inputs into a big numerical Cuisinart and out popped the number 15?

Or do people just like alliteration? "Fight for Fifteen!" fits nicely on a protester's sign and sounds great as a chant. President Obama argued for a $10.10 minimum wage saying "It's easy to remember." Not, "It's the optimum value for this economic variable." Not, "We did our due diligence and arrived at the number $10.10." Not even, "We did a back-of-the-envelope and came up with the number $9.73, but then rounded it up a little bit." The proposal has changed dramatically over the past several years. Obama first called for a federal minimum wage of $9, then $10.10. James Galbraith called for a $12 minimum in 2013 (he describes his proposal here around the 50-minute mark), but now he's at $15. Has inflation changed the appropriate minimum wage in a few short years? No, inflation has only been at around 2% a year, not nearly large enough nor operating for long enough to turn a nominal 12 into a 15 (that would take about 15 years at 2% annual inflation). Has there been a recent flood of high-quality minimum wage studies that have killed off the downward-sloping demand curve for good? Not exactly. There's been some fine work on the minimum wage in recent years, but most of it in the same vein as the dueling "there's a disemployment effect/no there isn't" studies of the past 20 years. If anything, the new work on Seattle shows that all those disemployment effects are very real and in fact lead to low-wage workers earning less because of reduced work hours.

What's changing here is that political "entrepreneurs" are realizing they can get away with making bigger and more extravagant proposals, completely unanchored by underlying fundamentals. This is incredibly irresponsible. If these politicians and academics want to meddle with the labor market, they need to do a much better job of justifying their proposals. Politicians who propose higher minimum wages are riding a wave of populism. Irresponsible academics reassure them that minimum wages have no effect on unemployment and no other ill effects, contrary to what a straightforward reading of the literature actually says.

Illinois recently raised its minimum wage, which will be raised in steps to $15/hour. I contacted my representative to ask if there was some kind of policy whitepaper or report that justified the number 15 and the specific phase-in schedule. She gave me a stock "I always appreciate hearing from my constituents" answer, without actually answering my question. She referred me to Will Guzzardi, a representative from Chicago, who apparently sponsored the bill. In other words, she did not base her vote (which was in favor of the bill) on any kind of information that might have conceivably justified raising the minimum wage. If she'd had such a report, she would have pointed me to it.

My message to Guzzardi went unanswered. But I can find public statements by him here:
Guzzardi has repeatedly cited research showing no damaging economic effects where the minimum wage has increased. He said the only way to predict what will happen with an 82 percent wage hike in six years is to look at historical data.

“Raising the minimum wage has no net effect on employment, it doesn’t drive jobs out of the state,” Guzzardi said. “All it does is put money in people’s pockets who need it.”
Again, this is unbelievably irresponsible. He is simply mistaken about the state of minimum wage research. Even if some academics have sold the "minimum wages don't reduce jobs" story, that is at best a highly selective reading of the literature. See, for example, what Arindrajit Dube says in his testimony to congress. Dube is an economist who does a lot of empirical work on the minimum wage and fairly consistently finds no effect on unemployment. Does he say, "The minimum wage has no effect whatsoever on unemployment, so we can raise it arbitrarily high."? No, of course not. Even though some careless people (like Guzzardi) give the impression that there's no effect on unemployment, no matter how high we jack up the minimum wage, almost everyone implicitly understands that raising it high enough will cause unemployment. (Go for the reductio ad absurdum and see how people demur: "Why don't we raise it to $100/hour then? Or $1,000, or $1 million, for that matter?") The economists who support raising the minimum wage understand that raising it high enough will cause unemployment. Even laypeople and politicians who have no grounding in economics understand at a gut level that raising the minimum wage high enough causes unemployment. The disagreement is about whether the effect is measurable, whether it's too small to matter, and whether the gains to the winners justify the losses to the losers. Dube says in his testimony,
A natural target to set the minimum wage is to half of the median wage.
Why not higher? Because Dube implicitly understands that the disemployment effects are real. These ill effects will rear their ugly heads if we raise the minimum wage too high. At some point it becomes hard to make the negative effects disappear using statistical tricks and inappropriate datasets.

[Dube said of an increase to California's minimum wage from $10 to $15/hour: "California's experiment is worth running and monitoring." Presumably he wouldn't refer to it as an "experiment" if he were certain that there were no negative consequences to raising the minimum wage. He's hinting at the very real possibility that such a large change in the minimum wage will cause unemployment.]

There is an unfortunate confluence at work here. Some minimum wage researchers are studying the effects of the minimum wage and finding no effect. They can't reject the null hypothesis, that minimum wages don't cause unemployment in low wage workers. They have done a poor job of differentiating between, "We've positively proven that minimum wages have no effect on unemployment" and "The effects are real, but our datasets and methods are too crude to measure them. Noise overwhelms signal, so we wouldn't see an effect even if there was one." The second story is a much better summary of the recent contrarian research on the minimum wage. But some economists are leading the lay public to believe that the former statement is true. People like Dube implicitly endorse the latter when they pick a finite minimum wage (half the prevailing median wage), rather than picking one that's arbitrarily high. Politicians and political commentators only absorb a very crude version of this. They don't understand that the economists are measuring the effects of small differences in minimum wages (say, the $1 or $2 difference between two neighboring state's minimum wages, or before and after a law change), not the total effect of the minimum wage (compared to what we'd see in a counterfactual world where it was $0). They don't understand that the economists are using crude proxies for "minimum wage workers", such as "employed teenagers" or "all restaurant workers." To the extent that some of these workers earn substantially more than the minimum wage, these kinds of studies will understate the effect of the minimum wage increase on their wages and on their subsequent employment/unemployment. The proxy approach effectively dilutes the true effect of the policy. They don't understand that most minimum wage studies are seriously under-powered, meaning they wouldn't find an effect even if there was one. Policy "entrepreneurs" take a crude version of the lessons from recent research and use it to sell bad medicine to the public. Economist who favor increasing the minimum wage (or even those who lend intellectual respectability to the idea) need to be more explicit about what they actually believe: that demand curves slope downward. If you make something more expensive (in this case, low-skilled labor), people naturally want to buy less of it.

That's my commentary on the academic side of the argument. There is a crude approach to justifying the $15/hour number, which I consider completely unserious even though it's fairly common. It goes something like, "We need to make sure everyone can earn a living wage" or "Everyone should be able to earn a wage that covers the cost of living." This is superficially compelling, but it falls apart under even a tiny amount of scrutiny. Terms like living wage and cost of living get thrown around without much thought. Do people who earn less than a living wage literally die? Do they wallow in Dickensian poverty for a few years, wasting away until starvation, disease, and exposure catch up to them? Not really. That's basically unheard of in developed countries like the United States. The term cost of living is wonderful propaganda. Taken literally it means, "The bare minimum necessary to ensure raw survival." That's not what it means in practice, though. Based on how the term is actually used, the "cost of living" usually means "the cost of the basket of goods and services, food, shelter, and medicine, that we've become accustomed to." It varies across regions in within the United States, not always because it's inherently more costly to live in some places but because the residents are used to a higher standard of living. Immigrants often come from relatively poor countries and live in conditions that the average American would regard as crushing austerity. These same immigrants are often trying to save their earnings (often "low-wage" earnings, but very high compared to what they could earn back home) to send remittances back home. For them, indulging an average American lifestyle would mean depriving their loved ones at home a substantial fortune. The literal "cost of living" is very low, a few thousand dollars a year maybe.

This argument about employers owing their employees a living wage is very strange in the sense that it seems to have bizarre implications that nobody actually believes. (I owe this argument to Jonathan Meer, see here and here.) Suppose a working mother has a baby. Her cost of living has increased. Does her employer owe her a raise? Suppose her working husband loses his job. Or suppose he dies. Is the employer supposed to be her all-purpose insurer for all these contingencies that potentially affect her cost of living? I think most people would say "No." Even forgetting for a moment that this would make every employer a giant insurance company and turn every single employee an enormous liability, it doesn't sound right that employers hold this moral obligation to fix their employees lives when their conditions deteriorate. Let's at least be upfront about this: the living wage argument is weird, because it has implications that most people would reject as logical absurdities. [If you're tempted to say, "No, I'm not saying any of that weird stuff about employers being obligated to insure their employees against all hits to their income. I just want a $15/hour minimum wage.", then you might have missed the point here. If your moral premise implies something logically absurd or utterly impractical, you don't get to quarantine off those inconvenient implications. It's not cricket to assert a premise, but then pick and choose which implications of that premise you like. It requires that you either reject the moral premise, bite the bullet, or legitimately explain away the implications you don't like.]

All that aside, this stuff about living wages assumes away whether employers can actually afford those higher minimum wages. This living wage framing of the argument simply side-steps all the arguments about minimum wages being counter-productive, throwing people out of work, making it harder to find work in the firs place, and reducing their work hours. If the Seattle results are reliable, then the minimum wage is the wrong policy tool for addressing grinding poverty. It's as if someone proposed bloodletting to cure cancer, and then a skeptic points out that bloodletting is not an effective cancer treatment. It's actually counter-productive to drain a sick person of some of his blood, one might reasonably protest. It would be irrational for the bloodletting advocate to accuse the skeptic of not caring, or to reiterate that cancer is a very serious problem indeed, so we have to do something about it. This kind of response would completely miss the point of the criticism: the treatment is not effective. Whether the underlying problem is real or whether there might be some other working solution are different questions entirely.

Another argument, which I also consider flippant, is that we should increase the minimum wage because it's popular. I guess under this framing, the "$15" doesn't have to come out of any kind of cost-benefit analysis. We should just do it because it's what popular opinion dictates. This argument doesn't make sense for a lot of reasons. Popular policies are often the wrong thing to do. Read Bryan Caplan's The Myth of the Rational Voter for a book-length treatment of this idea. Thank goodness there are checks and balances on "the will of the people," because the general public is often sadly misinformed about the effects of policy. The minimum wage is no exception to this pattern. If anything it's the archetypal example. There is no good reason that a number (such as "10.10" or "15") that the public happens to anchor on would tend to be the right number. Governments have an obligation not to simply impose democratically popular ideas on the population. They should use their bureaucracies to research such proposals and provide necessary information to the voting public and policy-makers. (Washington state's commissioning of the Seattle studies is a nice example of this process at work. Let's cost-benefit analyze more government programs, please.) Insofar as the "fight for 15" crowd has achieved policy success, governments have fallen down on the job here.

Saturday, February 23, 2019

Criticisms of the Seattle Minimum Wage Studies Miss the Mark


I recently did a write-up of two studies on the Seattle minimum wage increase. These studies threaten to overturn a lot of prior studies and prevailing attitudes about minimum wages. It's not likely that the "minimum wages have no ill effects" constituency would take this lying down. I wanted to see what I could find in terms of criticisms of this new research. I found this commentary by the Economic Policy Institute (EPI), written by Ben Zipperer and John Schmitt. Their initial summary:
The authors’ analysis, however, suffers from a number of data and methodological problems that bias the study in the direction of finding job loss, even where there may have been no job loss at all. One initial indicator of these problems is that the estimated employment losses in the Seattle study lie far outside even those generally suggested by mainstream critics of the minimum wage (see, for example, Neumark and Wascher [2008])—as the authors themselves acknowledge.

The authors of the Seattle study (Jardim et. al.) are very upfront about the limitations of their data set (details below). And there is a long discussion of why their results differ from previous results. In a nutshell, the new studies could accurately measure actual hours worked, while previous studies could only detect job losses. Also, the new studies could directly measure individuals’ wages, whereas prior studies had to settle for statistical aggregates (“teenage workers” or “restaurant workers”) that  have heterogeneous wages and thus dilute the impact of a minimum wage hike.

The first bullet point in the EPI piece:

The employment responses estimated by the authors are well outside the bounds of most published research, and indeed all of the research cited by the authors implies much smaller and even no employment changes in response to wage increases similar to those experienced so far in Seattle.
Once again, they explain why they get a different result. Intuitively, it makes sense that you’d see a bigger effect if you can measure hours worked instead of binary “employed/not employed.” It seems reasonable that it’s easier to cut hours than to actually lay off workers. Also, the study was able to actually measure wages. Like I said in my previous post, they were able to recover the standard effect sizes seen in the minimum wage literature when they looked at “restaurant workers” as a whole, instead of identifying low-wage workers according to their actual wages. This casts doubt on the prior minimum wage literature, not on the new study.

Second bullet point:
The study implausibly finds employment changes due to the minimum wage in parts of the labor market where there should have been none. The study’s own estimates inaccurately imply the minimum wage caused large gains in the number of jobs paying above $19.00 per hour and in the number of hours worked in those jobs—even though those jobs are well above the wage range where the $13.00 minimum wage should be having measurable effects.
This is a bizarre framing.  The study repeatedly cautions the reader that Seattle was undergoing an economic boom, which presumably was driving up high-wage employment. The authors of the study do not say or imply that increased employment above the $19/hour mark is due to the minimum wage. Only someone robotically interpreting their model to mean “everything after the minimum wage increase is caused by the minimum wage increase” would draw such a conclusion, and this would require ignoring the multiple warnings in the paper about Seattle’s booming economy. What’s stunning is that low-wage employment declined despite this boom in the labor market. See Figure 1: “Finding a Reasonable Threshold” and the discussion within the text of the paper in Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle

Here is some commentary from the paper:
While the preponderance of evidence suggests that a low-wage threshold slightly above the statutory minimum poses little risk of miscoding jobs as lost when they have actually been promoted to higher wage levels, in our preferred specifications we report findings based on a relatively conservative $19 threshold.
I'm reading this as saying that the disappearing jobs below the new minimum wage are mostly funneled into jobs slightly above the new minimum, insofar as they aren't completely lost. There's no way those disappearing jobs below the minimum wage were funneled into much higher wage categories.

Here is Figure 1 itself:


A few prominent features present themselves in this figure. "Hours Worked" at wages below the statutory minimum decline dramatically, as you can see at the left end of the graph. The dollar ranges just above the new statutory minimum increase substantially. (The EPI piece complains that they don't see a "spike" at the new statutory minimum. That seems nit-picky in light of this figure.) For the Synthetic Control (the two charts on the right), the right-most wages are variously positive and negative, significant and insignificant, implying no significant effect on total employment. The lines in the center of each bar are the standard errors; if the bar reaches beyond the standard errors, it's thought to be "statistically significant." The EPI piece insists that all categories above the $19/hour mark should be pooled for the sake of determining statistical significance. Fair enough. That seems like a subjective judgment. Interested readers can read the full paper and EPI piece to see if this is a valid criticism.  

Third bullet point from the EPI piece:
The study excludes an important group of workers, representing roughly 40 percent of the workforce: those working for employers with businesses in multiple locations. By omitting all multi-location businesses, such as chains, in Seattle, the authors bias their results toward showing job loss if there has been a shift in employment from small, single-location establishments toward larger firms with multiple locations.
The paper discusses this at length. Here’s some background. The authors tried to match employees to employers, and geocoded employers so they could decide if the employer was within Seattle city limits (affected by the minimum wage) or outside the city limits (not affected). Multi-site employers, with locations both inside and out, presented a challenge, because it wasn’t clear whether the employee was affected (worked within Seattle city limits) or not. Here’s a  quote from the Jardim et. al. paper:
Multi-location firms may respond differently to local minimum wage laws. On the one hand, firms with establishments inside and outside of the affected jurisdiction could  more easily absorb the added labor costs from their affected locations, and thus would have less incentive to respond by changing their labor demand. On the other hand, such firms would have an easier time relocating work to their existing sites outside of the affected jurisdiction, and thus might reduce labor demand more than single-location businesses. Survey evidence collected in Seattle at the time of the first minimum wage increase, and again one year later, increase suggests that multi-location firms were in fact more likely to plan and implement staff reductions. Our employment survey results may therefore be biased toward zero.

In other words, the authors of the study fully considered this, and they decided that it biased them toward finding a smaller employment effect than if they could accurately measure everyone’s exact location of work. Further down the page, the EPI piece acknowledges and discusses the author’s arguments. They don’t like the survey results and insist on some hard data demonstrating what multi-site employers actually do after a minimum wage hike. Fair enough, but it seems like Jardim et. al. went out of their way to address this limitation. Again, this seems like a mix of nit-picking and self-serving speculation on the part of the EPI. They also say:
A better approach would be to use the longitudinal nature of their data to see whether or not the Seattle minimum wage increase led low-wage workers to shift from single-site to multi-site employers in greater shares than was the case elsewhere in Washington, where the minimum wage remained constant.
Jardim et. al.’s second paper is a longitudinal analysis. It doesn’t directly address the question of shifting from multi-site to single-site employers, but it does suggest that workers in single-site locations benefit only modestly or not at all from the minimum wage increase. With the benefit of the second study, it's hard to argue that former single-site employees were massively upgrading their career prospects by transitioning to multi-site employers. The second study actually found a decline (of 8%) in job-turnover, making it harder to tell a "multi-site employers drove wages up" story. (The EPI piece was published before the second paper came out, so they didn't have the benefit of that analysis when it was written.) 

Back to the EPI piece:
We also note that another recent study of the Seattle labor market’s response so far to the minimum wage ordinance finds estimates of the employment effect in the restaurant sector that are in line with earlier research and concludes that to date the minimum wage increases have had no negative impact on employment.
Again, this misses a major theme of the Jardim et. al. paper: they were able to recreate these null-results in the restaurant sector using their data set. The paper is actually consistent with these previous findings if it imposes the limitations of other studies on its own data set.


The EPI piece looks to this observer like a mix of borderline-reasonable critiques and motivated reasoning. As far as I can tell, the results of the Jardim et. al. paper still stand.

If You Read This Blog On a Reader...

I must have accidentally hit "Publish" on my most recent post before it was actually done. If you read this blog via Feedly or some other blog reader, you may have seen a half-baked version of it. Apologies if you read that unfinished product and were taken aback by the abrupt ending. It looks like once I publish something, it's forever stuck that way on Feedly, even if I un-Publish it to finish it off or make edits.

Well, now it's fully-baked! So (assuming you aren't) feel free to give it another go.

Friday, February 22, 2019

Seattle Minimum Wage Studies

The recent decision by the government of Illinois to increase the minimum wage has renewed my interest in the topic. I've written on this a few times in the past. See here, here, here, here, here, and here. I've read Neumark and Wascher's book Minimum Wages, which was written in 2008. Enough interesting research has been published since 2008 that I thought I'd read a few papers on the topic.

Seattle recently introduced a minimum wage higher than the prevailing minimum wage in Washington state. Seattle's minimum wage changed from $9.47 to $11.00 on April 1, 2015 and from $11.00 to $13.00 on January 1, 2016, then to $15.00 on January 1, 2017. (Actually it varies by large vs. small employers, whether or not benefits are offered, whether or not employees receive tips, and it's indexed to inflation after $15.00.) Since Seattle had a higher minimum wage than the rest of Washington, this was a kind of natural experiment allowing us to test the effects of a minimum wage. Two excellent papers came out of this, both by the same group of researchers. (Two papers that I have read, anyway. If other papers have emerged from this episode, I haven't read them, so I can't attest to their excellence.) The first paper (first published, and the first I will discuss here) is called Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence From Seattle. (Here is a link to the abstract; you can find a full pdf of the working paper with a Google search.) The second paper is called Minimum Wage Increases and Individual Employment Trajectories.

I came across these papers because I had remembered reading a summary by Jonathan Meer in 2017, which he posted to Facebook. See what he said, quoted here in this Marginal Revolution post by Alex Tabarrok. Pretty damning. The minimum wage increase had some pretty bad consequences for Seattle. But my Google search for "Seattle Minimum Wage Study" kept turning up headlines implying that the news out of Seattle wasn't so bad. What gives?

The First Paper

I'll lead with the conclusion from the first paper. The minimum wage hike to $13/hour caused hours worked in low-wage jobs to fall by 9.4% (3.5 million hours per quarter). The number of jobs fell by 6.8% (5,000 jobs). Wages for low-wage workers only increased by 3.1%. Coupled with the loss in hours worked, the average low-wage worker netted a loss of $125 per month. The labor demand elasticity came out to -3.0, which is in stunning contrast to most minimum wage studies that find values in the -0.1 to -0.3 range (or sometimes zero or even positive, implausibly implying a minimum wage increases demand for labor!).

[A later revision of their paper found that the loss was $74 per month. I don't know if I should regard this as a "correction" to the original paper, or if I should instead view it as one of two perfectly valid alternative point estimates for different model specifications. Maybe they caved to some criticisms on the "working paper" version of the paper, the one with the $125/month estimate, and got talked down to a lower estimate for the publication version. It doesn't matter too much. Both are substantial losses for a low-wage worker. I'm happy to have a discussion using either one as the "true" estimate.]

 The underlying data set makes this study particularly credible. Washington's Employment Security Department collects data for administering unemployment insurance. Washington is one of four states that collects hours worked in addition to earnings, which allows them to calculate hourly wages. (Which are the other four? There is potential for future papers here.) In other words, someone with this data set knows everyone's wage, employment status, and hours worked at various points in time. They can identify who was actually affected by the minimum wage, because they know who earned less than or close to the new minimum. This is in contrast to other studies that use crude proxies for "affected by the minimum wage." Studies often look at employment in the restaurant industry as a whole, or teenagers as a whole, assuming that a large fraction of these workers are affected by a minimum wage increase. To the extent that these groups contain workers who earn well above the new minimum, measuring employment in these groups will dilute the true effect of the minimum wage on the workers actually impacted. In fact (and I think this is really cool) these researchers looked at "restaurant workers"in their data set, effectively imposing the limitations of other minimum wage studies on their own data set, and got results similar to those other studies. They are effectively saying: When I hobble my data set to be as restrictive as the data sets used in other minimum wage studies, I get very low effect sizes, too. But the data in its full detail and granularity tells a different story. This is really important. It casts doubt on a lot of prior work on the minimum wage and suggests that much more granular data gathering is required to study the matter. From the paper:
In summary, utilizing methods more consistent with prior literature allows us to almost perfectly replicate the conventional findings of no, or minor, employment effects. These methods reflect data limitations, however, that our analysis can circumvent. We conclude that the stark differences between our findings and most prior literature reflect in no small part the impact of data limitations on prior work.
There are a lot of other interesting technical details that I won't comment on too deeply here. Again, read the paper for the full details. They chose $19/hour as their threshold for "low-wage worker", and have a long exposition and many graphs justifying this threshold, plus some commentary on how their results are robust to choice of threshold. This was an interesting discussion. Who is "affected by the minimum wage?" You might be tempted to define this as "workers initially earning less than the new minimum wage." But those people are basically extinct after the new minimum wage goes into effect; if the new minimum wage is $13/hour, there are no longer any workers earning $12/hour. That doesn't mean they've all lost their jobs, nor does it mean they've all been bumped into the $13/hour bucket. Also, if you suddenly move everyone who is currently below $13/hour to the new statutory minimum, employers have to give at least a slight pay bump to people earning more than that to preserve merit/seniority differentials (this commonsense observation is consistent with the paper's findings). These researchers had to look at statistical aggregates to discover what was going on. If employment dropped in the "low-wage worker" category, that's a good sign that the minimum wage reduced employment for this group. And that's exactly what happened. (Their second paper actually follows individual low-wage workers over time, rather than bucketing the population into "low-wage" and other categories.)

There's also a long discussion about the appropriate control group. This is important. I think when most people read headline-news version of these studies, something like, "Minimum Wage Caused Seattle Wage-Earners to Lose $125 a Month", they think it's an objective fact being reported. As if someone's just listing off accounting entries from before and after the minimum wage hike, and discovering that total pay was lower afterwards. Economists need a control group to study these things. You have to compare "Seattle" to "King County excluding Seattle", or compare Seattle to several surrounding counties, or Seattle to some kind of synthetic-Seattle (other regions that have similar economic features and trends to Seattle but for the minimum wage hike). They actually test several of these options. They find that the two options using real geographic neighbors, "King County excluding Seattle" and three nearby counties (Snohomish, Kitsap, and Pierce Counties), don't work very well. They fail a "falsification test" (see paper for details). But the synthetic controls pass the falsification test. In my reading, this also casts doubt on some previous minimum wage literature, which compares a treatment region (say, a border county in a state that increases the minimum wage) to a contiguous control region (a county across the border, presumably not affected by the minimum wage increase). Reiterating: the "$125 a month" figure above isn't an objective fact. It's what actually happened in Seattle compared with what their model says should have happened in the absence of a minimum wage increase. From the paper:
Difference-in-difference specifications assume that the treated and control regions have the same trends in the absence of the policy (parallel trends assumption), and will generally fail to produce consistent treatment effect estimates if this assumption is not true. It is prudent to be especially cautious about the parallel trends assumption given that the greater Seattle region experienced rapid economic growth coming out of the Great Recession, and the pace of recovery could have varied  by sub-region. As we show below, our two difference-in-difference specifications fail a falsification test, which suggests diverging trends. 
This economic boom in Seattle is important. Both papers caution the reader multiple times that this economic boom might mean the results aren't generalizeable to other regions. Actually, some critics of the first study (invariably people who are pro-minimum wage) have implausibly claimed that the economic boom discredits the finding of large disemployment effects. If anything, and economic boom should make a region better poised to absorb a minimum wage increase. The critics say something to the effect that the economic boom raised all wages, which shifted everyone up the income distribution, so that's where all those low-wage workers and lost hours went. (See Ben Zipperer's comments in this NYT piece.) This doesn't make a lot of sense. I would expect an economic boom to generally raise everyone's position on the income distribution, but also to create more jobs at the low-end. And besides, the authors make clear that they tested several thresholds for defining low-wage work (landing on $19/hour), and that their results were pretty robust to these assumptions. It seems like this critique requires an implausibly large shift up the income distribution.

The Second Paper

As I hinted above, the second study, called Minimum Wage Increases and Individual Employment Trajectories, was longitudinal. It followed individuals over time, rather than following statistical categories (defined as above or below the $19/hour cut-off). It found that you could basically define two groups of low-wage workers: experienced and inexperienced. The paper actually explores ten deciles, ordered by increasing levels of experience, but the qualitative "experienced vs. inexperienced" categories work well to describe their findings. From the abstract:
On net, the minimum wage increase from $9.47 to as much as $13 per hour raised earnings by an average of $8-12 per week. The entirety of these gains accrued to workers with above-median experience at baseline; less-experienced workers saw no significant change to weekly pay. Approximately one-quarter of the earnings gains can be attributed to experienced workers making up for lost hours in Seattle with work outside the city limits. We associate the minimum wage with an 8% reduction in job turnover rates as well as a significant reduction in the rate of new entries into the workforce.
 So what's going on here? The first paper says that low-wage workers earned $125 (or $74) less per month due to lost hours, and the second paper says they earned $8-12 more per week. I was initially confused, because my Google searches were turning up headlines triumphantly declaring the Seattle experiment a victory for minimum wage supporters. But really, it's all there in the abstract. There is no contradiction here. There were significant reductions in new entrants. The less experienced half of low-wage workers didn't see significant gains or losses in their earnings. The more experienced half of low-wage workers saw a $19/week increase in their earnings. Some people seem to have "benefited" (in terms of sheer total earnings, if that's all we care about), for others it was pretty much a wash, and still others who weren't yet in the job market seem to have lost out. This is only a "success" if you don't count the people who would have entered the labor market but didn't (couldn't?).

Some people are claiming that the less experienced group in the second study are actually benefiting, because they are earning essentially the same income for fewer hours of work. That this is a "benefit" is not at all clear. We don't know how working conditions have changed in light of the new minimum. Maybe employers are instituting more draconian work protocols during working hours, then dismissing the workers when they're not needed. Whereas previously they might have paid a lower wage and kept the worker on the clock all day under a more relaxed schedule. Are workers having to clock out for non-peak hours, then clock back in later in the same day? Do they have to go somewhere in the meantime? Does this entail paying for gas and parking? Calling this a "win" for the low-experience group is incredibly naive. Doing so ignores the lessons of the study itself. You know those high-experience low-wage workers, the ones who benefited more from the wage increase? They were grouped according to total number of hours worked (specifically, hours worked in a reference quarter just prior to the minimum wage increase). Extra hours of work confer a benefit by pushing people into the "high-experience" category. If low-wage workers are seeing their hours cut, that probably means this pipeline has been slowed down. The best thing for people in this cohort is to earn lots of experience at whatever wage the market will offer. Conceivably, most of the benefits from that work are not the actual wages, but the basic job skills learned (things like showing up on time, following instructions, losing the bad attitude, etc.) that lead to higher wages in the following years. Those hours aren't just spent earning wages. They're spend building human capital.

Besides, let's concede that the "pro-" argument has changed significantly. Were minimum wage advocates saying to low-wage workers, "This new law won't affect your income, but it will give you back more free time."? No. That's not how these policies are sold on the political market. You often hear nonsense about how the new minimum will raise people's incomes and lift them out of poverty, offering them a "living wage." Minimum wage advocates who are chalking this one up as a "win" should acknowledge that the argument has changed rather dramatically, and that we got something very different from what was initially promised. By the way, while it's true that prior minimum wage studies often failed to find a negative impact on employment, it's just as true that those earlier minimum wage studies often failed to find a positive impact on earnings. Most minimum wage advocates only concern themselves with the first part. Well, if we're doing away with neoclassical economics (really, just the common-sense observation that when something costs more you buy less of it) and pretending we're slaves to theory-free naive empiricism, you have to take both parts of that research together. You have to admit the part about the benefits failing to manifest themselves. (See this table summarizing the literature from the book Minimum Wages, particularly the part about Income Distribution.)

There is a lot of narrative discussion in this paper on "the two models" of low-wage workers and the effects of minimum wages. One model is that low-wage work is an entry-level job, from which point workers gain skills and gradually move up to a higher-paid job. A minimum wage knocks out the lower rungs of this ladder, making it harder for job market entrants to get their start. The other model is that low-wage jobs are dead-end jobs, with workers permanently stuck at low levels of income. A minimum wage makes these permanent jobs pay a little more and allows these workers to earn a "living wage." The authors suggest that both models are true of some workers in some jobs, and that the study somewhat supports this dichotomy. The low-experience group, the one that didn't benefit, corresponds to the first model, while the high-experience group corresponds to the second model, in their telling. But some of the information in the paper undercuts the second model. From the paper ("This model" refers to a neoclassical theory of low-wage jobs and skill-building):
This model implies individual employed in low-wage jobs at any given point in time will likely mature out of that market within a short time period. Prior studies have supported this conclusion, finding that 50 to 70 percent of workers earning exactly the minimum wage transition to a higher hourly rate within a year.
So, of the 30 to 50 percent of workers who remain at the minimum wage for a given year, how many of those are a permanent underclass? Do 70% have a transition probability of 1, with the other 30% a transition probability of zero? Or is there just some random-but-reliable churn across the spectrum? Given this transition probability, plainly most of the people who have ever earned minimum wage eventually move on to higher paying jobs. So the "permanent underclass" theory of minimum wage workers doesn't make much sense. I'm sure that some fraction of these people remain minimum wage earners year after year, but it's a much smaller fraction than 30% or 50%.

The authors explain the superficially contradictory conclusions of their two papers (emphasis mine):
The results of this longitudinal analysis contrast strikingly with repeat cross-sectional analysis suggesting sharper reductions in hours worked in Seattle's low wage labor market in 2016 (Jardim et al, 2018a.).These findings could be compatible for multiple reasons. First, longitudinal analysis by necessity excludes workers who enter Seattle's low-wage workforce after the baseline period, or who never enter at all. Second, individual workers may be making up for lost work in Seattle by adding employment outside the city limits. Our decision to include all Washington state employment and earnings might mask steeper employment and hours declines inside the city.
 And:
Job seekers who lack any labor market experience in Washington are invisible to us, as they do not appear in administrative records. We can infer their trajectories by studying aggregate statistics on the number of new entrants into the Seattle low-wage labor market. 
Here is a figure from the paper showing how new entrants in the low-wage labor market declined in Seattle compared to the rest of Washington state:


To be clear, the second study, which is longitudinal, is not picking up any effect on new entrants in the low-wage labor market. The first study, which is measuring the effect on statistical aggregates (employees with wages under $19/hour), does pick up these effects. I think this explains the superficial "contradiction" between the two studies. I believe this figure and the discussion about new entrants reflects the influence of a recent paper by Jonathan Meer and Jeremy West, titled Effects of the Minimum Wage on Employment Dynamics. This paper concluded that disemployment effects are small (perhaps even zero) for workers who are already employed, but minimum wage increases slow the rate of growth of new jobs. There was much academic debate over this study, but the new studies from Seattle seem to back the Meer/West story.

What These New Studies Mean

Assuming these new studies are credible, I think there are some important lessons for minimum wage policy. What follows is my own commentary, drawing from sources beyond the paper. If I get something wrong here, it's not the fault of the authors of these two excellent papers. I will jump from topic to topic in the following paragraphs, so apologies if you experience some whip-lash reading them. First off...

The demand curve for low-wage labor slopes downward! Both studies find that the minimum wage caused a significant reduction in hours. If these results generalize, it settles a debate in the minimum wage literature. Some studies have found that the demand is completely inelastic (meaning increasing the minimum wage has no effect on demand for labor), or even that the elasticity is positive (meaning that increasing the minimum wage increases the demand for labor). This has led to some speculation that employers of low-wage labor hold monopsony power. "Monopsony" means single buyer, similar to a "monopoly" which is a single seller. Just as a monopolist can unilaterally raise prices, a monopsonist can unilaterally lower them. Economic theory tells us that a government imposed price floor (like the minimum wage) can cause a monopsonist to buy more than they would if they could use their unconstrained market power to set the price. (See this post by David Henderson for a brief explanation of this argument. In addition, any good introductory microeconomics text will explain this argument.) Some commentary on the minimum wage literature has suggested that the near-zero or positive elasticity of demand implies that monopsony power is rampant in the market for low-wage labor. I think common sense militates against the monopsony story. Even in small towns, the main strip is usually populated by several chain restaurants, all competing for low-wage workers. Even setting common sense aside, the Seattle studies discredit the monopsony story. The higher minimum wage reduced hours worked. The monopsony story would have predicted an increase in hours worked, assuming monopsonists were previously successful in keeping wages down. Apparently stories of low-wage employers keeping wages low with "market power" are vastly overblown.

These studies fundamentally change the academic debate. The debate on the minimum wage used to be about whether the effect on employment was statistically significant (though small), insignificant, or slightly positive. The effect on "hours worked" is substantial in both of the Seattle studies. The debate is no longer whether increasing the minimum wage reduces employment. Once again, both studies saw reduction in hours worked for all demographics. The new debate is about whether the reduction in hours worked are offset by the increased wages. For low-wage workers as a whole, the answer is "No."

These studies provide conservative estimates for what a minimum wage increase is likely to do. Seattle was particularly well situated to absorb a minimum wage increase. Seattle has high median incomes (median household income of $100,630 in 2017) compared to the rest of the United States ($59,039 in 2017) or Washington state ($70,979 in 2017). Those rich tech sector workers can afford the price increases that come with higher labor costs. That won't necessarily be true of the rest of the country. The same minimum wage increase in, say, Mississippi (with a median wage of $14.22), will almost certainly cause more disruption in the labor market. (Does anyone think all of these counties would be able to absorb a $15/hour minimum wage?) Also, as both papers caution repeatedly, Seattle was in the middle of an economic boom over the period when the new minimum wage went into effect. Two excerpts from the second paper:
Settle transitioned from a period of growth to a period of stasis or modest decline [in the low-wage labor market] once the minimum wage increase took affect, despite its booming economy. Washington state outside King County continues to see growth in the number of new entrants, stabilizing to a higher level in mid-2015.
...
As a final caveat, we emphasize that during the period under study Seattle was undergoing an exceptional economic boom driven by rapid expansion of its high-skilled workforce. This may have driven the wages of less-paid employees up relative to the remainder of Washington State where our matched controls reside.  
Some critics of these studies have claimed that Seattle's economic boom simply means the results aren't generalizeable elsewhere. The economic boom simply "contaminates" the study, so we have to throw it out. Nope. Seattle's boom means that these studies are a very conservative estimate of what an increase in the minimum wage would do elsewhere. The boom isn't just a contaminant, adding random noise to the study. It's a countervailing force pushing employment and quarterly pay up, while the treatment under study here is pushing those things down. We should take these results as a kind of lower-bound for what is likely to happen elsewhere. Say, in a state or city with a higher median wage, perhaps not undergoing an economic boom or indeed undergoing a decline. These studies should give pause to any local governments considering a similar move.

Some people might be surprised by how few hours these low-wage workers actually worked.
Approximately 93% of the control sample logged less than full-time full-quarter work (i.e. 520 hours) in the baseline period.
...
Less experienced workers worked 108.6 (142.2) hours during the baseline quarter for cohort 1 (2), while more experienced workers worked 367.1 (432.2) hours during he baseline quarter for cohort 1 (2).
These people mostly aren't working full-time jobs. The less-experienced group is only working 1/5 to 1/4 of a full-time job. The fabled full-time minimum wage worker isn't represented in this group. (Supposing one in ten of these "less experienced" workers works full-time (520 hours/quarter), that means the other nine-in-ten average out to only 63 hours a quarter. The "full-time minimum wage worker" archetype might be better represented in the more experienced group of workers, who work more hours on average.) What these people need are more hours of work, not higher wages. There seems to be this myth that everyone's trying equally hard, but "the rich" are richer simply by virtue of their higher salaries. Actually, if you look across income quantiles (splitting into five quintiles each containing 20% of households is common), households in the higher quantiles log more hours worked, more full-time workers, and so on. Hours matter more than wage rates. It's barking up the wrong tree to focus on getting slightly higher wages for these jobs (higher wages which are apparently offset by reductions in working hours).

All that said, I'm left with a feeling of "Meh, maybe it's not so bad." The fraction of workers who are affected by the minimum wage is very small. We're talking 2-3 percent of the population earning at or below the federal minimum wage, and the "or below..." includes restaurant workers whose tips generally bring them above the minimum wage. In Seattle, in 2014 quarter 2, 13.6% of workers were earning below $13/hour, and 31% were earning below $19/hour (the cutoff used to define "low-wage workers" in the study; I'm using numbers pulled from Table 3 of the first paper). So most workers are escaping the effects of existing minimum wages. Most would escape even substantial minimum wage increases. This is kind of hopeful. It means that the social engineers probably won't screw things up too badly. It's still a very bad policy, and the effect on inexperienced low-wage workers (particularly new entrants) is perverse. But it's not going to disrupt the economy as a whole. To preempt another argument about the minimum wage, some people talk about "inflation" caused by higher minimum wages, as in "The cost of labor goes up, so prices in general go up." If low-wage workers are a small fraction of the labor market, then prices probably won't rise very much. If a minor input of production (in this case low-wage labor) increases slightly in cost, the price increases passed on to consumers won't be very large. Even anti-minimum wage economists (like Don Boudreaux and Neumark and Wascher) will go out of the way to point out that the "inflation" argument against minimum wages is a fallacy. (It must be a common one, though. The book Scratch Beginnings makes this argument against raising the minimum wage, and I've heard it several times in casual conversation.)

The optimistic take here is that employers can adjust along many margins to absorb the effects of a minimum wage hike. They can demand more work out of fewer hours with stricter workplace protocols, insist on shorter breaks, lower their tolerance for slacking, make capital investments, and so on. They can trim fringe benefits. They can be more selective about whom to hire. (Jonathan Meer has a long discussion of the various margins along which employers can adjust to a minimum wage increase in this excellent podcast.) My "the glass is half full" take is that large numbers of people don't get suddenly cast into permanent unemployment. But I still think this is a bad policy. Workers and employers have come to a set of mutually agreeable terms about work hours, scheduling flexibility, work intensity, and fringe benefits like training, free parking, free meals, medical/dental insurance, and so on. The minimum wage goes up, and these employees are forced to take a different deal from the one that everyone previously agreed to. Minimum wage advocates are basically telling them, "I know you accepted lower monetary compensation in exchange for better working conditions and fringe benefits. Nope! I'm insisting you take more of your compensation in money in exchange for the fewer fringe benefits." They are effectively deciding they have the right to veto these agreements and give the workers the deal the social engineers think they should want. These other margins of adjustment can be hard to measure. If the two Seattle studies are credible, then even employment and compensation are hard to measure, even though we have government statistics on them. Read the paper and make a list of all the caveats they make about their data set, which is still superior to almost any other study's. To end on a sour note, I think the glass is more than half empty. Minimum wage increases are not casting millions of people into permanent unemployment, but they are making work less pleasant and less rewarding in a thousand little ways that are difficult or impossible to measure. So minimum wage advocates will always be able to claim the empirical high-ground, insisting that there's "no evidence" of ill effects. But we know that these painful adjustments are happening, because the kinds of businesses that employ low-wage workers subsist on slim profit margins. (Go look up profit margins by industry to see what I mean, or simply note the very high turnover rate in the restaurant industry.) They don't have giant piles of money sitting around such that they can simply absorb a cost increase. Call it speculative, but it's safe to infer that these businesses are adjusting along these other hard-to-measure dimensions.

My final thought is that maybe this really is "just one more study." (Even though it's two papers, it's effectively one big study.) It's a study of a single law passed in a single city over a few short years, so I shouldn't get too excited about it. Then again, it does seem to be the most detailed study with the richest data set. And recall that it was able to replicate the small-to-zero employment effect in the restaurant industry. My feeling is that this is an important pair of papers. It presents a road map for future research: start tracking hours worked in addition to earnings, and do so anywhere that a minimum wage increase is being considered.