David Neumark's Latest Paper On The Minimum Wage

See MINIMUM WAGES: Evaluating New Evidence on Employment Effects by Neumark and J.M. Ian Salas. Excerpts:

Executive Summary:

"The fierce political debate over raising the minimum
wage, which is repeated yearly in legislatures across the
country, has at times been matched by a strong academic
debate on the subject. Specifically, economists have argued
over whether a higher minimum wage reduces the
employment of less-skilled jobseekers.

The published research on the subject points overwhelmingly
in one direction: A summary of the last two decades
of literature on the minimum wage, co-authored by the
lead economist on this study, concluded that most of the
evidence points to job loss following wage hikes. Economists
have detected this job loss using state variation in
minimum wages, with states that do not raise their minimum
wage acting as a “control group” for states that do.

But today, a small group of economists (listed at right)

Arindrajit Dube
University of Massachusetts-Amherst
Sylvia Allegretto
University of California-Berkeley
Michael Reich
University of California-Berkeley
T. William Lester
University of North Carolina

has mounted an aggressive challenge to the existing academic
consensus on minimum wages. In a series of studies
first published through the organized labor-aligned
Institute for Research on Labor and Employment (and
later in the journals Review of Economics and Statistics
and Industrial Relations), they’ve argued that prior studies
on the minimum wage were incorrect in blaming the
policy for a drop in employment opportunities among
less-skilled employees (like teens) or in service-intense industries.
Rather, they claim, these employment declines

are due to unrelated changes in states’ economies—in

particular, unexplained downturns in employment of

unskilled workers that just happen to coincide with dozens

of state minimum wage increases.

To get around this purported problem, they toss out most
of the labor market data available to detect the effects of
wage increases, and restrict their analysis to either neighboring
state border counties or states in the same Census
division. Using this highly-restrictive model, they claim,

provides better control groups and shows that a higher

minimum wage has no negative effect on employment.

With the encouragement of the economists themselves,
who have a history of working in support of progressive
causes, these studies (henceforth IRLE papers) have
gained prominence among activist groups who leverage
them to claim that mandated wage hikes will have no
adverse impact on employment. (One of the economists
even said explicitly at a 2010 conference in Atlanta that
this research should “help to pave the way” for higher
mandated wages.)

Or so they hope. But in this new study, University of California-
Irvine labor economist David Neumark worked
with UC-Irvine Ph.D. student J.M. Ian Salas to determine
whether the IRLE papers have merit. Specifically,
do the studies make good on the claim their authors’
have put forth, of overturning the decades of research
preceding them?

Neumark and Salas report that the evidence presented in

the IRLE papers only runs contrary to earlier studies because

the authors’ empirical models rely on inappropriate

control groups, and toss out the economic data necessary

to detect the impact of a minimum wage increase. They
are unequivocal in their conclusion: “[N]either the conclusions
of these studies nor the methods they use are
supported by the data.”

The authors of the IRLE papers provide no direct evidence

to justify their highly-restrictive study design, instead
speculating that nearby states or counties constitute
ideal control groups against which to measure the effects
of the minimum wage. But Neumark and Salas demonstrate
that the premise of the IRLE papers is wholly incorrect:

If you examine the characteristics of the control

counties and states used in the IRLE papers (which the

authors of those papers failed to do), you find that they’re

generally very poor control groups.

• For instance, the authors’ preferred control for Leon
County, FL—home of the Florida state capital in
Tallahassee, with a population of roughly 275,000
people—is Grady County, GA, which has barely
25,000 people and no major cities.

• Similarly, one control state for Connecticut—a vibrant
northeastern state with 3.5 million people and
$237 billion in annual economic output—is Vermont,
a state with roughly 1/6th of Connecticut’s
population and one-tenth its economic output.

Instead of speculating about which states represent ideal
controls, Neumark and Salas closely examine the economic
characteristics of all states in each Census Division,
and find that it’s mostly states outside the Census
Division that serve as better control groups. (A similar
pattern holds for nearby counties, which they also examine
individually.) Yet all of this identifying data is discarded
by the authors of the IRLE papers.

In other words, the robust set of control groups the authors
use actually aren’t robust at all—indeed, they’re less
suited to the task at hand than studies that have come
before. And in the small number of cases where nearby

states or counties are appropriate controls, the data in

these cases show that employment did fall after a minimum

wage increase.

Given their numerous methodological problems, it’s not
surprising that the evidence in favor of the empirical approach
advocated in the IRLE papers is “weak or non-existent.”

When the analysis is not restricted to these inappropriate

control groups, the data clearly show that wage

hikes do cause job loss. Indeed, in some cases Neumark
and Salas find that the IRLE authors omitted evidence
that exposed the weaknesses in their approach.

Neumark and Salas end with a strong admonishment to
the authors of the IRLE papers: “[P]rior to concluding
that one has overturned a literature based on a vast number
of studies, one has to make a much stronger case that
the data and methods that yield this answer are more
convincing than the established research literature that
finds disemployment effects, and understand why the
studies in that literature would have generated misleading
evidence.”

It’s a warning that the economists themselves should
heed, as should legislators eager for studies (no matter
their accuracy) that validate their ideological preferences."

Conclusions

"In two recent studies, Dube et al., 2010 and Allegretto et
al., 2011 present evidence and a forceful critique of much
of the prior research on the employment effects of minimum
wages. They argue that the evidence of negative
employment effects for low-skilled workers is spurious,
and generated by other differences across geographic areas
that were not adequately controlled for by researchers.
And they put forth a self-proclaimed “fourth generation”
of minimum wage studies that control for this spatial heterogeneity
and conclude that once one does this, there are
“no detectable employment losses from the kind of minimum
wage increases we have seen in the United States”
(Dube et al., 2010, p. 962).



However, the analysis described in this report suggests
that their methods are flawed and give misleading answers.
In particular, neither study makes a compelling ar-
gument that its methods isolate more reliable identifying
information (i.e., a better counterfactual). In one case—
the issue of state-specific trends—the research described
in this report explicitly demonstrates the problem with
their methods and shows how more appropriate ways of
controlling for unobserved trends that affect teen employment
lead to evidence of disemployment effects that
is similar to past studies. In the other case—identifying
minimum wage effects from the variation within Census
divisions or, even more narrowly, within contiguous
cross-border county pairs—the same research shows that
the exclusion of other regions or counties as potential
controls is not supported by the data. Moreover, when it
is supported by the data, the evidence is again consistent
with past findings of disemployment effects.

In addition to the flaws in the studies by ADR and DLR
that the empirical analysis in this evaluation identifies,
other recent studies more convincingly address potential
biases in state-level panel data that the ADR and DLR
studies were intended to address, and find negative employment
effects of minimum wages. Together, the evidence
invalidates the strong conclusions that ADR and
DLR draw—that there are “no detectable employment
losses from the kind of minimum wage increases we have
seen in the United States” (DLR, 2010, p. 962), and that
“Interpretations of the quality and nature of the evidence
in the existing minimum wage literature …, must be revised
substantially” (ADR, 2011, p. 238).

Can one come up with a dataset and an econometric
specification of the effects of minimum wages on teen
and low-skilled employment that does not yield disemployment
effects? As in the earlier literature, the answer
is yes. But prior to concluding that one has overturned a
literature based on a vast number of studies, one has to
make a much stronger case that the data and methods
that yield this answer are more convincing than the established
research literature that finds disemployment effects,
and understand why the studies in that literature
would have generated misleading evidence.

The research described in this report indicates that the
studies by Allegretto et al. (2011) and Dube et al. (2010)
claiming to overturn evidence that minimum wages reduce
employment—like earlier prominent studies making
this claim (e.g., Card and Krueger, 1995, relying heavily
on their 1994 study)48—fail to meet these standards.
Instead, the research record still shows that minimum

wages pose a tradeoff of higher wages for some against job

losses for others, and that policymakers need to bear this
tradeoff in mind when making decisions about increasing
the minimum wage."