Oregon’s leading economic blogger, Mark Thoma,
recently called for an increase
in the national minimum wage. I have no problem with the thrust of his
proposal, but I do question some of his economic analysis.
Mark asks, “doesn’t an increase in the minimum wage reduce
employment?” And, answers, “No.”
No problem with that. It is entirely consistent with what we
know about the effects of moderate increases in wage floors: We know that moderate
minimum-wage hikes increase the wages of those earning minimum wages and those
just above the minimum (Dube,
Lester and Reich, 2010), although typically not much or for long (Congressional Budget Office, 2014).
It is likely that research being carried out on more aggressive minimum-wage
increases in Seattle or Los Angeles will show larger and longer wage increases
than those seen previously. We know too that moderate increases in wage floors do not measurably reduce total employment
(Card and Krueger 1995;
Neumark
and Wascher, 2008; Dube,
Lester, and Reich, 2010; Doucouliagos
and Stanley, 2009; Lerner,
2014; Schmitt,
2015).
But then Mark goes on to note that: “This is just what you
would expect if minimum wage workers are paid less than the value of their
marginal products, i.e. less than their value to the firm. In such a case, an
increase in the minimum wage does not push workers’ compensation beyond the
point where they remain valuable to the firm. The main effect is to
redistribute income from managers and owners to workers in a way that better
reflects the contribution of each to the production of goods and services.”
Here Mark goes beyond the evidence: it appears that the main responses to moderate minimum-wage
hikes are (usually small) price increases (Aaronson,
2001; Lemos,
2008; Aaronson,
Agarwal, and French, 2011; Hirsch,
Kaufman, and Zelenska, 2015), wage compression (Autor,
Mannning, and Smith, 2016; Hirsch,
Kaufman, and Zelenska, 2015, to be fair to Thoma, these studies support the
notion that employers may also compensate for boosting wages at the bottom by
cutting them at the top), and productivity improvements, in part due to
reductions in labor turnover (Howes,
2005). Lemos (2008)
concludes that owners rarely if ever absorb minimum-wage increases in the form
of lower profits; evidently most of the burden is shifted forward to customers.
The only evidence I know of that would contradict Lemos’ conclusion is reported
by Draca, Machin, and Van Reenen (2011),
who concluded that the adoption of a minimum wage significantly reduced
profitability in the United Kingdom.
According to Schmitt
(2015) minimum wage hikes have little or no effect on job totals because
“the cost shock of the minimum wage is small relative to most firms' overall
costs and only modest relative to the wages paid to low-wage workers.” In other
words, enterprises deal with cost shocks that are a lot bigger all the time.
Indeed, weighed against the economy as a whole, the
effects of minimum wage changes are tiny. According to the Oregon State
Economist, the total wage premium associated with the current $9.25 minimum wage
floor accounts for less than .5 percent of the state’s total compensation pool.
The cost of the recently enacted legislation on wages (wages below the state
median) is estimated to be little more than $2 billion, where final output is
over $170 billion per annum. Consequently, it is hardly surprising that the
visible consequences of minimum-wage boosts are indistinct and exceedingly
difficult to discern, let alone measure.
As a result, economists often focus their attentions on
bellwether populations (e.g., relatively low-skilled individuals, as described
by their ages and education levels, as in Clemens (2015) or Sabia (2008)) or industries (usually
quick-service restaurants, although Howes (2005)
looks at home healthcare and Draca, Machin, and Van Reenen (2011) at residential care homes
in the UK) to suss out the effects of minimum-wage hikes for individuals,
workers or service recipients, and enterprises.
This sort of analysis produces several results that are
inconsistent with the notion that low-wage workers are paid less than their
marginal revenue product. First, there is compelling evidence that minimum wage
hikes are associated with reductions in the employment of younger,
lower-skilled, and less-well educated employees (i.e., presumably less
productive workers) in favor of older, higher-skilled, and better educated
employees. There is also some evidence
of rationing inefficiency: higher minimum wages attract people with better
qualifications, who would not normally be in the workforce, to seek low-wage
employment, thereby displacing some of those in the labor force at the time of
the increase.
For example, in the bellwether
industry my colleagues (Kawika Pierson, Jon Thompson, and Robert Walker) and
have looked at here in Oregon, childcare,
where staffing, driven by regulations on caregiver-to-child ratios, accounts for
about 80 percent of expenses and nationally the minimum wage is also the median
hourly wage, it’s easy to see that Oregon’s high minimum wage results in a
relatively high median (and average) wage. For example, the median is nearly
two dollars an hour more than in Idaho, with no state minimum, a 26 percent
premium (this contrasts with the fast-food industry where wages account for
only 25 percent of costs and the median wage difference is only 11.5 percent). Not
surprisingly, Oregon also has among the highest childcare costs in the nation –
and among the best qualified childcare givers. For example, according to LEHD
data (the D stands for dynamics, so this statement is not inadvertently repetitive)
set, which comprehends information on worker education-employment by specific
industry and by quarter for all states from 1993 through 2012, there is no
significant difference in the education levels of fast-food workers in Oregon
and Idaho; in childcare the difference averages over one full grade level –
indeed, nearly half (42 percent) of the certified teachers in Oregon’s registered
child-care centers have BA degrees.
It might also be noted that when we used LEHD data to
estimate the relation between employment levels in Oregon’s childcare industry and
statutory wage floors over time (using employment growth in Idaho and
Washington as controls), we found a statisticlly and economically significant
negative relationship, with elasticities between .25 and .40.
What’s happening here? We don’t know for certain. It’s
complex; a lot of things are going on. But we’re pretty sure that the effects
of minimum wage hikes cannot be reduced to a simple story about redistributing income
from owners to low-wage workers to better reflect their marginal revenue
products. That looks to us more like a presupposition than an evidence-based
conclusion.
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