Thursday, October 27, 2016

Bad Arguments For the Minimum Wage

Now, there are some really bad arguments for the minimum wage. There are people who don’t even acknowledge that it’s theoretically possible for the minimum wage to cause unemployment. It either doesn’t occur to them, or they pretend the very idea is absurd on its face when confronted with it, or they dismiss it as being numerically insignificant without evidence. My post won’t discuss these people, because they aren’t really serious.

There are some slightly better but still bad arguments for the minimum wage that actually come from people who are well-read and economically literate. These people argue that while economic theory does indeed predict that a minimum wage leads to unemployment for low-skilled workers, it doesn’t tell us how big the effect is. The effect may be big or small. It’s an empirical question. The empirical literature has many studies that show a small or even positive effect of the minimum wage on employment. Summarizing slightly, the argument here is that the costs of the minimum wage fail to materialize, so there’s nothing to worry about.

But hold on a second! Did you notice that something’s missing? Here we have advocates for a policy telling us that the costs fail to materialize. Okay, so what about the benefits? Aren’t there two sides to a ledger?  Doesn’t a “cost-benefit analysis” entail measuring the benefits, too?

It turns out there is an enormous literature on the effects of the minimum wage, and we have empirical studies on things other than the effect on unemployment. The book Minimum Wages by David Neumark and William L. Wascher is a thorough literature review on the economics of minimum wages. Attached is a summary table that appears near the end of their book.

Hopefully they wouldn’t mind me using it. (I’d be downright baffled if someone wrote a book intended to inform public policy but then suddenly got "copyright happy" when someone tried to share excerpts from it!) Notice that we fail to see the presumed benefits of the minimum wage. Under "Income distribution", it says, "For U.S. economy, clear conclusion that minimum wage effects range from no beneficial distributional effects to adverse effects, with no evidence of beneficial distributional effects." Based on the rhetoric marshaled in support of the minimum wage, you'd expect to see some sort of distributional impact. You'd hope to see a reduction in poverty or something like that. Based on the empirical literature, minimum wage proponents can claim no such benefit.

Also, notice that it isn’t at all a consensus that minimum wages don’t cause unemployment. They probably do. There are some studies that indicate otherwise, but they aren’t the majority of studies, and according to Neumark and Wascher they aren’t the majority of the best studies with the best data and methodologies. Measured elasticities are in the -0.1 to -0.3 range. A -0.1 elasticity means that a 10% increase in the minimum wage would result in a 1% drop in employment (for low skilled workers).

I have to point out a minor detail in this table. Notice under "Prices and profits" they say " appreciable impact on inflation." Just as there are bad arguments in favor of the minimum wage, there are bad arguments against it. One such goes something like: "Minimum wage will just cause inflation, which will eat away the entire benefit." This is a common lay argument, but almost no economist takes it seriously. It's important to note that Neumark and Wascher slay this fallacy. Lest you think they are just ideologues with axes to grind, witness here that they are debunking a bad argument in favor of their overall conclusion.

I’ve seen some of the back-and-forth on this issue. Proponents of the minimum wage will insist that the studies that show no unemployment effect are the best studies with the most cutting-edge statistical methods, and opponents will redo their studies with these sexy new methods and find that indeed there is an unemployment effect. This kind of back-and-forth is important, but rather than glom onto a few studies it might be more sensible to have a healthy agnosticism. Maybe, in some places at some particular times when some particular minimum wage increase happened, there was no effect on youth employment. That’s not shattering to my worldview. I’m happy to entertain the view that the effect of minimum wage on unemployment is too small to see in a lot of empirical studies. But that would hardly be the end of the debate. If we’re crafting policy in a state of radical uncertainty, that means the potential for enormous harm exists. You don’t just get to take your point estimate and assume it’s the sum total of all truth. There is uncertainty around that estimate, and if you underestimate the unemployment effects you will do enormous harm to the people least capable of absorbing it. And even if you somehow establish that there’s no unemployment effect and the error bars around your point estimate are infinitely narrow, you would still need to empirically demonstrate a benefit. The current state of the empirical literature doesn’t support any such benefit. No one can definitively say, “…and therefore the benefits of the minimum wage justify the costs.” This part of the argument is completely missing.

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