Thursday, July 6, 2017

Bryan Caplan On How Evidence From Other Markets And Economic Theory In General Shows The Problems With Minimum Wage Laws

See Minimally Convincing.
"Two high-quality studies of the disemployment effects of the minimum wage are getting a lot of attention.  The first looks at Seattle.  Punchline:
This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees' earnings by an average of $125 per month in 2016.
The second looks at Denmark.  Punchline:
On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old.
These look like careful studies to me.  But if I were a pro-minimum wage activist, neither would deter me.  As I confessed before the empirics were in:
If I were sympathetic to the minimum wage, I'd insist, "The worst the experiments will show is that high minimum wages hurt employment in individual cities.  That wouldn't be too surprising, because it's easy for firms and workers to move in and out of cities.  The experiments will shed little light on state-level minimum wages, and essentially no light on federal minimum wages."
In other words, I'd channel Ayn Rand villain Ivy Starnes:
She made a short, nasty, snippy little speech in which she said that the plan had failed because the rest of the country had not accepted it, that a single community could not succeed in the midst of a selfish, greedy world - and that the plan was a noble ideal, but human nature was not good enough for it.
The same goes, of course, for a group-specific minimum wage.  If I favored the minimum wage, I'd look at the Danish results and say:
"Fine, high minimum wages hurt employment for workers in the critical age category.  So what?  It only shows that when some workers are poorly protected, firms prefer to hire them.  The experiments shed little light on comprehensive minimum wages that protect everyone.  Plus, Denmark is a small country of 6M people.  If Denmark's minimum wage hurts low-skill Danes, we need a pan-European minimum wage, not deregulation."
What if the studies had come out the other way?  Opponents also have a plausible objection: The studies measure short-run disemployment effects, which we should expect to be mild.  In the long-run, however, employers have far more flexibility.  They can replace labor with capital.  They can replace low-skilled workers with higher-skilled workers.  And they can shed workers the guilt-free way - by attrition.

I'm not an Austrian economist; our profession's shift from pure theory to empirics has been a huge step forward.  But we also need common sense and a broad view of what empirical evidence counts as "relevant."  As I've said before:
In the absence of any specific empirical evidence, I am 99%+ sure that a randomly selected demand curve will have a negative slope.  I hew to this prior even in cases - like demand for illegal drugs or illegal immigration - where a downward-sloping demand curve is ideologically inconvenient for me.  What makes me so sure?  Every purchase I've ever made or considered - and every conversation I've had with other people about every purchase they've ever made or considered.
Research doesn't have to officially be about the minimum wage to be highly relevant to the debate.  All of the following empirical literatures support the orthodox view that the minimum wage has pronounced disemployment effects:
1. The literature on the effect of low-skilled immigration on native wages.  A strong consensus finds that large increases in low-skilled immigration have little effect on low-skilled native wages.  David Card himself is a major contributor here, most famously for his study of the Mariel boatlift.  These results imply a highly elastic demand curve for low-skilled labor, which in turn implies a large disemployment effect of the minimum wage.
This consensus among immigration researchers is so strong that George Borjas titled his dissenting paper "The Labor Demand Curve Is Downward Sloping."  If this were a paper on the minimum wage, readers would assume Borjas was arguing that the labor demand curve is downward-sloping rather than vertical.  Since he's writing about immigration, however, he's actually claiming the labor demand curve is downward-sloping rather than horizontal!
2. The literature on the effect of European labor market regulation. Most economists who study European labor markets admit that strict labor market regulations are an important cause of high long-term unemployment.  When I ask random European economists, they tell me, "The economics is clear; the problem is politics," meaning that European governments are afraid to embrace the deregulation they know they need to restore full employment.  To be fair, high minimum wages are only one facet of European labor market regulation.  But if you find that one kind of regulation that raises labor costs reduces employment, the reasonable inference to draw is that any regulation that raises labor costs has similar effects - including, of course, the minimum wage.
3. The literature on the effects of price controls in general.  There are vast empirical literatures studying the effects of price controls of housing (rent control), agriculture (price supports), energy (oil and gas price controls), banking (Regulation Q) etc.  Each of these literatures bolsters the textbook story about the effect of price controls - and therefore ipso facto bolsters the textbook story about the effect of price controls in the labor market. 
If you object, "Evidence on rent control is only relevant for housing markets, not labor markets," I'll retort, "In that case, evidence on the minimum wage in New Jersey and Pennsylvania in the 1990s is only relevant for those two states during that decade."  My point: If you can't generalize empirical results from one market to another, you can't generalize empirical results from one state to another, or one era to another.  And if that's what you think, empirical work is a waste of time.
4. The literature on Keynesian macroeconomics.  If you're even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment.  If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment.  The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.
And don't forget the vast literature on labor demand elasticity..."

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