The Minimum Wage as a Perpetual Motion Machine?

In empirical work on the minimum wage, the elasticity of demand for low-wage workers is usually small. It is typically somewhere in the -0.1 range, as in a 10% change in the minimum wage results in a 1% drop in employment for affected workers.  (The Seattle studies, which measured “hours worked” instead of the usual “jobs lost” is a notable exception. It found elasticities higher than 1.0.)

I worry that an elasticity of less than 1 can be abused by people who try to calculate the net benefits of increasing the minimum wage. I’ve seen a few studies that try to do this. They will take some estimate of the elasticity of demand from the empirical literature, count up the costs to the losers (those who lose their jobs) and the benefits to the winners (those whose wages increase) and cheer the net social benefits of the minimum wage. 

Try this on for size. Let’s increase the minimum wage by 10%, which will reduce total employment of affected workers by only 1%. (Assuming -0.1 as the elasticity of demand for low wage workers.) The net effect is a benefit, because the gains to the winners are larger than the losses to the losers. Total compensation changes by (1 + 10%) * (1 – 1%) = 1.09, in other words a 9% increase. (The first term is the increase in wages per worker, the second term is the decrease in the total number of workers. Multiplying these together should give you the change in total compensation. Try it with some actual values for the minimum wage and numbers of workers to convince yourself.) Okay. So let’s keep going. Let’s raise the minimum wage by 100%. Net benefits to the affected workers are (1+100%)*(1-10%) = 1.8. An 80% increase! To boot, maybe there’s some way the winners can compensate the losers, such that everyone’s take-home pay increases! A 200% increase would yield an even bigger 140% increase! This isn’t literally a perpetual motion machine; it maxes out at a 450% increase in the minimum wage, then the net benefits start coming back down. But the notion that someone could take the logic of small increases and extrapolate them this far is alarming. It implies that there’s something fundamentally wrong with this approach. That fundamental error is present even for small changes, but the smallness allows minimum wage advocates to paper over it.

(If you assume that the demand curve is actually curved rather than being linear, then it actually does become a perpetual motion machine. Say, the quantity demanded for low wage workers is proportional to the price raised to the power -0.1, a curve that roughly speaking yields an elasticity of -0.1. Multiply the price times the quantity demanded to get total compensation for low-wage workers: price times price^-0.1 yields price^0.9.  This result absurdly implies that the total compensation keeps going up forever, no matter how high you raise the minimum wage. Consider this a reductio ad absurdum. Minimum wage advocates are welcome to explain what special thing is happening at small increases that stops happening at larger increases.)

I don't know how pro-minimum wage economists arrive at the conclusion that "the benefits of raising the minimum wage outweigh the costs". They might not be naively multiplying total wages by total employment the way I'm doing above, but they must be doing something like this. In an Intelligence Squared debate on the minimum wage, Jared Bernstein describes his correspondence with David Neumark to get the opinion of an anti-minimum wage economist. Bernstein wanted to know what value he should "plug in" for the elasticity of labor demand to fairly represent the anti-minimum wage folks, and with astonishment in his voice he says that Neumark told him -0.1. (I'll bet Neumark told him a range, minus 0.1 to minus 0.2, because that's what his book Minimum Wages says.) At some point in the debate, he says it's "nuts" to worry about these kinds of tiny job losses when you weigh them against the gains to those who remain employed. He's either doing the same back-of-the-envelope I'm doing above, or he's doing a sloppy hand-waving version of it in his head.

Here is an example of a calculation in which someone really is treating the minimum wage like a perpetual motion machine. This study (IMO a terrible one, more on that in a later post) by the Illinois Economic Policy Institute attempts to calculate the effects of a minimum wage on various economic outcomes. See Figure 4 and the associated discussion in the text. They claim that a literature review turns up a result that a 10% increase in the minimum wage results in a 1.1 percent increase in worker incomes and a 0.45 percent decrease in hours-worked (presumably this comes from the various studies measuring the elasticity of demand for low-skilled workers). They apparently think that you can extrapolate those numbers to arbitrarily high increases in the minimum wage, because that's exactly what Figure 4 is doing. I want to say, "Okay, show me what the result will be for a $50/hour minimum wage. Or $1,000/hour for that matter." They get that a $10/hour minimum wage will result in a 1% reduction in working hours and a 2.3% increase in worker incomes (from a starting point of an $8.25/hour minimum). They get this by calculating the change in the minimum wage, 10/8.25-1 = 21.2%, and simply multiplying through by the numbers above. So 21.2%* (1.1%/10%) = 2.3% for the change in worker incomes. 21.2% * (-0.45%/10%) = -1% for the reduction in worker hours. They do exactly the same thing for the $15/hour minimum wage: 15/8.25-1 = 81.8%. So 81.8% * (1.1%/10%) = +9.0% for the change in income and 81.8% * (-0.45%/10%) = -3.7% for the reduction in employment. If the 1.1% and 0.45% can really be extrapolated to arbitrarily high minimum wages, then they have a perpetual motion machine. The increase in incomes keeps going up forever. If asked about a $30 or $50 minimum wage, the authors might demur. "Oh, of course you'd start to see bigger disemployment effects at that point." But why wouldn't they also see it at $13 and $15/hour? The $13 and $15 are minimum wages far large than what the 1.1% and 0.45% numbers are calculated from, so even extrapolating this far is dubious.

This discussion so far mostly applies to people advocating for very large increases in the minimum wage. Many pro-minimum wage economists place reasonable bounds on what the minimum wage should be. (For example, Dube argues that it should be half the median wage.) Some economists and policy advocates are more reckless. They use a crude summary of the empirical work, something to the tune of: "Empirical work shows that there's no effect on unemployment no matter how high you raise the minimum wage, so we can raise it however high we wish."

There is a certain fuzziness and lack of candor in the arguments offered by pro-minimum wage economists, the careful ones and the reckless ones alike. It's notable that even the reckless ones who advocate $15/hour minimum give a finite number. All of these people are making some version of the argument that disemployment effects don't really matter for small increases, but at some point these effects become important and overwhelm any positive effects on income. It's all very hand-wavy. Most economists would argue that for small increases, employers and employees can make various adjustments and avoid laying off workers. I've heard pro- and anti-minimum wage economists make this kind of argument, so there is general agreement on this point. Employers can adjust along margins other than the "total employment" margin, whereby they start needing to lay people off. But ramp up the minimum wage too high, and you exhaust those other margins. There are only so many amenities to rake back, there is only so much extra productivity you can squeeze out of your workers with strict work protocols, etc. Those unemployment effects eventually start to bite. Here is what bothers me. We know that those adjustments along other margins must be happening. Most employers of low-skilled workers have very thin profit margins, so there just isn't a lot of extra money to simply pay out higher wages. We can infer using the standard tools of economics that those adjustments are probably bad for the workers and the employers. But when pro-minimum wage economists talk about these adjustments, when they explain why the disempoyment effects don't appear until you raise the wage higher, they either ignore these other adjustments (which are adverse to the interests of employees) or misleadingly describe them as benefits. For example, there is a tendency for workers who are subject to a binding minimum wage to hang on to their current jobs longer and search more intensely for work if they aren't currently employed. These are costs, but minimum wage advocates often misrepresent them as benefits which offset the tendency toward reduced employment. Let's stop counting costs as benefits and vice versa. Let's stop pretending that costs don't exist just because we can't measure them very well. Let's also stop pretending that we can take an elasticity calculated on a 20% increase in the minimum wage (typical of the small increases in the empirical literature) and extrapolate it to a 100% increase. Even the "reasonable" minimum wage advocates have been sloppy on these points. 

Forcing Wages Up Is a Bad Deal For Workers

Suppose you own a factory staffed with assembly line workers or a warehouse staffed with runners who stock and retrieve items. How cool should you keep your building? You’re faced with an optimization problem: What is the profit-maximizing temperature? You could totally skimp on climate control and let the building get unbearably hot in the summer. But this doesn’t save you money, because you would then have to pay your workers more to tolerate the poor working conditions. Workers know that they will be uncomfortable, perhaps even miserable, working a physically demanding job in the heat. They presumably are aware of the potential for heat stroke (or they soon will be). They will either quit en masse or they will demand adequate compensation to continue working. Skimping on climate control will cost you money. There is a sweet spot somewhere, a temperature (let’s say it’s 75 degrees) that minimizes the sum of your labor costs and your utility bill.

It’s useful to think about what happens when you try to deviate from this sweet spot. Maybe you run some numbers, and increasing the temperature to 80 degrees saves you 50 cents per employee-hour on utility bills, but you’d have to pay them an extra $1/hour to endure the conditions. Skimping is a losing deal for the employer. Or, to put it another way, you have the opportunity to sell something to your employees that only costs you 50 cents but which they value at $1. (That something being “an hour’s worth of 5-degree temperature mitigation”.) Usually there's a deal to be made when one party can produce something more cheaply than what another party is willing to pay for it.

Employers negotiate these trade-offs all the time, sometimes implicitly and sometimes explicitly. Should a restaurant provide free meals for its employees at break-times? Maybe. (A restaurant I worked for in high school had this policy.) If it doesn’t, that means its employees will have to take a longer break for meals, go somewhere else, and purchase a meal. They’ll demand higher pay, knowing they’ll need to purchase a meal in the middle of their shift. The restaurant might have to compensate its employees something like the market price of a meal if it makes them fend for themselves, but a restaurant can usually produce a meal with a (for example) $10 market price at an expense much less than $10. It costs something to provide free meals; ingredients and line cooks cost money. But the savings on payroll make up for the expense.

Should an office have refrigerators and microwaves for its employees to use? Again, the company could scrimp on these expenses. The appliances cost something, and refrigerators impose a cost on your utility bill. But employees without a fridge and microwaves might need to either eat unappealing “nonperishable” lunches brought from home or go to a restaurant and purchase a meal. It’s worth something to the employee to have the option of relatively cheap home-made meals. It might be cheaper to buy the appliances than to compensate the employees for doing without these amenities.

Should you make employees buy their uniform or provide it for free? Give them a 15-minute break every four hours or make them work through? Give them flexible working hours or insist on strict clock-watching? Free coffee? Showers and a changing room? A gym? A training or mentorship program? Should you implement borderline-compliant standards of safety or above-and-beyond standards of safety? For all of these options, employers and employees negotiate a trade-of. The employer might think of itself as minimizing its total expenses. The employee might think of itself as purchasing an amenity from its employer, an amenity that the employer can produce relatively cheaply. The employees could earn higher wages if they all decided to forego all amenities, but they don’t want to.

Enter the minimum wage. (Or anything that “raises wages” by legislative fiat.) The naïve view is that the minimum wage simply raises all the affected workers’ wages and nothing else happens. No negative consequences whatsoever.  A slightly more sophisticated view, based on empirical work showing a low elasticity of demand, is that there is some minor job loss but the increase in wages more than compensates for this negative side-effect. An even more sophisticated view would account for employers raking back the fringe benefits (and fridge benefits) described above. The employer would have paid its low-skilled workers $7.25 an hour and given them free meals, flexible breaks, and free parking. Oops, now the employer has to pay, say, $10 an hour. The employer doesn’t take this lying down. That business's underlying economics haven’t changed. The marginal productivity of its employees hasn’t changed at all, but the employer now has to compensate them more in wages. It’s going to pull back $2.75 an hour in amenities, wherever it can find it. We know that those now-discontinued amenities were worth at least $2.75/hour, because that’s how much (in this example) the employees were paying for them, and there is almost always some amount of consumer surplus on top of what the consumer actually pays.  Given the loss of consumer surplus on amenities, we’ve almost certainly made these people worse off. But someone naively running regressions on government employment and wage data might wrongly conclude that we’ve helped them.

Running regressions on government employment statistics is exactly what many empirical researchers do. It’s a “Well, here’s the data we have” approach, like the figurative drunk looking for his keys under the street light. I have heard one economist lampoon this approach in the following way: These economists are living up to the straw-man stereotype that they only care about dollars and cents. They don’t seem to care that the work environment might become less pleasant or even intolerable if we force wages up by fiat. They don't seem to care that there are things an employee might value about their job aside from the dollars earned and hours worked.  It doesn’t seem to register with them that there are things they can’t measure. (Wouldn't it be stunning if people didn't care at all about the quality of their working environment, given that they spend a quarter to a half of their waking hours there?) It doesn’t even seem to register with them that their own field meaningfully informs us about those things we can’t measure. The discussion of amenities above is stuff from basic econ 101. It's simply applying the welfare economics you might encounter in a standard microeconomics textbook to the question of how much to pay in wages versus how much to pay in amenities. When we overrule people's agreements and make them take a deal other than they one they've chosen for themselves, we are far more likely to harm them than to help them. Thinking we can help people by forcibly altering their labor contracts is like thinking we can help people by removing and replacing items in their shopping cart.

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I should probably leave this part off, but I'm tempted to preempt a certain kind of response. It goes something like: "Yeah, right. Employer can turn up the heat and tell their employees to go suck it!" Perhaps followed by actual examples of Amazon runners suffering heat stroke and Chinese factory workers committing suicide over poor working conditions. (I've spoken to someone who worked at an Amazon fulfillment center, and by his account the media portrayal is a gross exaggeration.) Some people think that employers can claw back fringe benefits at will because they have "market power" or something. Okay. 1) So why do any employees offer any amenities at all to their employees? If employers can engage in arbitrary expense-slashing without incurring these other costs, why not do it? 2) Even assuming employers have market power and can pay lower than the fair market rate, they are still trading off between amenities and hourly pay. They would still have to pay their employees more in wages if they lowered their safety standards (for example), even if the total wage + amenities is lower because of market power. 3) The horrific real-world examples that come to mind, like heat stroke and draconian work protocols in Amazon fulfillment centers, are probably examples of exactly what I'm describing in this post. These examples usually involve low-skilled workers on whom the minimum wage or some other mandatory benefits legislation is binding. The employer legally must pay a higher wage than they otherwise would, so they slash amenities and try to squeeze more productivity out of each worker.

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.

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.

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.