Sunday, July 10, 2016

All $15 Minimum Wages Are Not Equal

By Adam Millsap of Mercatus.
"This November Minneapolis’ voters will likely vote on a referendum to increase the city’s minimum wage to $15 per hour by 2020. Some members of the state legislature are also pushing a bill that would raise the state’s minimum wage to $15 per hour by 2022. If passed Minneapolis would join several other cities including Los Angeles, Washington D.C., and Seattle that have also increased their minimum wage over the last few years.

Supporters of a higher minimum wage think that such a law will give many workers a raise, and they tend to downplay any job losses that may result. The empirical work examining the minimum wage’s effect on employment is mixed, though there is plenty of evidence that reality matches theory, namely that a higher minimum wage leads to less employment of low-skill workers such as teenagers and adults without high school diplomas.

Even leading proponents of a higher minimum wage like economist Arindrajit Dube caution that large increases could negatively impact employment. In a policy paper for Brookings, Professor Dube puts forth a rule-of-thumb for state and local policy makers that want to increase the minimum wage: Set the minimum wage to approximately 50% of the area’s median wage. There is no theoretical reason for this rule, but Professor Dube believes that historical and international data shows that a ratio of 0.5 strikes an acceptable balance between giving workers more money and attenuating job losses.

Indexing a city’s minimum wage to the city’s median wage is a relatively nuanced concept for most policy makers and voters, especially amidst the shouting of the $15-per-hour crowd. In fact, I have yet to hear of any city considering a minimum wage increase using, or even discussing, the rule.
But let’s suppose that Professor Dube’s rule is appropriate: How would Minneapolis’ $15 per hour policy fare? In short, not well.

To examine the policy, I collected American Community Survey data on individual median earnings (pre-tax wages, salary, and self-employment income, see p.83) in Minneapolis for people 16 and over and for people 25 and over from 2009 – 2014 (table S2001). I then used this data to estimate earnings out to 2020, which is when the $15 minimum wage would go into effect. I estimated median earnings by calculating the average increase in earnings from 2009 – 2014 using the ACS data and then assuming the same average annual increase from 2015 – 2020. I then estimated the median wage by dividing the median earnings by 50 weeks and 40 hours per week.

I also collected data on Minneapolis’ minimum wage from 2009 to 2016 based on past and current law and then calculated the minimum wage to 2020 under the assumption that the $15 minimum wage is implemented and that the subsequent increases would be in equal increments each year. The table below contains the data.

Minneapolis Minimum Wage

Prof. Dube’s rule of thumb is that the minimum wage should be set to 50% of the median wage. The last two columns of the table display the minimum/median wage ratio based on the median earnings for adults 25 and over and the median earnings for people 16 and over.

Since younger people have lower earnings on average using the 25 and over earnings tilts the results in favor of a higher minimum wage. But as the data show and the figure below makes clearer, even when using this wage Minneapolis’ $15 proposal breaks the 50% rule by a large margin.
Minneapolis Minimum Wage

Minneapolis’ 2016 minimum wage of $9.50 is already 59% of the city’s 16 and over median wage. If wages in Minneapolis continue to grow at the same pace as the 2009 – 2014 period, by 2020 a $15 minimum wage will be 86% of the city’s 16 and over median wage (blue line). Even using the higher 25 and over median wage, a $15 minimum will be 69% of the city’s median wage (red line).
This is evidence that a $15 minimum wage is likely to have a relatively large effect on employment in Minneapolis. As Prof. Dube says

“…a high ratio—say around 0.8— indicates a highly interventionist policy where the minimum wage is dramatically compressing differences in wages for nearly half the workforce.”
Employers can adjust to moderately higher mandated wages along a variety of dimensions—higher prices, extracting more effort from workers, a decrease in non-wage benefits—but relatively large increases will intensify the negative effects of these adjustments. An increase to $15 per hour in Minneapolis is likely to result in larger employment losses than in higher wage areas.

For example, Washington D.C. is also in the process of increasing its minimum wage to $15 per hour by 2020. I created the same chart for D.C. to show the differences between it and Minneapolis.
Minneapolis Minimum Wage
As shown in the figure, when the $15 minimum wage is fully implemented in 2020 it will be 53% of the 16 and over median wage (blue line) and 44% of the 25 and over median wage (red line). This is because D.C. is a higher-wage city than Minneapolis.

Economists who argue that the minimum wage has no or only a very small effect on employment rely on evidence from modest increases in the minimum wage. No economist believes that every minimum wage will have benefits that are greater than the costs, and so the challenge among economists who support a minimum wage above $0 is to strike the right balance between benefits and costs. Minneapolis $15 per hour proposal is in uncharted territory and violates the rule-of-thumb of one of academe’s biggest minimum wage supporters.

Supporters of a $15 minimum wage often downplay or reject arguments that a higher minimum wage will lead to significant declines in low-skill employment, and cite the work of economists such as Professor Dube to support their claims. But as the preceding analysis demonstrates, the evidence that they cite is often irrelevant to the specific policy they support.

The $15 ‘living wage’ populism that pervades the minimum wage debate is not based on economic evidence, and, as shown here, it’s likely to harm many local economies if implemented indiscriminately across the U.S. While workers in higher-wage cities like D.C. may be able to escape the worst of its effects, those in lower-wage places like Minneapolis are unlikely to be so lucky."

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