Minimum Wages #2

David Neumark and William Wascher have pulled together a blunderbuss of a minimum wage review. In 152 pages, the paper discusses over 90 recent studies on the effect of minimum wages on employment, including 4 studies from Australia. Their conclusions:

Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research
David Neumark, William Wascher
We review the burgeoning literature on the employment effects of minimum wages – in the United States and other countries – that was spurred by the “new minimum wage research” beginning in the early 1990’s. The wide range of existing estimates makes it difficult for us to draw broad generalizations about the implications of the new minimum wage research. Clearly, no consensus now exists about the overall effects on low-skilled employment of an increase in the minimum wage. However, the oft-stated assertion that this recent research fails to support the traditional view that the minimum wage reduces the employment of low-skilled workers is clearly incorrect. The overwhelming majority of the studies surveyed in this paper give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects. Moreover, the evidence tends to point to disemployment effects of minimum wages in the United States as well as many other countries. Two potentially more important conclusions emerge from our review. First, we see very few – if any – cases where a study provides convincing evidence of positive employment effects of minimum wages, especially from studies that focus on broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, when researchers focus on the least-skilled groups most likely to be adversely affected by minimum wages, we regard the evidence as relatively overwhelming that there are stronger disemployment effects for these groups.

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17 Responses to Minimum Wages #2

  1. Kevin Cox says:

    Do any of the studies discuss measures of fairness or other social factors that we instinctively believe important or do they only concentrate on the ‘easy’ measures such as money and employment rates.

  2. Leo says:

    I’m curious – how do you measure the ‘fairness’ of a minimum wage without focussing on money and employment effects?

    Those are the only things it effects. It can change income distribution (money) and employment levels (employment). There ain’t nuffink else a minimum wage does, mate.

  3. shuanna says:

    I wonder how many of the advocates of lower minimum wage rates have ever lived for a lengthy time on a minimum wage, without significant asset-backing or support of other parties eg family.

    How many of them would want such an outcome for their own kids?

  4. Borofkin says:

    Shuanna,

    People who support a lower minimum wage argue that the benefits of lower unemployment outweigh the harm caused by lower wages. Your question: “How many of them would want such an outcome for their own kids?”, implying that a person wouldn’t want their own children to have to survive on such a small amount of money, can be rephrased to support lower minimum wages, e.g. “How many of the people who support a higher minimum wage would want their own kids to be unemployed?”

  5. Michael Moriarty says:

    Leo,

    “It can change income distribution (money) and employment levels (employment). There ain’t nuffink else a minimum wage does, mate.”

    There are many many things a Mandated Minimum wage affects.

    Right from the start it impacts the participation rate. There are people who are not employed but in an ironic twist they are not unemployed. If the wage was high enough it would entice people into the work force.

    It impacts on the “Wellbeing Index”.

    It has a relationship on the participation level at high schools and tertiary education centres.

    The crime rate.

    The social spin offs are immense. Look at things like work related injuries, absenteeism, alcoholism family violence…

  6. Michael Moriarty says:

    How dumb can I be I forgot to mention Inflation !

  7. Leo says:

    Participation rate effects are covered by ’employment’.

    What evidence is there of a positive link between the minimum wage and any of the social indicators you mention? If the negative employment effects of a raise are sufficient, it might well exacerbate those problems.

  8. derrida derider says:

    It should be interesting to get Card’s reactions to this. Neumark & Wascher, of course, made a strong (but IMO unsuccesful) attempt at rebutting Card & Krueger’s work. You’d have to think they’ve got strong priors.

    I’ll read the paper with interest – but does it do a proper metastudy with all those fancy techniques to look at how variance changes with sample size, etc or does it just scan all the papers and take a “majority rules” approach?

    The fragility of results suggests the disemployment effects of US minimum wages cannot be large, or they’d stick out like dog’s balls. Though as I’ve noted elsewhere, this says nothing about Australia’s far higher min wage.

  9. Andrew Leigh says:

    DD, you’d enjoy reading N&W’s study. It doesn’t use those fancy meta-analysis techniques, since the methodology of some of these studies is much better than others. In this instance, equally weighting good and bad studies would be a mistake.

    Michael, you’re right to mention those other issues. (For example, there’s good evidence that higher minimum wages raise the highschool dropout rate.) But I still think employment and hourly wages are the main outcomes we should be focusing on.

  10. Kevin Cox says:

    Leo,

    The difficulty with so many studies that Andrew reports on and I suspect that economists as whole study is that they are so one (or should I say two dimensional). These studies discussed here try to see if there is a relationship between minimum wages and employment rates. From a knowledge of other complex systems we can say with a high degree of certainty that there will be many relationships that can be derived from the numbers – but so what.

    Let us forget seeing if their are relationships between minimum wages and unemployment and concentrate on making the morally right decision rather than trying to make a judgment and policy about reducing – or increasing minimum wages because it may affect the unemployment rate.

    If instead of trying to see if there is a tradeoff we approach the problem from the point of view of what is a fair minimum wage in our society and then work from that. I think this is what the current body in charge of setting minimum wages is supposed to do. If increasing minimum wages happens to increase unemployment then let us look at other ways of addressing the problem but let us not fall into the trap of compromising a fair wage on the argument that even though it may not be fair it makes society as whole better off because it increases employment.

    If someone works – no matter what job they do – they should get a fair wage. Let us argue about what is a fair wage but let us not go off on tangents and argue that increasing minimum wages increases unemployment and hence we should not increase minimum wages – which is what employers always argue.

    While I am on the topic we can get rid of all this nonsense about unemployment benefits and welfare by taking a different “non economic” point of view and say – everyone in society is entitled to some income that will sustain them simply because they are a member of the society. If we now take that point of view then we will remove a lot of the nonsense and breast beating we get about welfare payments and work for the dole and mutual obligation and get down to tackling the real problems of incentivising people to work. In a modern society you do not have to incentivise people by starving them and forcing them to go through a whole lot of time wasting and non productive procedures to get a fair non working wage.

  11. Crocodile says:

    I would be interested in seeing comparisons of minimum wages against productivity growth as well as unemployment.

    I’ve not seen this done routinely and I may be wrong but would guess that if minimum wages fall so would productivity growth simply because it may be cheaper to employ human labour rather than invest in capital equipment. If this is the case ( and I’m only guessing ) then the drive to push down minimum wages would hardly seem to be worth the bother.

  12. Andrew Leigh says:

    Croc, I don’t know about productivity, but the capital-labour ratios are apparently affected by labour market regulation. It’s said that European firms adopt technology faster than their US counterparts precisely because labour is more expensive.

  13. Leo says:

    You have really lost me, you know.

    The morality of any action depends on its consequences. If a consequence of a high and rising minimum wage is that the rich are richer and the poor poorer (as it probably is), how could it possibly be ‘morally right’ in the eyes of anyone with egalitarian principles?

    And while I don’t disagree with the ideals behind your words about minimum incomes, the sad truth is that overwhelming evidence from Europe indicates the kind of universalist, compassionate welfare state you suggest has some very tragic human consequences in the longer run.

  14. Kevin Cox says:

    Leo,

    I should not have used morality – wrong choice of words. However, I am not talking about welfare states as you imagine.

    If we want to take some empirical evidence on the effect of raising minimum wages why not look at Singapore. Singapore has done quite well with relatively high minimum wages.

    If we study the effect of minimum wages on employment then somewhere – perhaps most places – it will appear that there may be a cause and effect. However, we do have other ways of controlling inflation which the Reserve Bank is doing well. Do not abandon the “fair thing” on the excuse that something might increase inflation.

    It is useful to see the relationships such as the effect of raising minimum wages as that can then be taken into account in other areas.

    My worry about economics as it appears to be used by decision makers is that it leads to simplistic solutions. Reduce or restrict minimum wages and we will help control inflation.

    It may or it may not but if it does then we can do something else to alleviate inflation – like controlling chief executives pays as suggested elsewhere. If it is good enough to set a minimum wage surely we can put constraints on maximum wages which may well have a much greater effect on inflation.

  15. derrida derider says:

    Controlling minimum wages has virtually nothing to do with controlling inflation, Kevin – it’s just not what the argument is about.

    It is not employer’s costs or the aggregate effect on employment we worry about. It is the sectoral effects on those whose productivity is low (or is believed to be low by a potential employer – eg a person who has been out of work a long while).

    Bluntly, employers don’t take an individual on unless they reckon they can make a profit out of them, and this may not be possible if they have to pay a ‘decent’ wage to someone who won’t produce much.

    Maybe this is not fair – maybe employers should be willing to make a loss for the greater good of society. But the argument is not about whether employers should but whether they will. Some labour economists (including me) reckon there are some circumstances where we can make it in employers’ interest to do this – but the traditional view is that we can’t. This post is about what the data says about these two propositions – ie the world as it is, not as it “ought” to be.

  16. Leo says:

    Thanks, Derrida.

  17. Patrick says:

    If we now take that point of view then we will remove a lot of the nonsense and breast beating

    That’s a beaut – obviously, if you agree with me, then we won’t need to argue much will we?

    There is little more pernicious, as DD’s comments suggest, than making policy for a fantasy world and implementing it in ours.

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