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Home Publications Blogs Beat the Press Charles Lane Doesn't Like the Minimum Wage (see addendum)

Charles Lane Doesn't Like the Minimum Wage (see addendum)

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Tuesday, 19 February 2013 04:27

That's what he told us in his column today, because he sure didn't make much of an argument. Lane cites several recent papers showing that the minimum wage has no negative effect on employment (including my colleague, John Schmitt's paper). He then notes that these studies could be right, but he also refers to research by David Neumark of the University of California at Irvine and William Wascher of the Federal Reserve that shows the last minimum wage hike (from $5.15 an hour in 2007 to $7.25 in 2009) lowered employment of young people by 300,000.

He then warns that if their research is right, and we push the minimum wage too high, then we could be hurting the people we are trying to help. He also points out that even if the research showing no employment effect is right, then we would still be hurting other workers by pushing up prices or wage compression. He then proposes spending more money on the earned-income tax credit (EITC) as an alternative to a higher minimum wage.

Okay, let's have some fun here. Lane's bad story is that 300,000 fewer workers would be employed. That sounds really awful, after all these are the people we are trying to help. But let's think about this one for a moment. The jobs we are talking about tend to be high turnover jobs that workers only hold for relatively short periods of time. The research that Lane is depending on shows that at any point in time 300,000 fewer workers will be employed as a result of a minimum wage hike of more than 40 percent. In effect, this means that workers will on average have to spend more time between jobs looking for work.

More than 3 million workers were in the affected wage band between the old and new minimum wage. If we assume that on average they worked 10 percent less (the 300,000 job loss) and that their average hourly wage gain was 20 percent (half of the wage increase) then on average these workers will net roughly 8 percent more in pay each year (120 percent * 90 percent), while working 10 percent fewer hours. Pretty awful story, huh? And that's based on the research that finds a negative effect on employment. 

As far as the rest Lane's story, yes, the higher pay for minimum wage workers comes mostly out of other workers' pockets. (Some comes from profits and some comes from increased productivity.) This is true of everyone's pay. If protectionists did not dominate national policy we could import more doctors and bring our doctors' pay in line with pay in other wealthy countries and save other workers close to $100 billion a year in health care costs. But the money that goes out of workers' pockets to support the excess pay of doctors, Wall Street bankers or CEOs doesn't concern Lane, only the money that goes to pay custodians, retail clerks, and dishwashers.

But the best part is the idea that the EITC is somehow free. In fact we need government revenue to pay the EITC, which requires taxes. Taxes will also come out of workers' pockets and also have a distorting effect on the economy. In addition, there are also costs associated with administering the EITC. While it does not have nearly the level of fraud claimed by its critics, clearly some portion of the money is paid out improperly. And, low-wage workers often have difficulty dealing with tax returns. Many throw hundreds of dollars in the garbage paying tax preparation services in order to claim their EITC.

In short, Lane doesn't really have much of a case against a higher minimum wage even if we accept his bad story about job loss. And, he seems to have imagined that there is an alternative costless way to get more money to low-paid workers.

There is one final point worth noting in the context of proposals to increase the minimum wage. From its inception in 1938 to 1969, the minimum wage rose in step with economy-wide productivity growth. If we had continued this policy over the last four decades the minimum wage would be $16.50 an hour. Even if the minimum wage is raised to 9.00 an hour, minimum wage workers would get none of the benefits of economic growth over the last four decades.

 

Addendum:

Charles Lane wrote to tell me that I had misrepresented the Neumark estimate of the employment impact of the last minimum wage hike. Neumark was only referring to the impact of the last phase of the increase (which was phased in over three years) from 6.55 to 7.25, a rise of 10.7 percent, not the increase from 5.15 that I had referred to in my initial note. 

I should have looked at his reference in the column. I'll admit that I have not taken Neumark's work on the minimum wage seriously since he uncritically took data from the fast food industry lobby to try to argue the case that the minimum wage caused unemployment. It turned out that the industry had cooked the data. When Neumark used data that was independently collected he found the same result as everyone else, the minimum wage did not increase unemployment.

But, even if we take Neumark's numbers at face value, we still don't get much of a horror story. A rise of 10.7 percent means that the average gain would be around 8.9 percent. (To see the logic, imagine that hourly earnings were originally distributed evenly between the prior minimum wage of $5.15 an hour and the new minimum wage of $7.25 an hour. After two rounds of minimum wage hikes, two thirds of the workers are now sitting at $6.55 an hour or close to it. The remaining third are evenly distributed across the remaining band. This would mean that two-thirds of the affected workers would recieve the full 10.7 percent increase, while the remaining third would see an average hike of 5.4 percent. This gives an average increase of 8.9 percent.)

Neumark's estimate would then imply workers are on average putting in 10 percent fewer hours and taking home 2 percent less money. This is based on the assessment of an economist who has devoted a career to trashing the minimum wage. Can't say that sounds like a horror story.

Comments (28)Add Comment
Wage inflation
written by bakho, February 19, 2013 4:39
The Fed is not hitting its inflation target. Inflation is too low so they are enacting policies that the same critics of minimum wage dislike.

What better way to increase wage inflation than to raise the minimum wage?
The critics are fighting the last war of high inflation. We now have too low inflation. Someone tell them that times have changed.
retired, Low-rated comment [Show]
...
written by watermelonpunch, February 19, 2013 10:26
@ JCStrss
I once felt as you do.

Now that I have almost no access at all to doctors because of lack of insurance and exorbitant prices, I have changed my tune.

I would prefer ANY doctor, even one that could barely communicate with me, or not at all, than no doctor at all...

I'll take your Chinese attending. Please, please please, can *I* see that Chinese attending if you don't want him?

They can speak Cantonese or an obscure Somalian dialect for all I care!
I'd just like to be able to afford to see a doctor!!!

Please!????
...
written by Kat, February 19, 2013 10:30
As far as the rest Lane's story, yes the higher pay for minimum wage workers comes mostly out of other workers' pockets. (Some comes from profits and some comes from increased productivity.) This is true of everyone's pay. If protectionists did not dominate national policy we could import more doctors and bring our doctors' pay in line with pay in other wealthy countries and save other workers close to $100 billion a year in health care costs. But the money that goes out of workers' pockets to support the excess pay of doctors, Wall Street bankers or CEOs doesn't concern Lane, only the money that goes to pay custodians, retail clerks, and dishwashers.

But the higher paid workers are revenue creators and the lower wage workers are just costs. Really, they're lucky they even have a job. Employers could do away with them altogether to really fatten their bottom line. Fortunately, we live in a society where the job creators are so willing to selflessly share their profits.
...
written by Brett, February 19, 2013 10:44
Great comment on the productivity/minimum wage link in the past. A $16.50/hr minimum wage, if it didn't have a negative effect on employment, would be pretty good news - that would be about $31,000 a year pre-tax, or enough to put people into what we would consider the "lower middle class" on a single full-time job.

Of course, it's also possible that we'd just see a ton of loopholes, like with the regular minimum wage law.
...
written by liberal, February 19, 2013 11:03
As far as the rest Lane's story, yes the higher pay for minimum wage workers comes mostly out of other workers' pockets. (Some comes from profits and some comes from increased productivity.)


Actually, IIRC I've seen a Georgist type claim that an increase in the minimum wage would mainly come out of landowners' pockets.
...
written by elboku, February 19, 2013 11:07
If the min. wage was indexed to inflation just from 1968; today's min. wage would be ten fifty or so. The median wage n the US is about 26k or roughly 500 a week or 12.50 an hour;which means most Americans (the half below the median and those clustered around the median) work for roughly around the true min. wage. And people wonder why are economy is in the dumps?
...
written by liberal, February 19, 2013 11:13
JCStrss wrote,
...that you've never had a sick or hurting kid in the ER and dealt with a Dr. whose limited English is a real problem, compensated for by his arrogance and attitude that parents should not question Drs.


Right. Because that holier-than-thou attitude amoung the priestly physician class is mainly limited to non-native MDs.

LOL.
...
written by elboku, February 19, 2013 11:14
that should be 'our' and not 'are'- was typing 2 thoughts at once...darn multiple personalities...
...
written by watermelonpunch, February 19, 2013 11:43
@ liberal
Actually, IIRC I've seen a Georgist type claim that an increase in the minimum wage would mainly come out of landowners' pockets.


Where is this addressed?
Because it's along the lines of what I thought when I first saw some "average people" worried about what effects a minimum wage increase would bring.
The idea I saw most commonly expressed is the idea that if you raise the minimum wage, the cost of things you buy will rise up.
And my first reaction to that was to wonder - But will it cause rentals to increase??
The reason this occurred to me is because, while I don't know if that would be the case or not, and I don't know of any polls regarding this...
I have a strong suspicion that most wouldn't mind paying a bit more for stuff like milk, trash removal, and television sets, if they didn't have to pay 40-50% of their income for their basic housing expense.

Anyone have any info on this idea?
...
written by liberal, February 19, 2013 11:54
watermelonpunch,

Where is this addressed?


I think it comes from the very heart of the Ricardian analysis of land rent, "the margin of production." But I'm not sure, and I don't have time to read/think about the economics.

And my first reaction to that was to wonder - But will it cause rentals to increase??


Whose rental? The effect I'm referring to is that it would come out of the rent of commercial landowners (IIRC).

As for residential, unfortunately, the effect would work against helping the working poor---the more money working poor have to spend on housing, the higher they'll bid up the price of housing. And in terms of the land component (but not the component for improvements (buildings etc), that would all go to the landlord.

Of course, the Georgist solution is to get rid of things like sales taxes and replace them with an ad valorem tax on land, perhaps combined with an ethic of decreasing housing prices by getting rid of zoning laws whose main effect is to constrain the supply of housing and thus increase its price.
...
written by Mark Jamison, February 19, 2013 12:14
Conservative critics of the minimum wage have referred to the EITC as a better way to deliver the same effect. That's disingenuous at best since conservatives would balk at the kind of tax increases necessary to provide more funding for the EITC. Lane simply inserts his preference for the EITC as a straw man to deflect attention from his basic ideology that labor should be as cheap as possible.
...
written by watermelonpunch, February 19, 2013 1:11
As for residential, unfortunately, the effect would work against helping the working poor---the more money working poor have to spend on housing, the higher they'll bid up the price of housing.


That happened without working poor having a living wage though.
???
...
written by urban legend, February 19, 2013 3:11
". . . yes the higher pay for minimum wage workers comes mostly out of other workers' pockets."

Is there any empirical evidence for this at all? I doubt it. If there is any competition at all, employers have to compete for talent. It is far more likely that a minimum wage increase pushes wages up generally in a reverse cascade effect, because to compete for talent a premium over the minimum for higher-level jobs is necessary. The impact on the employer is moderated if not eliminated by (1) the fact that for most employers their competitive position will not be affected at all, since it applies to all their competitors as well (who most likely have a similar level of dependence on low-wage labor); (2) morale and productivity will improve at the bottom of the scale, with turnover and training costs reduced and benefiting the employer; and (3) the people with the highest marginal propensity to spend (and the least propensity to spend it outside the country on ski trips to Saint Moritz and condos in Nice) will have more money to spend, thereby increasing demand for many of the employers' goods and services.

Applying Econ 101 analysis to the complex effects of requiring all employers who use low-wage labor to pay them more than a race-to-the-bottom wage is simple-minded in the extreme.
...
written by watermelonpunch, February 19, 2013 5:00
because to compete for talent a premium over the minimum for higher-level jobs is necessary


I was assuming that too. I imagine the cascading would only go so far up, with diminishing effects the higher the pay.
But surely there would be a lifting of wages noticeable at the lower end.

That's one thing i notice when people talk about the minimum wage. They say things like - but most minimum wage workers are young, part time, and yadda yadda.
Well, maybe that's true (I don't know). But what about all the people working for $8.50/hr?

Obviously a job that right now pays $8.50/hour, does so because they cannot pay minimum wage and fill the positions. Right?
So if the minimum wage was $8.50/hr - those jobs would be forced into offering more too.

That said, I hardly think raising the minimum wage would cascade up to CEO pay. ha ha ha. But I doubt anyone thinks they need a raise.
KAT For Real!?
written by JP, February 19, 2013 7:32
"But the higher paid workers are revenue creators and the lower wage workers are just costs. Really, they're lucky they even have a job. Employers could do away with them altogether to really fatten their bottom line. Fortunately, we live in a society where the job creators are so willing to selflessly share their profits."

I honestly do not know if you are making a joke or actually ascribe to the sentiments that would create those sentiments.

Please clarify and set me straight.
Thanks
I hardly Know nothing about these minimum wars
written by Antiderivative, February 19, 2013 7:34
I hardly know nothing about these minimum wars, and I am not the brightest economist in the room. I just started to delve into this topic less than a week ago. However, I feel it is something that we should discuss and I hope I can offer fresh eyes this debate.

First off, from my understanding, Nuemark made his career off opposing the seminal work done by Card and Krueger. Card also lost "friends" due to his seminal work.

"I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed."
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3190

Second off, there are better ways to help minimum wage workers besides lowering their wage. We could increase educational opportunities, or enact universal preschool. (I am not going to dig up the studies right now since you limit me to one link per comment...and plus I am lazy). However, the research points in the direction that universal preschool makes parents (especially working mothers) more productive and allows better opportunities.

There are definitely better ways to boost opportunities for the poor/struggling besides raising the minimum wage.

Honestly, I don't even seeing the minimum wage as a policy solution to any of our problems. Don't get me wrong I support it (I see more benefits coming from it than doing nothing), but I am largely ambivalent about it, unless you can prove it to be a stimulative measure.

Just like most studies, raising the minimum wage will have negligible results. Bush raised the minimum wage by 24% during his tenure and the sky never collapsed. Obama proposes another 24% increase and this will hardly effect the economy.

Much hullabaloo about nothing.

Oops...typo
written by Antiderivative, February 19, 2013 7:39
"Second off, there are better ways to help minimum wage workers besides lowering their wage."

It should read."Second off, there are better ways to help minimum wage workers besides INCREASING their wage.

Sorry, I can't edit comments, which works against me. I never get the English right in the first try. It is a constant struggle.

However, I needed to correct this egregious mistake.
Minimum wage increase in liquidity trap
written by Senator-Elect, February 19, 2013 9:40
Thanks for these arguments. Very interesting.

I was curious about whether a minimum wage increase is even better policy while the economy is in recession. Wage inflation is what we need in this situation, right?

Thanks for your ongoing great work!
I really hope this is TWO cases of Poe's Law!!!
written by watermelonpunch, February 19, 2013 9:47
@ JP

I thought the last line rather gave it away, no?
"are so willing to selflessly share their profits"
Would a real extremist defending "job creators" really say that?
I'm really asking this as a question, not a snide remark.
I can't judge the Poe's Law angle here, because I'm quite sure, based on other comments by Kat, that the term "job creators" wouldn't be used in seriousness.

@ Antiderivative

You have FALLEN into the trap????

For pity's sake, how is universal pre-school opportunities going to help the 40 year old childless person working a minimum wage job?

Educational opportunities are all well & good.
But to say that's all we need is to say that the men who collect your garbage so you don't have to live in filth, are not worthy of a living wage.

The end result of this trap is to make moral and righteous the idea that as long as everyone has the opportunity not to be doing "underclass jobs" (that are vital to civilization), those who do (or must do) those jobs, can morally & righteously treated as little better than slaves.

What's more, I think this is backward strategy thinking.
If our janitors, garbage collectors, ditch diggers, and cafeteria servers were paid a fair living wage, the economic & educational opportunities would almost take care of themselves, for them, and their children.

We need the people working in the hospital laundry & in institutional kitchens, people cleaning public bathrooms and working at the landfills.

Or do you want to have to take grandma's soiled sheets home to launder them when she breaks her hip & needs to stay in the hospital?

The idea that the solution to poverty is to make sure everyone has a "fair shot" at college is either: snobbish & arrogant, myopic & unthinkingly out of touch with their fellow humans, or just plain selfish & nasty.
(Or, and I hope not, maybe all of the above.)
Fall into what trap?
written by Antiderivative, February 19, 2013 9:57
Yeah@Senator-Elect
https://encrypted-tbn3.gstatic.com/images? q=tbn:ANd9GcRx4vpNiq11qr05YH9A9LiN1RkxDS0ojevzZeL9YZbAg
5dj1IlYGw


This is a charade, right.
...
written by Antiderivative, February 19, 2013 10:28
I am not even going to comment on the "grease the lube" hypothesis.

This idea that inflation that lubricates the employment market never sat well with me.

How is inflation supposed to lube the job market, especially when corporations are sitting on a hoard of cash flows?

Good by classical economics....

Not nyt, not no one remembers franken amendment on bond rating agencies
written by JaaaaayCeeeee, February 20, 2013 3:47
There is a new group of 5 brief op-ed's in the NYT opinion section, called Room For Debate, where experts opine on how to prevent more bond rating fiascoes. None of the five mention Dodd Frank's Franken amendment: http://www.nytimes.com/roomfor...g-fiascoes

You already pointed this out concerning NYT and WAPO this week: http://www.cepr.net/index.php/...g-agencies

I guess if you can't defund Dodd-Frank away, or litigate it away, you can always just ignore it?
...
written by Kat, February 20, 2013 8:41
Watermelonpunch-- thanks! I was going to respond to both of those posts. I'm all in favor of universal preschool, but why do we insist on such rube goldbergesque schemes to provide for a more equitable distribution of wealth.

I loved the title of this post by the publisher of The American Conservative
http://www.theamericanconservative.com/articles/raising-american-wages-by-raising-american-wages/
(he wants a higher minimum than the ones Obama proposed in 2008 and 2012)

There are nations that do not have government mandated minimum wages, but have far more equitable distributions of wealth-- I'm thinking of Scandinavian countries. What they do have is a lot more protections of the rights of workers to collectively bargain.
Median wage
written by SqueakyRat, February 20, 2013 1:22
@ elboku

Your number on median wage is low. The latest from the BLS is $775/wk.
www.bls.gov/news.release/pdf/wkyeng.pdf
Obtuse is
written by JP, February 20, 2013 7:13
Me. Thank you watermelonpunch and Kat. I needed clarification because I have heard Kat's words "for real". Now I try to hang out with a better crowd, and they can be hard to find.
...
written by Kat, February 21, 2013 1:07
JP,
I didn't take offense (nor did I vote your comment down.)
...
written by watermelonpunch, February 21, 2013 11:50
@JP I didn't vote your comment down either.
I really was trying to be helpful.
I've seen a lot of nonsense comments all over the web, of course, but none quite as comprehensive as Kat's satire (nor as well written ha ha).
Anyway, I'm still convinced that someone with those sentiments for real wouldn't use the word "selflessly". Though mostly because of my bias in thinking that they wouldn't know the meaning of the word, and so wouldn't use it. ;o) Maybe that's my bad.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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