Critique of the Illinois Economic Policy Institute Report: Raising the Minimum Wage

The Illinois Economic Policy Institute put out this report titled Raising the Minimum Wage.  I mentioned this in a previous post but I thought it would be worth giving it a much more thorough treatment here. I think this report is being used by policy-makers in Illinois to justify the recent minimum wage hike. If so, someone needs to dissect the report, vet its various claims, and debunk the stuff it gets wrong. Honestly, I suspect that Illinois politicians don’t really bother with the requisite scholarship or policy analysis that they’d need to actually govern effectively. Maybe a few ranking members read the executive summary of the report, but most probably didn't even get that far. I’m pretty sure that the $15/hour minimum wage was passed based on political considerations, not a cost-benefit analysis. I seriously doubt that the people running my state did their due diligence here. When I contacted my representative in the Illinois House, she forwarded me to another member of her party who was spearheading this initiative, Will Guzzardi.  He was not responsive. He’s made some public statements that badly misrepresent what the literature on the minimum wages says. I’m curious if the ILEPI paper is one of his sources. Even if not, I want to make it a little bit harder for policy think tanks like the ILEPI to just say whatever they want. If they are going to make bad arguments in a public forum, I think someone should point out how bad they are. If they are making dishonest or misleading claims, they should be held to account and publicly embarrassed for it. Every state probably has institutes like the ILEPI who put out policy papers. It’s worth taking the time to read what they say and, if necessary, trying to debunk these papers.

The Executive Summary starts with the sentence: “Illinois should raise the minimum wage.” To their credit, they are upfront about their intent. It becomes clear as you read the document that this was their true starting point, and all the “evidence” was assembled to reach this conclusion. Then follows an irrelevant statement that 13 states have a higher minimum wage and that nine of those states have unemployment rates lower than Illinois. As I read this I braced myself for some really bad econometrics. The report did not disappoint (or should I say didn’t fail to disappoint?). It also mentions the irrelevant fact that a majority of voters support increasing the minimum wage. Okay, but maybe that’s a function of dishonest policy advocates misleading them? Maybe that’s due to widespread economic illiteracy, a problem made worse by extremely biased policy papers like this one. In policy analysis, saying that something is democratically popular is a throw-away argument. Nobody decides to be pro-X just because slightly over 50% of the population support X. It's an irrelevant piece of information, so why bring it up?

The second paragraph begins: “Raising the minimum wage boosts worker incomes while having little or no effect on employment.” This is a misleading summary of the research. I’ve written about that here. The ILEPI isn’t alone in making this claim, but they are mistaken.

The report then describes a staged roll-out, eventually getting to $15/hour by July 1, 2024, along with absurdly optimistic estimates of how much incomes would rise for Illinois workers.

From the last paragraph of the executive summary: “Illinois’ current minimum wage of $8.25 per hour fails to prevent workers from earning poverty-level wages.” If the intent is to help poor households, the minimum wage is an extremely poorly targeted policy for it. $8.25 an hour is a perfectly good starting wage for a first job. Very few minimum-wage workers stay at that wage for long. Very few of them are full-time workers in a single-earner household. A 2014 report by the CBO found that only 19% of the increased wages from a minimum wage hike would accrue to families below the poverty line, with 29% accruing to households above 3x the poverty line. 

First sentence of the introduction: “The minimum wage is intended to ensure that working-class individuals can maintain a decent standard of living.” Of course, intentions are not results. It goes on:

“Despite this acknowledgement that poverty-level wages foster reliance on social safety net programs, a full-time worker earning today’s state minimum wage rate of $8.25 per hour brings home just $17,160 in annual income. This is $3,620 below the federal poverty line for a family of three and $7,940 below the federal poverty line for a family of four.”

This is just completely irrelevant. There are very few full-time minimum wage workers, and most minimum wage workers are in households that are well above the poverty line. Also, like I’ve argued before, the notion that our social safety net programs are subsidizing the employers of low-wage workers is exactly backwards. Safety nets makes the option of not working more attractive, which means employers have to pay more to attract workers.

Figure 1 is a stunningly bad piece of econometric reasoning. It lists the states with a $10/hour or higher minimum wage and gives the overall unemployment rate. Most of the research on the minimum wage focuses on teenagers or restaurant workers, in other words groups where minimum wage workers are highly represented. Minimum wage workers only make up a tiny proportion of total workers (2.3% of workers, according to the BLS). Total unemployment, calculated across the whole population, severely dilutes the effect of the minimum wage, and careful economists have caught on to this problem and adjusted their methods. I don’t know why they even bothered with this chart. It is far below the standards of modern econometric studies on the effects of minimum wages.

There is a long discussion of Chicago’s minimum wage hike. I’m not familiar with the attempts to study that particular city’s minimum wage policy. They claim (citing a paper by one of the report’s authors) that “…the policy change is working.” If I familiarize myself with the literature on the Chicago episode, I'll write up another blog post on that.

The report notes that many minimum wage studies find small elasticities: “In their meta-analysis of 64 studies, Belman and Wolfson report that a 10 percent increase in the minimum wage is statistically associated with a small 0.2 and 0.6 percent drop in employment or hours.” A couple of reactions to this. Do they really think that a 100% increase in the minimum wage would only cause a 2% to 6% increase in unemployment to the relevant workers? Taking the low estimate: Would a 200% increase only cause a 4% increase in unemployment? That seems implausible, but as we’ll see below they actually do take these estimates and extrapolate them far beyond where they are appropriate. For another thing, the disemployment effects are much stronger when you measure not just employment (as in: Are you employed? Yes or No) but also measure hours worked. You get much larger elasticities that way, and in fact the loss in hours worked can be large enough that workers actually lose net income, despite their higher wages.

Then they turn their attention to Seattle, which I do know a little about: “However, another recent study by researchers at the University of California, Berkeley found that minimum wage increases in Seattle resulted in higher earnings for affected workers in food service but had no negative impact on their employment.” This is incredibly misleading. They fail to cite the two papers by Jardim et. al. which had a much more detailed dataset. The Jardim group had access to state unemployment insurance data which had “hours worked” in addition to earnings, which allowed them to compute the hourly wages for each worker, before and after the minimum wage hike. This allowed them to 1) accurately identify low-wage workers and 2) track "hours worked" over time at the individual worker level. They found huge disempoyment effects, but these showed up as lost hours worked and slowed growth of jobs in the low-wage sector. The Berkley group’s study was too crude to pick up these effects. In fact, the Jardim et. al. papers effectively replicated the Berkley group’s findings by only looking at restaurant workers (in other words, by ignoring some of the rich features of their dataset), which is strong evidence that all these “null result” papers are hobbled by inadequate datasets. When you have the data in its full detail, the disemployment effects show up quite clearly. Pardon me for saying so, but this shows very bad faith on the part of the authors of the ILEPI report. Clearly the results of the Jardim group discredit the conclusion the ILEPI would like to reach, so they fail to disclose it to their readers. (The Jardim et. al. papers were out when the ILEPI published this report.) This is part of the reason why we get so much bad policy.

The paper mentions more intense job search and reductions in turnover as ways of explaining the low disemployment effects found in (some of) the minimum wage literature. As I’ve written before, those are costs, not benefits. People who are trying to justify a higher minimum wage need to be upfront about this. A standard economic treatment of these issues treats them as costs, as part of the deadweight loss. (See the last image in this post and the surrounding discussion; the small triangle is the deadweight loss from foregone employment that would have happened at the natural market wage, and the pink rectangle is the potential deadweight loss from extra job search.)

There is then a discussion of who benefits (demographically speaking) and by how much. All of this is irrelevant if you don’t buy their assumptions about disemployment effects, but go ahead and read it.

I was perturbed by the discussion and tables under the heading Economic Impact: Minimum Wage Hikes Would Grow the Illinois Economy. “Drawing on the economic research, Figure 4 assumes that every 10 percent increase in the minimum wage causes a 1.1 percent increase in worker incomes and a 0.45 percent decrease in working hours. These “elasticities” are midpoints between the comprehensive analysis of dozens of minimum wage studies (Belman & Wolfson, 2014) and the more recent, and perhaps more relevant, evaluation of the Chicago minimum wage hikes (Manzo et al., 2018).” I criticized these assumptions and the resulting table, Figure 4, in a recent post.

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 is a general criticism I have of this report and of other advocates of minimum wages: Okay, so show me what happens with a $50 minimum wage. Or a $1,000 minimum wage. Are your equations and calculations telling me something sensible? If they are obviously missing something at these very large values, then isn’t it likely they’re missing something, even if it’s subtle, at lower values?

The report attempts to quantify “multipliers” using IMPLAN software, which it refers to as a “’gold standard’ in economic impact analysis.” I’m not familiar with the software, so someone who has done real scholarly economic research can chime in and tell me if theirs is an accurate description or legitimate use of the software. I find it highly dubious that some off-the-shelf software can accurately simulate a real economy after a policy change such as a minimum wage increase. I don’t know if this kind of thing is common in economic research, but I’m pretty sure it isn’t valid. Figure 5 shows the results of these simulations. Unsurprisingly, they find net benefits for the $10, $13, and $15 minimum wage. Here is where my general critique comes back in: Show me what happens when you plug in $30 or $50, or $1,000 for that matter. Is there still a “net economic benefit”, even though no reasonable person believes there would be one? To their credit, they disclose that there would be a large reduction in hours worked (again, assuming the IMPLAN computations are right): “The impact on employment would be a drop of about 220 million labor-hours in Illinois. However, despite the estimated drops in total hours of employment, the positive economic impact means the minimum wage hike would positively impact more workers than those who would be negatively impacted by it.” I am just incredulous at this line of argument, which I’ve seen elsewhere. Even when you get minimum wage advocates to admit to some kind of job loss, they dismiss them in light of the “net benefits” or otherwise assume it will just turn out alright for the people who lose their jobs. Maybe it’s the most vulnerable workers with the lowest skill-level who lose their jobs, and the benefits accrue to the better-off among the minimum wage workers? Indeed that would be a sensible a priori assumption, and that’s basically what the Jardim et. al. studies of the Seattle minimum wage hike found. Weighing these job losses against economic gains simulated in canned software, and siding with the simulated gains, is highly suspect.

The report claims: “As a result, more than 35,000 low-income workers in Illinois would be lifted out of poverty if the minimum wage was increased to $10 an hour. This would represent a 2 percent drop in the total number of people living in poverty across Illinois.” Again, we’re assuming that the increased wages aren’t offset by hours reductions or job cuts, which would plunge some of these workers into even worse poverty than what they’re now experiencing. See their summary of poverty reductions in Figure 6. Again, I’d like to see what this table looks like for very large increases in the minimum wage. If it tells us that there would be a large reduction in poverty at $20 or $25, it would make me even more skeptical of what it’s telling me about what’s happening at $10 and $13. Figure 7 in the same section attempts to quantify the impact on the Illinois State budget. Higher minimum wages, to the extent that they actually increase take-home pay, might increase income, sales, and property taxes. They’d also make people less dependent on SNAP and other transfer programs. Once again, the bigger the minimum wage hike, the more money Illinois saves! I hate to repeat myself, but let’s see them plug in $50 or some other absurdly high value. If they think they have a true perpetual motion machine, let them say so. If they don’t, let them explain what’s fundamentally different about “small” minimum wage hikes. (Scare quotes around “small” because we’re talking about nearly a doubling here.)

Obviously this report has a lot of problems, and I hope nobody is citing to argue for a higher minimum wage. For my readers in other states, check to see if your state has a counterpart to the Illinois Economic Policy Institute. There is some low-hanging fruit here in terms of policy advocacy. Many of these state-level think tanks are poor in resources and can’t afford to fund high-quality scholarship. They put out stuff like this to influence policy. Don’t let them succeed, not if they haven’t earned it. If they put out reports that are full of mistakes, material omissions, poor arguments, and motivated reasoning, call them on it If there is a local think tank that you are sympathetic with, do the same for them and help them make more convincing arguments. Most people in the policy analysis space probably think they can just uncritically cite a study (like the ILEPI piece) and be believed by their receptive audience. Don’t make it too easy for them. A lot of published research is just no good, and a little bit of critical reading can go a long way. People who put out stuff like this under their name should feel some hesitation or embarrassment. They need to do their scholarship with the feeling that, "I can't just say anything. It has to at least make sense. Otherwise that jerk Jubal Harshaw is going to jump on me." David Henderson set an excellent example of what I'm talking about here, here, and here. Maybe the authors of the CEA report were able to brush off Henderson's criticism with a, "Who cares what this Henderson guy thinks." But I think most academics, deep down, are honest and will feel nagged by the idea that they've said something wrong or easily critique-able. Putting out these critiques slightly changes the incentives in an Adam Smith Theory of Moral Sentiments sort of way, if not in a Wealth of Nations sort of way.