At long last, Kathy G comes back on the minimum wage.
Most of the post is responding to an argument I have not made: that the minimum wage decreases employment. To be sure, I might make that argument--but then again, I might not. I think the empirical evidence is ambiguous, and though the bulk of it reinforces the intuitive belief that if you raise the cost of labor people will use less of it, there is a plausible argument that this is the result of publication bias. (Just to be clear, I haven't investigated this argument, so I am not endorsing it; I just think it's possible.)
I still think that the minimum wage is terrible policy, but that rests more on the fact that most of the people who receive it are not poor, and we have much better, more direct ways to target poverty than possibly introducing structural rigidities into the labor market, or encouraging employers to make working conditions worse. Whatever unemployment effect there is of US-sized changes in the minimum wage is too small to be detected amidst statistical noise.
So saying, for example, that Card and Krueger redid their study and found "no decrease in employment" is not useful. In fact, it's a big shift in the goalposts: before we were arguing about whether employment increased.
There's been a lengthy back and forth over Card and Krueger, and I'm about as sick of it as Card and Krueger are. People who want to believe that you can jack up wages ad nauseum without creating unemployment will abuse Card and Krueger to support ACORN's living wage programs. People who think that raising the minimum wage by a penny could plunge the economy into a new Great Depression are going to dispute the thing even if Jesus Christ Himself walks across the Potomac to endorse its conclusions. I can no more alter their fixed opinions than I could stop an earthquake by holding onto the ground. Especially since my personal opinion--"most work on price controls suggests that they're probably wrong, but it's hard to say for sure"--leaves me in a poor position to haul out the sword of righteousness and start laying into the infidels.
So back to the original argument: does the low wage labor market look like a monopsony? That is, does it act as if there is essentially one employer? My answer remains . . . ummmm, no.
Ms. G's argument relies heavily on the question that invariably gets deployed by the commenters I call The Jedi Masters of Econ 201: "If you lower wages by one penny, will everyone quit? If not, you've got a monopsony". The technical answer is that we don't know, because the government keeps employers from finding out.
But the real answer is that this is trivial. Almost no markets in existence look like the models in the economics textbooks; if Ms. G is going to reject generally applicable market principles in any situation that doesn't exactly correspond to perfect competition, then she should stop taking economics classes now; none of the models will be any use to her.
We don't have much trouble identifying Standard Oil or DeBeers as monopolies even though they are not actually the only companies in their markets and did not actually have perfectly unlimited pricing power. We have little trouble understanding that the US car market is no longer an oligopoly, even though the actual number of sellers has not actually expanded that much. Even commodity markets do not always look like perfect competition.
But despite the fact that the housing market is not perfectly competitive, rent controls still degrade the housing stock and restrict supply. Cap and trade works a zillion times better than simple fiat legislation. Etc. Etc. Etc.
Since wages rarely fluctuate by a penny in these inflationary times, the correct question is not whether such small fluctuations engender a perfectly competitive reaction. The right inquiry is whether noticeable wage gaps cause workers to move. Last time I looked, they did.
Likewise, noting that some workers have heterogenous preferences does not get you very far. Virtually all real world markets have a spectrum of customers with varying degrees of price sensitivity, depending on their affinity for other variations in the product. Nonetheless, they tend to function basically as you expect them to: when companies raise the price of their products, customers react by consuming less of them.
Basically all of these arguments seem like quibbling. "Monopsony doesn't require that turnover rates be low"--no, it doesn't, but you'd better have a good explanation for why it's so high if preferences are so heterogenous. You'd also better be able to demonstrate that you can keep wages low while others raise them and still have an adequate labor force. There may be data showing that this is true in the broad mass of the minimum wage market, but I have not seen it.
The core question is: if minimum wage labor markets are a monopsony, how come we don't find more evidence of statistically significant increases in employment following minimum wage increases? One answer is that it is a monopsony, but employers are not using their pricing power to supress wages/employment--in which case, I'm not sure why we care. Or possibly Ms G, like me, thinks that the changes in American minimum wage policy are generally too small to pick the employment effect out of statistical noise. So perhaps a different way to think about it is this: how much money would you be willing to bet that if a city enacted a $12 minimum wage, employment in that city would grow faster than employment in the surrounding area? I'd put $1,000 on the opposite happening. And I'm not much of a gambler.
This is one of those issues that's very difficult to study empirically, because there's almost no way to determine what people are actually making in the open market: I think it's safe to say that many people at the margin simply drop off the books when the min wage goes up.
That doesn't mean they stop working: it just means they get paid with an envelope full of cash at the end of the working day. And it may mean that the government stops getting their withholdings.
But I was under the impression that pretty much every study showed correlation between increases in min wage and black teenage unemployment.
This is one of those issues that's very difficult to study empirically, because there's almost no way to determine what people are actually making in the open market: I think it's safe to say that many people at the margin simply drop off the books when the min wage goes up.
That doesn't mean they stop working: it just means they get paid with an envelope full of cash at the end of the working day. And it may mean that the government stops getting their withholdings.
But I was under the impression that pretty much every study showed correlation between increases in min wage and black teenage unemployment.
A study that purports to prove that increases in the min wage has no effects on the demand for labor must imply that demand for labor is perfectly inelastic (a vertical, as opposed to a downward sloping, demand curve). This implies that there are infinite rents available for the producer, and that there are no substitutes to cheap labor available. Both are of course absurd contentions.
The more realistic view is that it takes time for an employer to adapt to increased wages. That is, the effect we should look at is changes in high/low quality labor and labor/capital mix over a period of a couple of years or so. Studies that look at that would be hard to conduct. But it's clearly silly to use short-run elasticities as a basis for long-term policy.
"we have much better, more direct ways to target poverty than possibly introducing structural rigidities into the labor market, or encouraging employers to make working conditions worse."
What are these "better, more direct ways", Megan? And which ones do you support?
Once again I ask: when we talk about minimum wage jobs, does the term literally mean jobs that pay the minimum, or is jobs that pay within a few dollars of the minimum?
Because in my personal experience, I don't see many jobs that actually pay the minimum wage anymore, even fast food jobs pay more. And I am in Missouri, probably one of the cheaper states to live in.
"we have much better, more direct ways to target poverty than possibly introducing structural rigidities into the labor market, or encouraging employers to make working conditions worse."
What are these "better, more direct ways", Megan? And which ones do you support?
This is the real issue. The "better, more direct" substitute for the minimum wage that people usually have in mind is the EITC. Given the choice between:
1) Do nothing
2) Increase the minimum wage
3) Expand the EITC
You should pick #3, pretty much every time.
The problem is that serious expansions of the EITC are only possible in limited political circumstances. Outside of those circumstances (say, during the last 8 years), the choice set effectively collapses to:
1) Do nothing
2) Increase the minimum wage
The question becomes what to do then. The liberal answer (and mine) is choice #2 - imperfect a policy response as that may be, over the parameter values we are usually talking about it is better than nothing.
The conservative/libertarian answer is to go on about how bad the minimum wage is and how much better the EITC is (but with no intention of actually expanding the EITC) as a way of effectively ensuring that we get option #1.
Maybe Megan is a sincere supporter of the EITC and like policies, but in practice this is how things play out.
then she should stop taking economics classes now; none of the models will be any use to her.
Probably everybody taking economics classes should do this, actually. Like philosophy and theology, economics is a field with no rigor to speak of.
The issues economics purports to study are the province of sociology, which is an actual science. Economics is just an excuse to cleave to a political ideology in an academic setting.
It's instructive that there's no actual Nobel Prize in economics; there's simply a copy-cat award given out in his name (and originally opposed by the Nobel Foundation) by the Swedish bank. And even that prize goes to far more sociologists these days than to true economists.
Chet, your post is bizarrely wrong in almost all respects, but I beg you to tell me how you look at this list and state that the prize is more often awarded to sociologists than economists. (Kahneman was a psychologist, not a sociologist). I also note that there is not even a copycat prize for sociology.
"I still think that the minimum wage is terrible policy, but that rests more on the fact that most of the people who receive it are not poor"
You're probably going to want to insert a citation if you intend to convince anyone.
"So back to the original argument: does the low wage labor market look like a monopsony? That is, does it act as if there is essentially one employer? My answer remains . . . ummmm, no."
Again, you're going to one to, I don't know, point to some research that reinforces this point.
"Ms. G's argument relies heavily on the question that invariably gets deployed by the commenters I call The Jedi Masters of Econ 201: "If you lower wages by one penny, will everyone quit? If not, you've got a monopsony". The technical answer is that we don't know, because the government keeps employers from finding out."
No it doesn't. Her argument rests on a number of studies (which she links to) that show that the standard perfect competition model for employment is inadequate. The perfect competition model is often used to support the argument that an increase in wages will decrease employment. These studies show that this is not the case. The monopsony model BETTER EXPLAINS the data we have on employment's response to wage changes.
So, you said that the monopsony model doesn't really applied to low wage labor markets. Kathy G replied that it does, and cites a number of studies that reinforce her point. Why should we believe you?
And Bob, I'm a longtime supporter of EITC. Which has been increased four times since its introduction in 1975--the same as minimum wage increases over a similar time period. There is no evidence that minimum wages are politically easier to pass than EITC increases.
Aren't the politics behind the minimum wage really driven by union wages that are based upon the minimum wage? (i.e. 250% of the minimum wage ect.)
One of the major beneficiaries of minimum wage laws are employers whose marginal product of labour is slightly higher than minimum wage.
For them these laws which in effect make it illegal to work for easier, more dignifying employment radically increase the supply of their prospective workers (which subsequently lowers their wages).
Before any laws the low skilled labour market had the option to work at museums and at other experience oriented employers (where MPL was under minimum wage). But now they can either not work or work only for employers with MPL above minimum wage.
For instance a few years ago when I was 16 and was looking for a summer job I worked at Safeway. I would have much rather worked in a semi-volunteer job where wages were low but where they offered more valuable experience (as would many youths). So, instead by looking for jobs I wouldn't have been looking for without minimum wage I was in effect increasing the supply of Safeway type jobs and lowering their wages.
My wages would have risen. But unless there was a monopsony, which there clearly was not, I was unambiguously worse off. And so were other low skilled workers who had previously been working for wages above minimum wage.
i could own all of you no problem B==D
There is no evidence that minimum wages are politically easier to pass than EITC increases.
You're right but only if you look at the federal minimum wage and ignore all of the minimum wage increases at the state level.
No one seriously discussing the minimum wage would ignore the movement on the issue at the state level. And yet you do just that...
wow u are quite a wusss. like i said i could own all of u B==D
Rickm, try following the links. Here's another: http://www.house.gov/jec/cost-gov/regs/minimum/against/against.htm
This comment has been deleted for profanity. Its author is politely requested to stop trolling the other commenters. -ed.
I still think that the minimum wage is terrible policy, but that rests more on the fact that most of the people who receive it are not poor...
According to the Economic Policy Institute your guess is wrong.
My wife owns a small athletic club in Colorado, where the minimum wage was increased recently. Regular increases are tied into our Constitution now, thanks to the voters.
We responded by installing automated card entry system and camera security system. This allowed us to not hire the high schoolers we normally would of, and our ROI was less than 6 months. Our members are actually happier since we can extend our open hours, and we don't have to pay front desk staff to play games and read books (they could never keep busy).
Our staff that actually did a good job already earned more than minimum wage.
Sigh.
Susan, "poor" is a technical term; more than half of the people who earn the minimum wage are not living under the poverty line. Moreover, 35% of them are living at home; a majority or near-majority of them are under 25.
There is no evidence that minimum wages are politically easier to pass than EITC increases.
This seems like a fairly uncharitable interpretation of my comment, but let me be more narrow and explicit:
Since 1995 or so - Gingrich congress onward, Bush II presidency - it has been occasionally possible for Democrats to get Republicans to choke down a minimum wage increase (as long as it is served with a side of small-business tax breaks or some such).
A serious EITC expansion has, however, been a non-starter with this incarnation of the Republican party. I don't think this is really in dispute.
Conversely, half of the people on minimum wage are under the poverty line, and 75% live on their own.
The 2001 expansion was pretty large. And there are state level EITC movements as well as federal.
How about Min Wage as a form of Zoning?
I think in general both sides are 'right' about the min wage. An increase to make a serious dent in poverty would result in less employment (or labor market rigidity where employers are reluctant to give new or lower class workers a 'chance' at on the books employment). There probably are some cases where modest increases might work in the opposite way and increase some types of employment (say by drawing teens away from the Playstation into the market or spurring some workers to be unexpectedly more productive.
This shouldn't be shocking. Sometimes raising the price may result in more sales but the general rule still applies. More often than not price increases mean less sales.
What if min wages are more about a type of zoning? Zoning is interesting because it forces a 'flavor' on a community. I can easily open a karate studio in my town but a junk yard would be a lot trickier.
Let's not be a fool here. Often zoning does carry an economic cost but often it's a cost many feel fine paying. They'd rather have Starbucks and not junkyards in their town...even though the junkyard may generate a little bit more net economic growth! Could min. wage jobs be a type of economic zoning policy on either a national or state level?
Think about what type of jobs would pay rates far below the min. wage. Some of them might fit the libertarian's ideal...perhaps the tasks Amazon.com's Mechanical Turk (http://www.mturk.com/mturk/welcome) where people who would otherwise be shut ins or staying at home all day can do something useful. But perhaps many of those jobs would be things that would really be exploitive. "Hey, HS drop out, I'll pay you $2 an hour to climb around this massive landfill and pick out pieces of metal! Watch out for hidden holes, firepits, and massive earth movers!" Perhaps people with mental or learning disabilities would be taken advantage of and made to do things that would, in the long run, be worse than if they were just unemployed for long periods of time.
The min wage, therefore, might serve to channel capital away from such industries and towards work we feel comfortable as a society permitting. Like zoning a little bit can go a long way but beyond that you can pull out your Milton Friedman and rattle off all the complaints.
So maybe min wage isn't so bad but 'living wage' is the wrong way to go.
I would actually argue that the state/city-level EITCs are evidence in favor of my point. Advocates moved to the states at least in part because it was more favorable terrain than the federal government.
2001 was not nothing, but certainly very modest compared to 1990 and 1993 - even 1986, was, I think, larger. And the big expansions people have been talking about for a while now - for childless workers, for 3+ kids workers, etc. - just were never going to happen in a world where the modern Republican party controlled either the House or the veto pen.
Rickm, we've got dueling reports. This one, which uses BLS data from 2005, gets different results:
http://www.heritage.org/research/economy/wm1186.cfm
Most work part time; fewer than half are in families below 200% of the poverty line; and the majority are between 16 and 24 years of age.
You'll undoubtedly say that Heritage is a corporate tool, and I will respond that EPI is a union-funded shilling machine with a rather cavalier disregard for disconfirming data. In this case, however, the BLS agrees with me:
http://www.bls.gov/cps/minwage2006.htm
The root of the problem is that we're talking about different populations; the EPI is looking at people who make between $5-10 an hour, and the BLS and Heritage, and me, are looking at people who currently make the minimum wage. Whether the EPI is right I can't say, since I don't have their data set. But they have a strong bias towards finding that minimum wages are awesome.
I know some of the liberals here won't believe Megan when she says that the Card/Krueger view is widely rejected by other economists, but perhaps criticism from one of their own will persuade them:
As David Hecht notes above, the minimum wage is very likely the cause of the high unemployment rate for black teenagers. That can have long-lasting consequences. The teenagers who cannot find legal unemployment are much more likely to turn to illegal cources of income. So, as Krugman says, it's hard to see why anyone would support an increase in the minimum wage rather than the Earned Income Tax Credit.
Thank you, Megan. Since povery level for a single person is $10,210yr. and a minimun wage salary is $12,210/yr., this person is not technically on or under the poverty level. Hoever, in the real world, that two thousand dollars per year will still mean this person is poor. And if this person supports anyone else, they are under the povery level, by $4,000.
Since 79% of them are adults, I'm not sure where your "35% live at home" comes from. 35% of the teens who work minimunm wage jobs? It's impossible to tell because you do not give links to your facts. "A majority or near majority of them are under 25." Where do you get this information? If The EPI is wrong and you are right, this is information people need to make an informed decision. Where did you get these exact numbers?
Moreover, 35% of them are living at home
Isn't whereever someone lives their "home"? Or are you saying that 65% of minimum wage workers are homeless? [/pedant]
"Since 1995 or so - Gingrich congress onward, Bush II presidency - it has been occasionally possible for Democrats to get Republicans to choke down a minimum wage increase (as long as it is served with a side of small-business tax breaks or some such).
A serious EITC expansion has, however, been a non-starter with this incarnation of the Republican party. I don't think this is really in dispute."
That is an odd interpretation of the evidence you present. Democrats haven't pushed as hard/hardly at all for an EITC increase so it isn't shocking that when forcing concessions they get what they push for instead of something they aren't even requesting. Republicans may fear that if they gave in at an EITC increase they might also be forced to have a minimum wage increase as well.
"A majority or near majority of them are under 25." Where do you get this information?-Susan from Texas
Susan, the Bureau of Labor Statistics reports that:
First of all, Megan said "most of the people who receive it are not poor", so "about half" doesn't answer my question either. Half is not even close to most.
Secondly, there are a few problems with your numbers. One small problem is that they don't account for salaried mininum wage, an unknown number that's not thought to be large. However, the min. wage count stops at exactly $5.15/hr. Anyone making as much as a penny more isn't included in this number.
Those problems are found just at first glance.
Susan - Many minimum wage jobs are not the sole source of support for the person working them.
Re: "Since 79% of them are adults, I'm not sure where your "35% live at home" comes from. "
Most of the adults who make minimum wage are fairly young. Its not exactly unheard of for young adults (18 on to the early or perhaps mid twenties) to still live with their parents.
And then you have to consider the people who are adults, no longer with their parents, but who work minimum wage as a 2nd job or who have a spouse who makes more than minimum wage, or who work more than 40 hours at minimum wage, or who other other sources of income besides their labor, or besides their on the books labor.
Adults with no other source of money or support, besides 40 hours or less of minimum wage labor, are a fairly rare group.
Re: "If The EPI is wrong and you are right"
The EPI data isn't about minium wage workers. It doesn't say what you quoted it as saying. Your quote was -
"Of the total [minimum wage] workers, 79% are adults and 59% are women..."
But what it actually says is
"Of the total affected workers, 79% are adults and 59% are women..."
Affected workers, does not equal "minimum wage workers". In this particular case it means workers who make less than $7.25. The current national minimum wage is $5.85 per hour. (And yes it is scheduled to increase to $7.25 by July 24, 2009, but employees making between $5.85 and $7.25/hour are not currently minimum wage employees)
Susan from Texas, it's not my job to substantiate every claim that Megan McArdle makes. You asked a question:
And I answered your question. So really you should be thanking me for pointing you to the evidence you requested. The fact that you are instead inclined to ignore the evidence and rebuke the person who brought it to you makes me suspect that cognitive dissonance is interfering with your reasoning here.
Now it's clear that about half of those receiving the federal minimum wage are 25 or under, but the central question is whether raising the minimum wage is an intelligent way to attack poverty, and the answer is a resounding no.
As Paul Krugman argued, a significant increase in the minimum wage is likley to increase unemployment--and is therefore a rather stupid way to help those at the bottom. A subsidy like the EITC makes much more sense.
That is an odd interpretation of the evidence you present. Democrats haven't pushed as hard/hardly at all for an EITC increase so it isn't shocking that when forcing concessions they get what they push for instead of something they aren't even requesting.
I don't think so. Your interpretation, in addition to mis-specifying the counterfactual, just ignores the history of the relevant period.
For example, Clinton et al. didn't stop fighting for the EITC after 1993. After Gingrich and crew came in they put cutting the EITC on their agenda. The Dems had to move to defense, and they succeeded in fending off those cuts.
As an Austrian-ish kind of guy (and, thus, not fixated on equilibrium), this strikes me as a good contrast between an appropriate use of equilibrium analysis (the "perfect competition" model) and an abuse of equilibrium analysis (the application of a monopsony model in this case).
Sure, everyone understands that almost every transaction in a modern economy has some degree of bilateral monopoly in it. But using that rational to sic the anti-trust agents onto every local corner store is absurd. It assumes that the anti-trust agents have a better grasp of local conditions than they actually do.
Similarly, here. Sure, there is some amount of bilateral monopoly even in unskilled labor markets, but surely that's trivial compared with the bluntness of the minimum wage.
I'd also note that Kathy G's comment about the difference in indiosyncratic working conditions leading to a less that completely fluid market (e.g., the firms who allow workers to make their own schedules) doesn't necessarily support raising the minimum wage. Those sorts of policies are changeable aspects of the work environment. To the extent that they are costly to the firm to provide, they might be changed in ways the Kathy G's of the world, and, more importantly, the actually employees, don't particularly like.
I agree the case has not been made for extensive min. wage increases as a tool for serious poverty fighting. Economic theory still rules against it and the emperical evidence leans against it as well. Nit picking over whether min. wage increases benefit pampered mall-rat teens more than working poor adults seems to miss the point IMO.
But the right wing case for eliminating the min. wage has also not been made. (See my previous post on the min. wage as a type of economic zoning). I don't think much has been presented to indicate that eliminating the min. wage would be a good idea.
I've seen the argument that the min. wage does price poor black teens out of the labor market. It's not clear to me, though, that on the whole eliminating the min. wage would be a net positive. Poor black teens, for example, might in the long run be better off getting as much school as they can where better off teens might be better off being tempted away from their excess free time by a min. wage job. Does anyone have an real example of a state reducing poverty by dropping the min wage (and remember since the min. wage is not indexed to inflation it drops just about every year...if it is so bad then there should be a clear empircal trail of evidence every year we've had high inflation without a raise).
Thanks for the info, Tom Fowler, and especially the politeness. I'll check more sources to get more info.
rwe, nice way to move the goalposts. You need to learn some manners to fit in with your betters.
Susan,
I apologize profusely. I guess it's rude to point out when people are ignoring evidence they simply don't like.
In a spirit of friendship and concilliation, however, I do wish to offer you a piece of advice. When you write things like this:
You're likely to get a little jazz from other commenters.
Yours truly, in sackcloth and ashes,
RWE
Funny you should mention ACORN. It does appear that ACORN itself recognizes that minimum wage laws reduces business' ability to do what they do.
I don't have a primary source for the 1995 California lawsuit, sorry. It's potentially findable by lexis and the like, for which I don't have an account, via the phrase "the more that ACORN must pay each individual outreach worker–either because of minimum wage or overtime requirements–the fewer outreach workers it will be able to hire.".
-dk
I found a document containing the docket number of the ACORN lawsuit [as appendix B].
-dk