Minimum wage Michael Kevane Dept of Economics Santa Clara University
Goals Listen and learn from each other about an important policy issue Be open to modify our stance in response to well-reasoned arguments, but also acknowledge that emotional responses are significant in how our brains arrive at preferences Agree that this issue, like many public policy issues, is extremely complex, and we should draw conclusions on the issue with humility rather than certainty Easier to agree that some outcome is probably not likely, than to agree that some outcome probably is likely Example: A modest rise in minimum wage is not likely to plunge an economy into significant recession. Why can we agree on this? Because in the history of reasonable minimum wage increases, this has never happened. The United States and California are huge, dynamic, and complex economies. A change in one sector typically cannot have large effects across the economy.
Goals Listen and learn from each other about an important policy issue Be open to modify our stance in response to well-reasoned arguments, but also acknowledge that emotional responses are significant in how our brains arrive at preferences Agree that this issue, like many public policy issues, is extremely complex, and we should draw conclusions on the issue with humility rather than certainty Easier to agree that some outcome is probably not likely, than to agree that some outcome probably is likely Example: A modest rise in minimum wage is not likely to plunge an economy into significant recession. Why can we agree on this? Because in the history of reasonable minimum wage increases, this has never happened. The United States and California are huge, dynamic, and complex economies. A change in one sector typically cannot have large effects across the economy.
A little math U.S. labor force about 155 million In 2014, 77.2 million workers age 16 and older in were paid at hourly rates, representing 58.7 percent of all wage and salary workers. Among those paid by the hour, 1.3 million earned exactly the prevailing federal minimum wage of $7.25 per hour. About 1.7 million had wages below the federal minimum. Together, these 3.0 million workers with wages at or below the federal minimum made up 3.9 percent of all hourly paid workers. http://www.bls.gov/opub/reports/minimum-wage/archive/characteristics-of-minimum-wage-workers-2014.pdf At minimum wage of $7.25 and working 50 weeks times 40 hours = $14,500 year If the annual income of 3 million people went up by $5,500 a year, this is $16.5 billion a year Apple: The Company posted quarterly revenue of $46.9 billion and quarterly net income of $9 billion... These results compare to revenue of $51.5 billion and net income of $11.1 billion in the year-ago quarter
What are the questions up for discussion and action? Do we support a higher minimum wage? in our region in other regions for whole nation for some groups of workers (teens, sheepherders) Do we also want to consider other price-fixing laws? What criteria do we use to decide what prices need to be regulated, generally? Philosophical consistency guides political preferences, versus pragmatism? What evidence and methods of inference should be used to evaluate? Whose well-being matters? Should we argue from a self-interest perspective, a benevolent superior perspective, a tactical perspective, or a behind the veil perspective? How to add up welfare? How should we value divergent opinions about what matters?
What are the questions up for discussion and action? Do we support a higher minimum wage? in our region in other regions for whole nation for some groups of workers (teens, sheepherders) Do we also want to consider other price-fixing laws? What criteria do we use to decide what prices need to be regulated, generally? Philosophical consistency guides political preferences, versus pragmatism? What evidence and methods of inference should be used to evaluate? Whose well-being matters? Should we argue from a self-interest perspective, a benevolent superior perspective, a tactical perspective, or a behind the veil perspective? How to add up well-being? How should we value divergent opinions about what matters?
Objections to raising the minimum wage Businesses will respond by: cutting jobs raising prices investing more heavily in labor-saving technology leaving the state And so low-wage employment will be lower Low-wage earners might earn lower incomes, or distribution of incomes might become more unequal See, for example, James Shirk, http://www.heritage.org/research/reports/2016/05/ californias-unprecedented-minimum-wage-increase-will-hurt-vulnerable-workers, accessed Oct 28, 2016
An ideal empirical study Different geographic regions in the United States would randomly be assigned to different minimum wages In some regions no inter-region migration would be permitted, in other regions migration would be as normal Any major changes occurring in regions after the minimum wage changes would be measured (e.g. hurricane destroying the city) Several years later, outcomes would be measured Controlling for other major events, differences between treatment and control groups would be «effect» of minimum wage External validity remains an issue: Experience in one five year period (of general growth, say, might not be experience in a five year period of recession) Varied effects might important: the average effect may not be that interesting if effects vary widely across regions
Note: migration and turnover matter for outcomes Imagine San Francisco county raises minimum wage to $14 500,000 workers in labor force Unemployment rate of about 3% (so 15,000 workers unemployed, suppose all unemployment among higher wage earners) Suppose 20% of workers earning less than $14 (suppose all earn $10 now) Suppose minimum wage has no effect on aboveminimum wages or jobs, suppose minimum wage causes low wage employment to decline by 5% (workers given more hours, labor-saving machinery used)
Migration and turnover So effects might be: Wages for the working poor rise by 40% (from 10 to 14) Unemployment rate goes up from 3% to 4% (now 20,000 total unemployed: add 5,000 newly unemployed low wage earners) So 95,000 workers see incomes rise by 40% 5,000 workers see incomes go to zero? If low-wage turnover means typical worker works 70% of the year, then on average all workers expected to be at least as well off But note- turnover may be a response to minimum wage Suppose rise in wage causes 30,000 low-wage workers to migrate in so now there are 130,000 low-wage workers, and 95,000 jobs so if work spread out equally, on average are getting $10 an hour
An ideal empirical study Different geographic regions in the United States would randomly be assigned to different minimum wages In some regions no inter-region migration would be permitted, in other regions migration would be as normal Any major changes occurring in regions after the minimum wage changes would be measured (e.g. hurricane destroying the city) Several years later, outcomes would be measured Controlling for other major events, differences between treatment and control groups would be «effect» of minimum wage External validity remains an issue: Experience in one five year period (of general growth, say, might not be experience in a five year period of recession) Varied effects might important: the average effect may not be that interesting if effects vary widely across regions So even our ideal empirical study is tremendously complex And since we cannot randomly assign minimum wages, have to further take into account that minimum wage law changes respond to labor market conditions
Consensus opinion amongst economists In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.
Seattle study of early effects of going from $9.50 to $11 After Seattle raised its minimum wage, lowwage workers employment, hours and wages all rose substantially. Neighboring areas that had similar trends in these variables before the increase and that, by the way, were also bound by the highest state minimum wage in the country when the increase took effect saw even larger employment and hours gains. (But quite a flawed study) https://www.washingtonpost.com/posteverything/wp/2016/08/10/so-far-the-seattle-minimum-wageincrease-is-doing-what-its-supposed-to-do/?utm_term=.46efb7e40a63