Wednesday, January 03, 2007

The empirical effects of minimum wage increases

There is a pretty lively if not totally well-informed debate occurring on a couple of blogs. As with a lot of things, Cherniak got it started with a post on the Ontario NDP's proposal to increase Ontario's minimum wage to $10 (it is currently at $7.75, but is moving to $8 soon). He's added a couple of other posts, and he has seen responses from MyBlahg and Plawiuk.

The problem with these posts - and especially the comments which follow them - is that none of them seem to know or at least acknowledge that there really isn't a consensus on what the effects of minimum wage increases are. And to the degree that a consensus is emerging, it's that any measurable effects are negative, but quite slight. The Economist summed up the shift in thinking quite nicely in an article last October:

The academic argument—and there has been plenty of it in recent years—has focused on the employment effects. Elementary economics would suggest that if you raise the cost of employing the lowest-skilled workers by increasing the minimum wage, employers will demand fewer of them. This used to be the consensus view. But a series of studies in the 1990s—including a famous analysis of fast-food restaurants in New Jersey and Pennsylvania by David Card at Berkeley and Alan Krueger of Princeton University—challenged that consensus, finding evidence that employment in fast-food restaurants actually rose after a minimum-wage hike. Other studies though, particularly those by David Neumark of the University of California at Irvine and William Wascher at the Federal Reserve, consistently found the opposite. Today's consensus, insofar as there is one, seems to be that raising minimum wages has minor negative effects at worst. Lawrence Katz, an economist at Harvard University and signatory of the EPI's letter, agrees that “most reasonably well-done estimates show small negative effects on employment among teenagers”. **

I know some folks will insist that what works in theory (or in their conception of economic theory) should work in practice. Others will reject conventional economics as biased in its approach. But these objections just won't cut the empirical mustard. So, before someone of whatever political orientation starts telling you what the consequences of minimum wage increases will be, remember that the people who actually get paid to study this stuff don't really know themselves.

** (I note and particularly like the Card and Krueger article cited, because it used a natural experiment to call into question years of wisdom based on more conventional observational studies).


Anonymous said...

Mankiw has a recent post on the subject:

``Consider this policy aimed to help workers at the bottom of the income distribution:

1. A wage subsidy for unskilled workers, paid for by
2. A tax on employers who hire unskilled workers.

Now, if you think like an economist, you might wonder about the logic of part 2 of this proposal. You might say, "A tax on the hiring of unskilled workers would discourage their employment, offsetting some of the benefits they would get from the wage subsidy. It would be better to finance the wage subsidy with a more general tax, rather than with a tax targeted specifically on employers of unskilled workers."

I agree. So why did I bring up this proposal? Because a policy essentially the same looks likely to become law, having been advocated by Congressional leaders and, recently at his news conference, President Bush. Haven't heard of it? It is called an increase in the minimum wage.''

Anonymous said...

Of course the real question isn't will an increase in the minimum wage help or hinder workers or employers. The real question is how far are we going to let the government go in intruding into our lives.

Or does no one care about this anymore? Probably not, that would just put all the policy analysts out of work.

Hello from North Bay, Peter.

Peter Loewen said...

Well, policy analysis doesn't pay all that much, so I wouldn't sweat it too much. But, I do think working through the empirical consequences of things is important for policy. Regardless of how much one would like government to retreat, on something like a minimum wage it is just not likely to occur. So, as a secondary activity it makes sense to figure out how intrusions, as you call them, can have the most positive effects.

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