Econ 539 - Public Policy Analysis: Minimum Wages, Part 2

Quite a while ago now, a 'friend-of-the-blog' in the restaurant industry e-mailed to ask about what I thought of the relatively high minimum wage in Oregon and the additional aspect of Oregon's minimum wage that it cannot be reduced for those that earn tips.  California and Washington also have high minimum wages and do not allow for a 'tip credit,' of this sort so we are not alone, but these are three of eight total states (that I was able to determine) that do not allow credit for tips.

The question was essentially, what did I think of the effect on unemployment in Oregon and what did I think of the specific impact on the restaurant industry?  I punted on the question at the time as it required too much time to read up on the literature just for the purposes of the blog which is, after all, not my real job.  But happily my real job has converged with the blog and doing a week on minimum wages in Public Policy Analysis required my familiarity with the literature and I have learned a few things.  Not enough to synthesize into a strong opinion, but enough to list some empirical evidence of the impact of minimum wages:

1.  Minimum wages, if they are designed to combat poverty are a pretty poor way to do so.

This table, from a Congressional Budget Office report on the effectiveness of the minimum wage relative to an expansion of the Earned Income Tax Credit (EITC), shows that just $1.6 billion of almost $11 billion would go to households classified as below the poverty line.

To get virtually the same amount of money going to impoverished households, you could do a $2.4 billion expansion of the EITC.

Why is it so bad as an anti-poverty measure?  Well, it didn't used to be, but it turns out that a very small fraction of impoverished households (or those within double the poverty line) actually work for the minimum wage.

Here is a table from a report done by Burkhauser and others in 2005:

From this table you can see how the persons making the minimum wage have evolved through time and now (or by 2003 at least) few of the households in or near poverty rely on a minimum wage job.  More and more, minimum wage earners are teenagers and part-timers. Which brings me to my next observation:

2. Minimum wages may distort the incentives for kids to invest in education.  By raising the opportunity cost of schooling, kids may be induced to leave school and not continue their education.  In fact Neumark and Wascher (AER 1995) have found such effects.  They find that minimum wages "...increase the probability that teenagers leave school to become employed or work more hours, and they increase the probability that teenagers leave school to become non-employed or non-enrolled."

3. But what about the big question of minimum wages and unemployment?  The evidence is decidedly mixed and the effects appear to be small, with a preponderance of the evidence suggesting an elasticity of teen workers at about -0.2 (though some notable studies even find positive employment effects, like the famous Card and Krueger 1994 AER paper).  However, many have pointed out that studies that fail to find any effect are unlikely to be published leading to a type of bias.  Given this, most studies of the effectiveness of the minimum wage (like the CBO one above) go with the zero employment affect assumption.

4. As for restaurants and the minimum wage: Oregon is already the second highest minimum wage state in the nation and added to that we have a no tip allowance so it is likely that we pay more for our restaurant food and that we have fewer restaurants than we would have in absence of a minimum wage.  Empirical evidence has found the minimum wage-price link to be strong.  This, of course (from the law of demand), means that we probably have fewer restaurant jobs than we would have in the absence of a minimum wage, but it does not mean we have lower employment overall, as well-paid restaurant employees spend their income as well and the net effect is, as mentioned above, a matter of some debate.

5. The last observation I have is that the big question to which their seems to be no good evidence is if states with relatively high minimum wages suffer higher unemployment and lower growth because of their minimum wages.  This is a very tricky empirical puzzle to solve so it does not surprise me that there is a lack of convincing evidence, but it would be extremely useful to know.  In other words, the graph I made for my last minimum wage post is really totally meaningless as far as a causal link goes.

My conclusion is that for me the main rationale for a minimum wage is to provide a 'living wage' - meaning to fight poverty - and that I think it is not a particularly effective way to do so, the EITC is much better, for example.  The minimum wage does, however, have the advantage of being practically costless to administer, while the EITC does not.  Still, from my perspective, if I were to think about further expansion, I would go for the EITC before the minimum wage.

Econ 539-Public Policy Analysis: Minimum Wage

For the last week of classes before our series of rapid-fire in-class presentations (my there are a lot of you) we will study the minimum wage using the methods and ideas presented in class.  We will study the standard neo-classical theory of labor markets and how minimum wages affect labor markets, and then think about how realistic the neo-classical model is and what kinds of other complexity we might add and how this might alter how we view minimum wages.

We will then proceed to think about how one might test for the effects of minimum wages using real-world data.  We will think about the causality and identification problems and how these might be overcome.  We will than proceed to examine a series of studies to attempt to get a sense of where the literature stands on the issue.

After this, on Wednesday, we will think about minimum wages in policy terms: what is the market failure we are trying to correct and is it the best was to do so.  We will compare alternatives to minimum wages, most notably the Earned Income Tax Credit.  Finally we will think about the appropriate pieces of a cost-benefit analysis of the Oregon minimum wage and the lack of an exemption for tips.  We will finish with a specific examination of the Oregon restaurant industry: how is it probably affected by the state minimum wage law.

To begin, here is a provocative graph I threw together last night using BLS data on state unemployment rates and US Department of Labor data on state minimum wages:

Is this graph meaningful?

Econ 539 - Public Policy Analysis: Cost-Benefit Analysis

Today in ECON 539 (a core course in OSUs Masters in Public Policy Program - I always forget to plug) we will look at cost benefit analysis. From and economics point of view the appropriate question is always about scarce resources and their best use. In cost-benefit analysis we use the concept of economic costs and benefits (not accounting costs and benefits) to get at the true social costs and benefits and allow us to determine the real net worth of particular policies.

Econ 539-Public Policy Analysis: Public Goods

Driving down to Corvallis this morning I had ample time to listen to the seemingly endless appeals for donations from OPB during their current pledge drive. One line in particular caught my ear - Geoff Norcross said something to the effect of: 'we have a good idea of how many listeners we have and we know exactly how many members we have, the gap between these two is pretty small, but we'd like to make it smaller...'

To me, this statement is incredible. I looked in vein for these statistics for OPB, but for WNYC in New York City, the number of people who donate relative to those that listen is less than 8% according to sfigures I have seen. So, I can't believe that OPB is above, say, 20% and I bet it is closer to 10%.

Which is the point of today's lecture: for goods that are like radio - have some degree of non-excludability (anyone can listen) and non-rivalry (one person's consumption does not leave any less for anyone else) - the private sector does not, in-general, provide an optimal amount of them. Thus the public sector may have a role in providing such goods: parks, roads, national defense, etc. But even the public sector may have trouble in providing them.

In both cases the free rider problem can be severe, just like with public radio. I know as an individual that if I don't contribute I can free ride on the contributions of others.

We will look at examples of public goods and revisit business improvement districts. new bridges and have a look at the example of Colorado Springs whose voters have failed to fund some basic city services.

Update: I realized in my haste that I never connected the dots. The reason OPB wants you to think the gap is small is that the social pressure is presumably greater if you think you are one of the few who don't contribute rather than one of many. A colleague brought my attention to a paper that finds exactly this result (and confirms that my 10% hypothesis is probably not far off).

Econ 539-Public Policy Analysis: Market Failures 1 - Externalities

Now that we have reviewed: the basics of choice theory and how people respond in predictable ways (in aggregate) to incentives; the basics of the free market efficiency result; the basics of economic growth; the basics of strategic behavior and the sub-optimal market outcomes that can result; the basics of data analysis and the challenge of causality; and the basic economics behind budget analysis; we are now ready to study some classical market failures. [By the way, that is a lot of basics I just listed which is a good reminder of what I am trying to accomplish in this class: a good intuitive understanding of the logic of economics and how it applies to policy]

Today we will study the most talked about market failure: externalities.

These are most often discussed in environmental policy but can be both positive and negative and can arise anywhere. We will study how the presence of externalities - costs and benefits that do not accrue to the agent engaged the the particular economic activity - can lead to inefficient market outcomes and the policy perscriptions to deal with externalities. We will also take a closer look at pollution in particular and talk about the difference between Pigouvian taxes, strict caps and cap-and-trade.

For examples we will have a look at Portland's Business Improvement District, the US Department of Energy's Weatherization Assistance Program and the Ash Grove cement plant.

Econ 539-Public Policy Analysis: Data Analysis

One of the most difficult aspects of social science is the fact that we don't often get to test policy in a lab, we have to use real-world data and try and isolate effects from all of the noise. Fortunately we have become pretty sophisticated at doing so and even more adept at designing policy implementation in a way that gives us some experimental evidence. Today in class we will discuss data analysis and different ways of teasing out causality and the necessary caution one must have in interpreting results.

As an example we will think about perhaps the most commonly used example: the education - earnings relationship.



We will also study the empirical evidence on class size and discuss the STAR study and it limitations.



In other words, what do these two graphs tell us and how much should we trust conclusions based on these pieces of evidence?

Econ 539-Public Policy Analysis: Game Theory

A big part of the class will be spent studying how and when markets fail and what (if any) are the appropriate policy responses. Though it may seem unusual for a public policy class, an important way that markets can fail is if there is strategic behavior. This is perhaps the most well-known result from game theory: in situations where strategic behavior is important, individually rational, self-interested behavior may not yield an efficient outcome.

For the purposes of this class, we will look closely at only the basic normal form games and see how this result comes about. I will also talk about sequential and repeated games in general and what additional important results come from these situations.

As examples, we will talk about the incentives of Wall Street banks and have a look at this Bob Frank column in the New York Times. We will also discuss another interesting example of game theory at work in my little take on unsigned intersections. (Which reminds me, I haven't been keeping up on the Economist's Notebook thing lately - I'll try to do more)

Econ 539-Public Policy Analysis: The Basics of Macro Policy and Growth

Today's class will have a look at the seminal paper by Mankiw, Romer and Weil as a way of introducing the topic of economic growth (and macroeconomics in general) and the appropriate role (if any) for government in the process. The role question will be largely relegated to a later discussion, while today's class will try and covey the basics about macro and growth and governmental manipulation.

I will start with a basic overview of the aggregate demand curve with a mention of the aggregate supply curve and talk about the natural level of output and deviations from it. I will also talk about the Phillips curve relationship, whether it really exists and what a government can try and do to deal with high unemployment episodes.

Finally we will chat a little about agglomeration externalities, urban redevelopment zones and fixed-route transit.

ECON 539-Public Policy Analysis: Incentives Matter

Finally time to get down to brass tacks and start some real teaching after a delayed start to the quarter caused by a chilly visit to Atlanta. I am teaching a class in the Masters in Public Policy program (and cross-listed as ECON 439 for our advanced undergrads) and will add a discussion here as an experiment in new media teaching.

Today's class will be about the basics of economic theory: how individuals respond to incentives. Economists believe that they do so in predictable ways. A more nuanced statement might allow for many personal idiosyncrasies but that on average people tend to behave like economic theory predicts.

I will start the class with a discussion of a paper by a friend of mine, Stacy Dickert-Conlin, who found a (surprisingly?) large response from the financial incentives to have a baby before midnight on December 31 from the US tax code and EITC.

With this as background we will go over the basics of preference theory, optimal choice and utility maximization.

Then, we will examine things that affect choice: changes in income (new Oregon income taxes), prices (tax on gasoline) and new technologies that alter costs like hybrid cars. We will also look at policies like food stamps which change the shape of the budget constraint.

Finally we will review the most fundamental concept in economics in my opinion: the concept of Marginal Benefit = Marginal Cost (MB=MC).

My class is overstuffed - literally - apparently there were jokes about calling the fire marshal in the first class (covered by a colleague), so no more can join this term. But the class will be offered again next year if anyone is interested.