Minimal Reasoning About the Minimum Wage
Kevin Drum is happy with the employment situation in Oregon because he feels that he has some serious evidence refuting the notion that higher minimum wages ceteris paribus don’t result in lower unemployment. Talk about over-reach.
In 2002, voters here raised the state’s minimum wage — and mandated automatic annual increases to keep up with inflation. Oregon’s 100,000 or so minimum-wage workers are paid at least $7.50 an hour, a rate that will increase to $7.80 in January, well above the federal $5.15 minimum.
Four years later, though it is impossible to say what would have happened had the minimum not been raised, Oregon’s experience suggests the most strident doomsayers were wrong. Private, nonfarm payrolls are up 8% over the past four years, nearly twice the national increase. Wages are up, too. Job growth is strong in industries employing many minimum-wage workers, such as restaurants and hotels. Oregon’s estimated 5.4% unemployment rate for 2006, though higher than the national average, is down from 7.6% in 2002, when the state was emerging from a recession.
What is wrong? None of these statistics actually measure just minimum wage jobs. For example, that the unemployment rate in Oregon is down from its previous peak means very little. Unemployment generally drops during an economic expansion and wages rise. So this doesn’t mean that wages and unemployment dropped because the minimum wage increased. Further, the argument isn’t: if you raise the minimum wage the economy wont expand. The actual argument is: ceteris paribus, raising the minimum wage (or instituting any price floor) will lead to excess demand. This isn’t really as controversial as people like Kevin Drum like to make it sound. Draw supply and demand curves and set the price floor above the market clearing wage. Supply is larger than demand. Granted this is theoretical, but there is not just some evidence that supply (demand) curves have a positive (negative) slope with respect to price; there is a veritable mountain of evidence. This is why we have the term law of supply and demand. If we were really going to use this evidence we’d have to look just at minimum wage jobs and then control for the fact that Oregon’s economy went through an expansion. Failure to do this means that the data isn’t telling us all that much.
That wages are rising also doesn’t help either. After all, as Brian Doss notes, people who benefit from this kind of policy weren’t going to get higher than minimum wage jobs anyways so noting that wages have gone up for those in jobs that pay above minimum wage is irrelevant. And even the fact that there is job growth in industries that have minimum wage workers, while a bit better, still doesn’t tell us all that much. After all, the economy is expanding so it is reasonable to think that part of the expansion is due to the expanding economy. That is, we’d have seen an expansion in this sector of the job market as well. Again, we’d want to control for the effect of the economic expansion.
Basically, what we’d like to know is, how many minimum wage jobs would we have at say $5.15/hour and at $7.50/hour, and take out the effects of the expanding economy? None of the above statistics tell us this answer, not even close.
So when Kevin writes,
Read the whole thing. Deborah Solomon provides both sides of the story, but it’s worth noting that virtually all the evidence on the anti-minimum wage side is either anecdotal or theoretical. The evidence on the pro-minimum wage side is concrete and statistical. You can decide for yourself which kind of evidence to believe.
It becomes painfully obvious how ignorant he is of this issue and what actually does constitute evidence. For as Alex Tabarrok and Tyler Cown have noted most of the people who work at minimum wage jobs are below the age of 25. Completing their education and developing a work history will ensure that many of these people will see a substantial rise in their hourly wage rate. Thus the idea that the minimum wage is a tool to fight poverty is highly suspect.
And surely Kevin Drum isn’t intending to impugn the reputation of David Neumark. Prof. Neumark has, you know, actually done the kind of statistical analysis that Kevin thinks he has done. Prof. Neumark’s conclusion in regards to raising the minimum wage,
The evidence from a large body of existing research suggests that minimum wage increases do more harm than good. Minimum wages reduce employment of young and less-skilled workers. Minimum wages deliver no net benefits to poor or low-income families, and if anything make them worse off, increasing poverty. Finally, there is some evidence that minimum wages have longer-run adverse effects, lowering the acquisition of skills and therefore lowering wages and earnings even beyond the age when individuals are most directly affected by a higher minimum.
Perhaps Prof. Neumark is simply a Republican stooge. And regarding the actual question we want answered here, Prof. Neumark notes that for every 10% increase in the minimum wage employment for teenagers falls by 1% to 2% (lets call it 1.5%). This translates into just under 8% fewer jobs for teenagers than if the minimum wage hadn’t been raised. And here is an interesting finding Prof. Neumark mentions, “A higher minimum wage increases the probability that a teenager will leave school to look for a job.” Not exactly the best way to go about reducing poverty and peolple living on low incomes.
It is probably true that small changes in the minimum wage have an effect that is too small to notice. However, changing the minimum wage from $5.15 to $7.80 isn’t a small change, that is a 50% increase in the minimum wage. And on top of this there are better ways of fighting proverty such as with the Earned Income Tax Credit. Under this policy it not only pays to work (i.e., reduces dependency on welfare and other government transfers) it also pays to take better paying jobs. And finally, Kevin’s dopey comment about theory vs. statistics is just that, dopey. What does Kevin think economists use to develop their statistical models if not theory?