Friday, October 9, 2015

Where Does the Minimum Wage Max Out?

Alan Krueger says we should set a nationwide wage floor no higher than $12/hr, since that’s as far as our research knowledge extends.  We know that a statutory minimum at that level will have little or no employment impact, but anything above that is beyond empirical familiarity—we just don’t know.  He is open to cities, where wages and living costs are higher, to experiment with higher wage floors, but not the Feds.

Far be it from me to dispute Krueger, who, with David Card, launched the revolution in empirical minimum wage studies a generation ago, finding in the process that he has become a poster boy for quasi-experimental methods.  Good for him!  But I don’t think his inference from the existing research is warranted, for three reasons.

1. From a policy perspective, the minimum wage could be set either too low or too high.  It would be too low if large gains in equity, poverty reduction and economic dynamism could be achieved at little cost in employment.  (Dynamism could take the form of innovation to offset higher labor costs.)  It would be too high if employment at the low end of the labor market were crippled.  What Krueger seems to be aiming at is a zero risk of overshooting the ideal minimum, as if there were no cost to undershooting it.  But surely, if we know that $12 is unlikely to bite back, then a proper balancing of risks should take us somewhere above $12.

2. A high percentage of low-wage jobs are intermittent.  People work for a while, get laid off or quit, then go back to another crapola job, and so on.  This means that a lot of the employment loss of a “too high” minimum wage simply means that workers will earn more money per hour but work fewer hours per year.  What that means for their bottom line depends on the elasticity of labor demand with respect to the wage mandate.  Even the economists on the payroll of the restaurant industry who have done battle with Card & Krueger find low elasticities, meaning that most intermittent workers would come out ahead despite longer spells of unemployment.  This doesn’t mean that we shouldn’t worry about unemployment at all, but that it isn’t quite the problem it’s made out to be.

3. Even if the minimum wage is set at a level that eats into employment, this can be offset by other policies.  Macropolicy, especially on the fiscal side, should push for lower overall unemployment rates.  We should finally begin to treat all young people, especially from low income backgrounds, as the repositories of incredible potential they are, by investing in their education, skill and practical experience—there are lots of models for this.  A ramping up of skill would, over time, lead to productivity gains that would support a higher wage structure.  The point is that the minimum wage is one piece of a much larger mosaic of economic policy, and its effects differ depending on what else is being done.

So is $15 the magic number?  I don’t know.  Like Krueger would probably say, we need more research.  But what I do know is that, if $12 is very safe, the right number is higher than that.


Denis Drew said...

AT LAST! Someone actually thinks of (thinks out) the practical trade off between the size of a minimum wage raise and the possible cost in jobs. IOW, if the wage rose 100% (which $15 today would in many places) and employment in that category (below 45 percentile) dropped even disastrously, 25%, labor would still be way ahead. Average raise across the 45% would be 50%.

Noto bene: $15, five years from now is $13.50.

Differential minimum wage depending on local living costs? As hinted just above, a higher wage ($15) in, say, South Carolina could mean the same overall amount of money going to the same overall demographic cohort (low-wage workers) -- but many would get more while a some got nothing (at least in their personal short run). So in a way that could count as A WASH. OTH, a differential would encourage $15 jobs in Ohio to move to $12 South Caroling -- A GIANT LABOR DEFICIT; another version of the race-to-the-bottom.
* * * * * * * * * *
This scaled concept needs to be articulated almost every time -- and if objections to practicality of academic researchers "guesstimating" about this arise they should at least be stated and probably some such framework should at least be hazarded.

Within this framework should be delineated the different sales -- and therefore employment -- effects at different low wage businesses depending on differing labor costs. Walmart with 7% labor costs will feel much less impact on prices (not necessarily on sales) of a large wage raise than than McDonald's with 33% ($15 raise prices there 25%).
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There is the possibility that raising wages an average 50% for the 45% of employees who take 10% of overall income (plausible representation of $15 federal minimum wage) would actually increase employment at their level -- as 5% of overall income were shifted to them from the 55% who now take 90% -- and they spent (do spend) disproportionately in lower wage businesses.

Denis Drew said...

(continued from above}
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I read a couple of days ago of some samplings of economists views of the possible employment effects of raising the fed min -- mostly of the eco 101 variety. I suspected that if whether the min was $5.15 or $11.15, they would be saying exactly the same things. I suspected they took (take) whatever the min is presently as some kind of "natural" starting point -- close enough anyway. I didn't think most of these progressives had any idea or even any curiosity about how $7.25 came to be in 2015.

Is the current labor price just a little low because of past moderate neglect -- or is today's price world-turned-upside-down low because of decades of mad, mad neglect -- just to state the outside ranges? Employees in Fight-For-Fifteen have no "mathi" idea for their price points either -- or do they? They are in touch at least intuitively with how much their wage demands would push prices up in different businesses -- and at least intuitively with how customers will react.

The chart below should have no trouble answering the range of neglect question (not that it will necessarily get past ivory tower intuition). In a nutshell: LBJ's 1968 min wage was $11 an hour -- per capita income has about doubled since.
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yr..per capita...real...nominal...dbl-index...%-of
(2013 dollars)


Anonymous said...

My question is why isn't the minimum wage pegged to something like the average income?