Why do folks get so worked up over the
minimum wage? The best evidence shows that the net effects of increasing
minimum wages are trivial (the figure
on the right plots strength of results on the vertical axis and effect size on
the horizontal axis). As
Madeline Zavodny put it, the issue appears to be a “maximal conflict over
minimal effects.”
Moreover, it is
clear that state adoptions of minimums higher than the national standard are
not due to differences in economic conditions: wage growth, the cost of living,
income inequality, a high proportion of minimum-wage earners in the workforce, etc.
That these things should matter seems intuitively plausible. For example, a
recent article in Governing magazine
categorically states that state minimum-wage increases are driven primarily by growth
in the relative cost of living, especially where gentrification and
amenity-based tourism amplify
inequalities of income and wealth. But, when such claims are subjected to
rigorous empirical testing no relationships are found. Minimum wage increases are
apparently not driven by absolute or relative economic hardship or, absent
interaction with political variables, economic conditions generally.
What, then, explains
interstate variations in minimum wages? The best research on this issue done to
date fingers politics. My colleagues, Kawika Pierson, and Tim Johnson,
and I have replicated much of this research. Our analysis confirms most earlier findings: that minimums higher than
the national standard predict subsequent state minimum-wage hikes, that timing
matters, and that states, which enact minimum-wage hikes, are almost invariably
under Democratic Party control (although not all states that are controlled by
Democrats have higher minimums and neither the size of Democratic majorities
nor shifts from Republican to Democratic control appear to be correlated with
increases in state minimum wages.)
We have extended
this line of investigation in three directions. First, we show that a
disproportionate number of minimum-wage hikes are enacted during the
even-numbered years between presidential elections (so-called mid-term election
years). This variable turns out to be significantly more powerful than the
number of years since the last boost (federal and/or state), the main
timing-related mechanism considered in earlier studies. Second, simple
partisan control matters more than ideology. Earlier studies looked at partisan
control or ideology, but not both. And, third, after accounting for the
election cycle and partisan control, state minimums are found to vary inversely
with their cost to in-state consumers, either because states adopting them have
few minimum wage workers or because of tax exporting (i.e., shifting the burden
of the minimum wage to out-of-state consumers). Most economists believe that if
a jurisdiction can export taxes, it will. But our attention to this factor was,
in fact, triggered by the SeaTac initiative, which raised the minimum wage “for
the airport’s hospitality and transportation workers.”
We used mixture models with state minimums as our response
variable and year fixed-effects and the interaction between Democratic control
of the state legislature and low-wage or export employment as a percent of
total employment as our predictor variables. Our interaction terms are
consistently positive and significant. The interaction terms also dominate any
effect that Democratic control (either as a percent or a dummy) or legislative
ideology shows on its own. Interestingly, specifications featuring the
interaction between Democratic control of the state legislature and export
employment consistently outperform those featuring the interaction between Democratic
control and low-wage employment. The interaction models involving ideology also
work quite well, but are dominated by the interaction of a naive Democratic
control dummy (1 when Democrats control the legislature) and the jobs measures.
Stated statistically, there are good reasons to think that legislative ideology
scores are measuring demand for minimum wages ‘with error’ in this setting, and
concluding, therefore, that the real issue is party brand.
As improper as this is, we marvel at the fact that we can explain
40-50+ percent of the variance in state minimum wages net of fixed effects. This
seems like a lot of explanatory power given that we are considering only partisan
control, the jobs mix, and the election cycle. At the same time, we do not see
how these results can be reconciled with the notion that minimum-wage battles
are really about the policy’s material consequences. The variables included in
our models are simply too feckless for that interpretation to be taken
seriously.
Instead, they suggest that the primary
function of proposed minimum-wage hikes is rallying the party faithful to fight
mid-term elections and that when Democrats actually control legislatures they
must often put up or shut up, whether they really want to or not. In other
words, the minimum wage, like banning assault-weapons or abstinence-only
sex education, is basically a political football, an otherwise largely inconsequential
object, given symbolic importance by interparty rivalry.
Of course, minimum wage hikes are also symbolically
important as expressions of public concern for low-wage workers. Nevertheless,
this legitimate justification is difficult to reconcile with the fact the issue
tends to reappear on the legislative agenda every fourth year even in states
where the minimum wage is high and indexed for inflation.
2 comments:
I'm pretty good at finance, but macroeconomics is not my thing. So consider this the perspective of an intelligent non-specialist. Folks like me understand that our economy is most efficient when prices are allowed to find their own equilibrium. We don't have a theory to explain why the targeted price-fixing we see (wage floors and short-term interest rates, to name the two biggies) is a good idea. Am I too much of a purist here?
Doug, I'm a little unclear about your message. With respect to wage floors, their aim is a fairer income distribution. There are some monopsony models in labor econ that say they actually produce benefits greater than costs, but the evidence rejects those models.
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