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.

The Government Version of Price Discrimination

Local governments often dig themselves into a deep hole. Tax rates need to be high enough to cover overall spending, some of which is impossible to cut. Pensions and other long term liabilities are often a big piece of that. A city can't simply decide not to pay pensions, because those are contractual obligations. The problem is that tax rates that are high enough to pay for spending are so high they deter new businesses from entering. So local governments often offer special tax breaks and other incentives to specific businesses to entice them. They couldn't simply offer everyone the same deal, because they'd go broke. (Broke-er?) But it's still a winning move to give a specific new business a lower tax rate. It's a good idea for such a city to charge different tax rates to different businesses, depending on their willingness to incorporate elsewhere.

It struck me that this looks a lot like the common practice of "price discrimination," which is economists' horrible term for charging different prices for the same product or service based on the buyer's willingness to pay. It's a perfectly defensible practice, even though people get morally indignant about the possibility that they might not get the absolute lowest possible price. Actually, even people paying the high price benefit (generally) from price discrimination. The price discriminating company can attract more customers by offering different prices to different customers, which allows them to spread fixed costs across a larger portfolio of customers. That allows overall prices to be lower than otherwise. Price discrimination is common when there are high fixed costs. It might cost you, say, $10 on average to serve all of your customers, naively dividing total expenses by total customers. But in many cases the marginal cost of servicing one additional customer is lower than the average cost. Maybe you're a restaurant with excess capacity near the end of the lunch hour, and you'll have to throw out a bunch of prepared items if they don't get sold. You might be willing to offer some kind of discount on the fly. Or maybe you're a doctor serving both wealth and indigent populations, and you know your less wealthy patients will simply do without medicine if you don't offer them a low price. It can be much more subtle than these examples.

I should be clear here. I don't think local governments are engaging in clever, well-planned strategies to maximize their revenues. I think they're locked in place by fiscal profligacy, because previous generations of politicians made irresponsible promises to their constituents. Still, there's a superficial resemblance here, so I thought I'd remark on it.

Were Early Climate Scientists "Climate Deniers?"

The question was so deep that almost no one had thought to ask it before: Does a climate exist? That is, does the earth’s weather have a long-term average? Most meteorologists, then as now, took the answer for granted. Surely any measurable behavior, no matter how it fluctuates, must have an average. Yet on reflection, it is far from obvious. As Lorenz pointed out, the average weather for the last 12,000 years has been notably different than the average for the previous 12,000, when most of North America was covered by ice. Was there one climate that changed to another for some physical reason? Or is there an even longer-term climate within which those periods were just fluctuations? Or is it possible that a system like the weather may NEVER converge to an average?

This is from James Gleick’s excellent book Chaos. Earth's climate (at least as it was understood at the time Gleick wrote Chaos) is non-stationary. It doesn't have a long term average, and as the excerpt implies one epoch's "average" climate can be very different from another's. Like a random walk, it doesn't settle on or revert to a long term average value. The book contains a reference to this paper from 1964, to flesh out some of the details. I don't know how much or how fast the Earth's climate changes due to these endogenous drifts (as opposed to forcings like CO2 or aerosols), but it seems like this should color our view of climate change somehow. 

I wonder of Gleick would feel uncomfortable writing that paragraph today. The climate of intellectual thought has indeed drifted to a different regime, and some of these basic points about the history of climate science might not be welcome. There is a discussion in Chaos of Earth getting "kicked" into a very different climate and getting stuck in that equilibrium. But it's not the "Venus Earth" scenario or even a very much warmer but still livable Earth. Rather, early climate modelers believed, based on their computer generated scenarios, that a "White Earth" was possible: an Earth in which the oceans are all covered in snow and the continents with ice. Climatologists were scratching their heads that their computer simulations kept falling into this scenario, but the real Earth never seems to have switched to this regime.

Don't read me as having some kind of hidden meaning or implication here. I'm just sharing because I found it interesting. Chaos is well worth a read. 

So Everyone Knows the "Right" Amount of Federal Spending on the Special Olympics?

I was annoyed by the media's pouncing on Besty DeVos for proposing a budget that cut federal funding to the Special Olympics. My first thought was that isn't not the business of government to be funding such things in the first place, no matter how laudable the organization's work. "How much should we fund the Special Olympics with federal money?" is a very different question from "Do we as a society value the work done by this organization?" The answer to the former can be zero, while the answer to the latter can be "Yes, very much so." A society that highly values religion and religious institutions (as in early America) would still be very wise to draw a boundary separating church and state. I don't see why that principle shouldn't apply here.

My slightly snarkier response was, "Oh, really? Suddenly everyone knows exactly the right quantity of federal spending on the Special Olympics? And that it just so happens to be the current amount?" What brilliant policy analysts we all are! How wonderful it is that we all paused, took a deep breath, and performed a cost-benefit analysis of this single budget item. Amazing that we all computed the operating needs of the Special Olympics, estimated the volume of charitable giving that can be counted upon, and came up with precisely $17.6 million as the difference. High-fives for not answering such important policy questions with your emotions!

My even snarkier response was something  like: "Why do you all hate the Special Olympics so much?" (I very nearly titled this post "Why Do Betsy DeVos's Critics Hate the Special Olympics So Much?", but then I realized that some people only read the title and don't bother to read the actual post.) Nobody was calling for an increase in spending on the Special Olympics. Nobody was paying attention at all until it became a hot-button news item. There's a lot of room between $17.6 million and infinity. Why weren't you calling for an increase? Here is a crystal ball that shows us a world where that number is twice as high, or another one where it's ten times as high. Would the denizens of that world pounce on you for your insufficient spending on the Special Olympics? Would they scorn you for failing to act to increase it? I'm sure in those worlds, anyone arguing to cut spending on a beloved cultural event would face the same kind of wrath as Betsy DeVos. There is no rational sense of "the right amount," just an emotional reaction that "beloved cultural icons shouldn't be defunded, ever." This should give us pause, because there is no way of deciding that the current amount of spending on something is too high (even if it really is too high). The recent flap over the Special Olympics has nothing to do with actual policy and everything to do with virtue signalling. There is plenty of reason to believe that the Special Olympics would be able to cover the shortfall with additional charitable givings if the federal government cut them out of the budget. See the Reason piece linked to above. The Special Olympics has revenues of $149 million, and federal grants are ~10% of that. A slightly more aggressive fundraising drive would surely cover any shortfall. Unless we really don't value the Special Olympics as a society. In which case forcing people to subsidize it is just wrong.

How to even steelman this? Maybe someone thinks, "Governments are deliberative in setting budgets, so we can be confident that the $17.6 million figure is right. It's vetted by many expert policy analysts. That explains why it doesn't need to be higher." In fact I often hear this "policy is the way it is for a good reason" argument, but I think that's a mistake. If I were trying to make the case that budget decisions are not deliberative and not backed by any kind of rational analysis, the DeVos story would be Exhibit A. "It's $17.6 million. Let's make it zero!" (public outcry) "Okay, we won't cut it at all!"

Drug Policy Deontology

On some level, drug prohibition is just deeply wrong. Policy analysis is important. We shouldn't be too flippant about over-ruling a cost-benefit analysis with an emotional appeal. We need to bring empirical evidence to bear, employing theoretical insights from economics, psychology, sociology, political science, and, yes, even philosophy. We should do a careful accounting of costs and benefits. But at the same time there are some bright lines that we should never cross. Using violence to stifle drug use is one such bright line. (By the way, in my reading the dry, dispassionate cost-benefit analysis clearly renders a verdict against drug prohibition. It's a policy that fails even on its own terms.)

There is a friend of the family I know who is on high-dose opioids for chronic pain. I'll refer to him by a made-up name: George. George is actually a composite of several people I know. He's been on several different opioids: high-dose Oxycontin, the fentanly patch, and presumably several other drugs I'm not aware of. Some people in my family think George is "faking it" and just likes to get high. Others think he has a real problem and needs the medicine to function. George is sometimes hard to get along with. This probably colors people's views of his prescription drug use. Other family members say, No, no, don't judge his very real problem in light of his otherwise problems. He suffers from a very real problem that can affect even the best of us. There is always this back-and-forth about whether people like George should be cut off or continue receiving their prescription.

I have a serious question for the "cut George off" folks. Who owns George? Who owns his body? Who does George's brain and bloodstream belong to? Anyone who claims the right to cut off George is claiming an ownership right in George's body. More to the point, they're claiming controlling ownership of George, as if poor George only owned 49% of shares in himself and a controlling board of trustees owned the rest of him, enough so to overrule him.

I can force myself to discussed drug policy in a detached, dispassionate way. I can make economic arguments, cite statistics, weigh evidence, and so on. But I actually think the moral case against drug prohibition is the strongest. People are sovereign over their own bodies. To try to dictate someone else's behavior under the threat of violence is to claim outright ownership of them. That seems wrong to me.

We don't have to argue about whether George is really in pain or just faking it to get high. George has the right to get high if he wants. If he's a burden on someone who has to clean up his problems, that person can cut George off or kick him out. I don't think George has a right to impose obligations on other adults because of his own irresponsibility. Whomever George is burdening has a basic right to sever the relationship. Or that person can choose to carry the burden and use the threat of cutting-off to change George's behavior. I don't object to that kind of soft power. Private action to solve a private problem is fine. But it's wrong to use of state power to force George into compliance. It's wrong to arrest him or his dealer for engaging in a mutually agreeable transaction. It's immoral to detain, beat, cage, and sometimes kill people because they consume or sell "the wrong" psychoactive substances.

Maybe I am really a consequentialist at heart, because I feel some unease as I write this all down. What if the George I am discussing is a child? Don't I have the right to stop him from ingesting something that's potentially dangerous, and physically restrain him if he doesn't comply? What if I have private knowledge that George is about to ingest something truly dangerous? Say, I know he's accidentally put something toxic into his tea, or he's about to ingest some heroin that is from a batch that just poisoned a bunch of addicts in the community (and I know this but George doesn't). Don't I have an obligation to slap it right out of his hand? What if there is a drug that turns people into violent zombies? Don't I have a right to restrain someone before he's overcome with irrational drug-fueled rage and before he gains the super-human strength of someone in this condition? (The tendency of any actual drugs to do this has been grotesquely exaggerated, by the way, though some kinds of "synthetic cannabis" appear to have this effect. Oh, if only there were a safe, naturally occurring version of synthetic cannabis!) These are extreme examples. I could stipulate that we're mostly talking about adults within the normal range of rationality. But it does seem like I veer to consequentialism whenever it gives a different answer from the pure deontology of "don't use force to stop drug use." But actually I think the bright line rules of deontology make sense. I favor legal homosexuality (a fairly recent development, let's remember) and gay marriage not because of a cost-benefit analysis, but because in some deep sense it's wrong to interfere with people's love lives. I favor "not throwing babies into fires" because it's just deeply wrong. (Perhaps some extreme environmentalist, like Thanos, would want to weigh the potential benefits of population reduction here. But most people just instantly see the right answer without requiring analysis.) I favor legal prostitution because I think sex workers own their bodies, and the state has no right to dictate what they can do with it. Bright line rules along the lines of "don't interfere with other people's affairs" get us to the right answer for most of these questions most of the time. The moral arguments against drug prohibition (among other prohibitions) is the most important one.

Unfortunately, claiming the moral high-ground is not a good way to win arguments and convince skeptics. "You're just evil" is a good thing to say if you want the listener to stop listening to anything else that comes out of your mouth. It's a poor way to communicate with people who really need to hear you, unless you're drawing a line in the sand and trying to "win." ("We hold these truths to be self-evident..." isn't something you say to the King of England if you're trying to open up a dialogue on moral inquiry.) I'm putting all this down because this is what I really think, and I feel like I might as well say so once in a while. If anyone who has read this far is a proponent of drug prohibition, I just want you to think about how deeply wrong it is to claim ownership of other people's bodies. Maybe that's not the framing you would use for your preferred policy, but that's in essence what drug prohibition does. If anyone thinks it is okay to violate self-ownership to meet some kind of policy goal, to "optimize" society by twiddling various policy nobs and levers, then let's think about cases where this would abridge a freedom that you cherish. Suppose the social science rendered a clear verdict in favor of banning private and home schools, or against legalizing homosexuality, or in favor of banning certain kinds of speech, or in favor of forced racial segregation. Most of us rightly recoil at even considering these things. My own drug policy deontology isn't something weird that I just made up. It's something everyone is doing all the time for the freedoms they happen to approve of. Let's apply that attitude more broadly. Other people's freedoms shouldn't require your approval.

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.