Friday, December 16, 2016

Some minimum wage studies find no detectable negative employment effects, how should we think about those findings?

From Mark Perry.
"Q: What should we think about minimum wage studies that claim to find no short-run negative employment effects following minimum wage hikes?

A: Here’s a collection of thoughts on that question, and some answers, from economists Steven Landsburg, Arnold Kling and Don Boudreaux.

1. Steven Landsburg 

This was a comment on Steven Landsburg’s blog:

I posted a study here recently on minimum wage workers in London. The authors found no measurable effect on employment, nor an increase in firm closures nor a rise in prices following an increase in minimum wage. Where did the money come from? Steven Landsburg’s analysis suggests that marginal firms would close, but they apparently did not.
Here’s Steven’s response to that comment (featured recently on CD here):
If you read a study saying that the laws of arithmetic are invalid, then no matter how carefully the study seems to have been conducted, you should be asking where the error is, not asking why people continue to believe in arithmetic.
2. Arnold Kling, from a recent post on his askblog (emphasis added):
The effect of the minimum wage in the short run on existing firms can be small. They mostly just suck it up and pay the higher wage. However, over time, there will be a tendency for processes that use low-skilled workers to be less profitable and processes that instead use capital and high-skilled workers to be relatively more profitable. So the patterns of specialization and trade that break up will tend to be those that have been employing low-skilled workers, and the new ones that form will tend to employ fewer low-skilled workers than would have been the case otherwise.
3. Don Boudreaux, two excepts from posts on the CafĂ© Hayek blog (here and here). Here’s the first one (my emphasis):
Employers in the U.S. have now had 80 years to adjust to the existence of minimum wage laws that makes unprofitable the hiring of the lowest-skilled workers. One result is that business and labor practices that would have employed legions of low-skilled workers in the absence of a minimum wage were either long ago snuffed out or never created. Empirical studies today, therefore, can at best detect only changes in employment at existing firms that use existing business practices – firms and practices that, having evolved in an economic environment with a minimum wage, were never suited to employ as many low-skilled workers as would be employed by businesses that evolved in an environment without a minimum wage.
Raising the existing minimum wage does indeed destroy some jobs. But even the most accurate measurements of today’s job destruction offer no clue to the full magnitude of the vast amount of economic opportunities that the minimum wage denies to the poor and unskilled.
As for the evidence that finds no negative employment effects of minimum-wage hikes – the vast bulk of this evidence comes from studies that take a minimum-wage regime as a given. That is, these studies are done of economies in which minimum-wage legislation already exists and, typically, has existed for a long time. Further, these economies are ones not only in which there is no expectation that minimum-wage legislation will be permanently repealed, but likely contain widespread expectations that existing levels of minimum wages will be raised to higher levels sometime in the foreseeable future.
Here the second excerpt from Don:
In short, nearly all existing studies that find no negative employment effects of minimum wages are studies of economies in which employers and employees have already adjusted their production arrangements and employment-contract terms (both formal and informal) to the realities of binding minimum wages and to the likelihood that existing minimum wages will be raised, if not today or tomorrow, the day after tomorrow. These empirical studies, therefore, tell us at best how employers and employees adjust to unexpected increases in existing minimum wages. And very few of these studies even attempt to distinguish unexpected hikes in the minimum wage from expected hikes. So even if such studies correctly find no negative employment effects of minimum-wage hikes, those findings do not tell us that imposing a minimum wage where none before existed (and where none had been reasonably anticipated) will not destroy jobs for some low-skilled workers.
No matter how scientific empirical investigations of minimum-wage changes appear to be – no matter how well-adorned are such studies with econometric bells, whistles, and impressive jargon – if they fail to account for the long-run effects on what Arnold Kling calls “patterns of specialization and trade,” their conclusions supply no guidance for assessing the full, long-run impact of minimum wages. Alas, the economics profession has within it many people are skilled econometricians but unskilled economists – and no amount of the former begins to make up for the latter.
MP: A related point is the fact that minimum wage hikes typically get phased in over a period of many, many years, allowing employers to adjust to gradually rising labor costs over long periods of time, see table above showing the schedule for minimum wage increases in the city of Seattle. Passed in May 2014, Seattle’s “$15 minimum wage” is getting phased in over time, and won’t affect some businesses (those with fewer than 500 employees) until January 1, 2021, which will be almost 7 years following the final approval of the legislation. Larger firms will face a mandatory minimum wages of $15 sooner, in 2017 and 2018, but were still given years of advance notice.

If the $15 an hour minimum wage had taken effect for all employers in Seattle immediately after passing, say in January 2015, it’s likely that the negative employment effects would have been immediate and visible, thereby clearly exposing the defects of minimum wage legislation. But phase a $15 minimum wage in over 5 or six years, and the negative employment effects are much less visible and detectable. Further, inflation over 5-6 years will erode the $15 wage in real dollars, and that’s a long enough period of time for natural long-run economic growth, increasing population, increased labor demand, and naturally rising wages over time to further mask the negative employment effects of the $15 minimum wage.

Bryan Caplan explained this very well several years ago on the Econlog blog (adjusted for a $15 minimum wage from Bryan’s original $12 an hour reference):
If you raise the minimum wage to $15 an hour today and low-skilled unemployment doubles overnight, even the benighted masses might connect the dots. A gradual phase-in is a great insurance policy against a public relations disaster. As long as the minimum wage takes years to kick in, any half-competent demagogue can find dozens of appealing scapegoats for unemployment of low-skilled workers [or explanations for why the $15 minimum wage was “successful” and didn’t have many obvious or detectable negative effects].
The fact that activists’ proposals include phase-in provisions therefore suggests that for all their bluster, they know that negative effects on employment are a serious possibility. If they really cared about low-skilled workers, they’d struggle to figure out the magnitude of the effect. Instead, they cleverly make the disemployment effect of the minimum wage too gradual to detect.
Note that in the case of Seattle’s $15 an hour minimum wage, the early empirical evidence is showing some mild negative employment effects — fewer jobs and fewer hours for some workers, see a summary here of results from the July 2016 report “Minimum Wage Study: Effects of Seattle wage hike modest, may be overshadowed by strong economy.” Those early results are based on the initial increase in mandated minimum wages to between $10.50 and $13 an hour on January 1 of this year, and not the full $15 an hour minimum wage that is getting phased in gradually over many years. And as the title of the report suggests, the potential negative employment effects of the minimum wage are possibly being somewhat offset/”overshadowed” by a robust economy; a robust economy that might have naturally put upward pressure on wages for low-skilled workers without any government interference. And yet the findings that the gradual phase-in of an eventual $15 minimum wage in Seattle hasn’t resulted yet in large negative employment effects (only small ones so far), has led some minimum wage advocates like Barry Ritholz to declare victory, see his article “Minimum-Wage Foes Tripped Up by Facts.” See Don Boudreaux’s responses to Ritholz here and here."

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