Analyzing the Minimum Wage: The Data

Today, we will look at the vast amount of data and see what conclusions we can draw from them, first looking at more seemingly partisan data on the Right and Left and working up from there (see my previous posts on Rights-based arguments and the importance of empiricism in economics).

The Right

This is one of the meta-analyses of Neumark and Wascher (the economists most cited in opposition to the minimum wage increases).  On page 115 we find the great line: “What is likely most striking to the reader who has managed to wade through our lengthy review is the wide range of estimates of the effects of the minimum wage on employment, especially when compared to the review by Brown et al. in 1982.”  That’s for sure. Neumark and Wascher of course find that the most reliable studies also tend to show disemployment effects from the minimum wage. They also find that single case studies (the same technique lauded by the Roosevelt Institution) to have serious flaws, possibly missing long term effects of the minimum wage increases.

Analysis against the minimum wage also comes from Sara Lemos in 2004, who found that minimum wage increases tend to increase prices.  She also notes that while employment effects have been heavily studied, other effects from the minimum wage, such as decreased profits or increased prices are not.  The competitive market model would suggest that if employment is not decreased, something else might.

The libertarian Cato Institute in a 2012 policy report found increased unemployment effects from larger minimum wage increases, and also that the minimum wage was not a great poverty fighting tool. A 2010 VCU study by Joseph Sabia and Richard Burkhauser also found the minimum wage to be unhelpful in the fight against poverty.

The Left

Turning to left-of-center sources, a meta analysis done by Dale Belman of Michigan State and Paul Wolfson in Dartmouth in the last year found little short term elasticity of  employment in response to minimum wage changes.  It analyzed many studies since 2000.  But it should also be noted that 2/3 of the 81 studies used were not included because of a lack of reported elasticity in most studies.

Another paper showing no effect of the minimum wage was done by Dube, Lester, and Reich. They tried to generalize the Card and Krueger method of case studies. This paper hoped to show that by having tons of case studies, regional effects could be eliminated, showing there was no employment effect from the minimum wage.

John Schmitt of the (leftist) Center for Economic and Policy Research has published a paper in February 2013 that I found cited by many different sources on the left. He mostly talks about 2 meta studies that others have done, including the Belman and Wolfson study as well as the Dube, Lester and Reich study from above. He largely dismisses Neumark and Wascher’s analysis as subjective.  While he concludes there is no statistical drop in employment from the minimum wage, he also hypothesizes why that is. Some of his reasons certainly don’t make the minimum wage any more attractive: reducing hours and non-wage benefits, cutting higher paid employees’ wages, increasing prices for consumers, or reducing profit (long term effects would be decline in industry growth).

Struggling with Agreement

I was having trouble finding a good consensus and even a poll of economists found slightly mixed results. They were split on whether it would make it “noticeably harder” to find a job if the minimum wage was raised, but about half thought we should probably do it anyway.

I thought disagreement might be due to political bias of the research.  But it’s pretty impossible for me to judge paper methodologies, so instead I tried looking for nonpartisan studies. The National Bureau of Economic Research is the largest US economics research organization in the US. NBER is probably the best representative of the economics profession as a whole.  They have several papers recently published discussing the minimum wage.

The first is by Jonathan Meer and Jeremy West of Texas A&M from December of last year. They found that while employment effects seemed hard to discern, it is likely long term employment and job growth are more affected since simply hiring fewer new workers might be easier than firing current ones.  The effects of the minimum wage in longer term job growth were largest for young and low wage workers.

Another interesting study found that the minimum wage did cost teenagers jobs, as well as push firms to substitute capital for labor.  But these same incentives effectively made the opportunity cost of education lower, and thus pushed more teenagers to stay in school.  This is effectively a very roundabout way to make firms and consumers pay to make teenagers stay in school more.

Another NBER study is by the familiar Neumark and Wascher which responds to the methodology accusations of earlier and criticizes the case technique of Dube, Lester, and Reich (shocker).

A final NBER study from 2008 seems to indicate that the minimum wage is effective if the object is to transfer wealth to low income earners (under their competitive labor market assumptions).  They also imply it would work well with wage subsidies. (I’m a little shaky on exactly what the research here actually found and what assumptions of the model they are making).

Looking for more centrist sources, I turned to the only think tank cited more than NBER for economic policy:  the Brookings Institution.  Brookings does advocate raising the minimum wage but their reasoning is more nuanced.  One revealing source is this short article on Seattle’s plan to raise its minimum wage to $15.   Despite the fair amount of evidence I found that the elasticity of employment was fairly low for the minimum wage, the author worries that if this policy is too narrow (at the city level instead of the state) and great in magnitude, this will cause businesses to lose to competition directly outside the city, leading to business closures and layoffs.

Another more general Brookings piece lists a few facts about the minimum wage.  The first three discuss the historical level of the minimum wage, but since empirical research on the minimum wage didn’t start until after 1991, again, there’s not much worth in looking at historical policy. Point 4 notes that the empirically measured employment effects are small. Point 5 makes the argument that even if there are employment effects, the net benefit to those who do remain employed is higher than the losses from those who lose their job.  Point 6 is that the minimum wage is the easiest poverty alleviating tool we can implement due to its political support.

The technically nonpartisan Congressional Budget Office also found that most low-income workers would benefit from an increase in the minimum wage, but some would lose their jobs. And of course, not all low-earners are actually poor.

A June 2014 paper from the Brookings Institution has this to say:

Although past increases do not appear to have adversely affected employment, there is no denying the risk that much larger increases might pose to the least skilled workers… In addition, a higher minimum isn’t well targeted on just the poor. Many of the people who would benefit from a higher minimum are secondary workers from more advantaged families. About two-thirds of current minimum-wage earners live above 200 percent of the federal poverty line. Only about a fifth are poor.
If we are really worried about families at the bottom, a better way to improve their lot is to increase the Earned Income Tax Credit (EITC) since it is well-targeted on those who most need assistance, and will not significantly affect employers.

It goes on to note that the EITC is still relatively expensive as far as government spending is concerned as well as having other problems, and the easiest political maneuver is to pair EITC reforms with minimum wage increases since those are basically “free”.

And just as a good summary, it looks like the Kennedy School of Government at Harvard has put together a more succinct (but less complete) look at this topic as well.

Oddly enough, one of the people I agree with most was Christina Romer, who wrote an op-ed in March for the New York Times, and whose economic policy I otherwise find arson-inducing (it also helped that it totally contradicted what the Times’ own editorial board had written a month earlier).  Romer’s point, that the minimum wage is complex and difficult to unravel, is actually a point that most groups seem to agree on. Neumark’s latest paper holds that minimum wage laws do have some benefits for some groups of the working poor (namely those poor still working after the market has adjusted). And his first page has a great chart illustrating some of the same points Christina Romer mentions.

What the data means

While there is still disagreement, the evidence points to a few principles I think we can generally regard as true:

  • Unemployment for low wage workers doesn’t go up as much as expected (disagreement here between Neumark and Wascher and the left, but the elasticities are still lower than expected) in response to changes in the minimum wage of a dollar or two (the only policies studied)
  • The minimum wage isn’t well targeted at the poor. Sources from the NBER, VCU, and Brookings all discussed this.
  • Low-income earners who keep their job will see big concrete benefits.  Pretty obvious.
  • There seem to be some negative long term effects from the minimum wage (lower job growth, higher prices). It’s hard to say for sure though because these other effects are far less studied than employment effects, but all studies in these areas found negative effects.

So while it’s arguable (and places full of smart people like the Brookings Institution make this argument) that raising the minimum wage can help alleviate some poverty, the murky benefits and possible long term costs beg the question as to why this particular policy is talked about so much.  I believe the answer is clearly political (not economic) because while its poverty fighting effects are barely adequate, it has huge popular political backing.

Armed with this knowledge, we can create a critique and a defense for both sides of this debate and contrast it with poor defenses (that are actually used in practice). For the left, a good argument acknowledges the shortcomings of the minimum wage as a limited policy tool to fight poverty, but it also keeps in mind the political reality that this is one of the only poverty fighting programs that remains popular.  Use of rights-based arguments that ignore economic research are deplorable. While every political ideology uses populist rhetoric to promote policies that might have significant intellectual backing, it doesn’t mean the populist arguments are themselves powerful.

For the right, it’s important to avoid blindly proclaiming that economic theory dooms the minimum wage when such a vast body of empirical work has been done precisely because definitive proof of that claim is largely unsupported, or at least contested. But again, there are still plenty of reasons to criticize this policy, since its allure stems from its political popularity, not its effectiveness. It’s also arguable that long term low-wage job growth will be affected by higher minimum wage growth, and it’s clear that while this policy is costless to the government, someone will likely bear the cost down the line, and it could be low wage earners.  But I’d also urge those on the right to promote good alternatives: examples include improving the Earned Income Tax Credit or passing wage subsidies.

And as for the stance of the author on this exhaustive piece, my views on this topic have morphed following my research. It seems clear to me that the lack of unemployment effects measured is an important empirical finding. But it’s also true that the data points towards other negative economic effects from minimum wage increases, and these need to be studied more. Overall, I would say that if the alternative to raising the minimum wage was to freeze all economic policy in the US forever, I would consider it a viable policy. But if the alternative policy was to do almost one of many other policies: improve the EITC, improve educational opportunities, reduce regulatory burdens, make it cheaper to hire workers, etc, I would pick that alternative.

I hope this piece will help at least change how we debate the minimum wage, sticking to empirical data and rationalism, if not convince anyone to change their positions entirely.