Some Nuance on the $15 Minimum Wage

by Levi Russell

Adam Millsap at the Mercatus Center has a great short piece on the effect the $15 minimum wage would have on labor markets. Though Millsap criticizes the $15 minimum wage, he does it in a very different way than any I've seen.

He takes as a starting point Arindrajit Dube's conjecture that the minimum wage should be set at 50% of the median wage. It's important to note that Dube is actually a proponent of the $15 minimum wage but believes that it could create problems, especially if the ratio is above 80%.

Millsap uses data from Washington D.C. and Minneapolis, MN to calculate the (projected) ratio of the $15 minimum wage to half the median wage in each of these cities. Millsap shows that in Minneapolis, the $15 minimum wage is projected to be 86% of the median wage for people 16 years of age and older. In D.C., the ratio is only 53%.

So, given Dube's preference for a minimum wage set at 50% of the median wage and warning about a minimum wage over 80% of the median, the $15 minimum is potentially very problematic for cities like Minneapolis. I imagine that it would be far worse for smaller rural communities.

Equal Pay Day

I wasn't going to write about this but a (female) colleague suggested I do so.

Equal Pay Day is supposed to be the day "that symbolizes how far into the year women must work to earn what men earned in the previous year." This is hilariously crude statistical analysis. In fact, men and women in the same occupations with similar experience and education actually make almost exactly the same salaries. In some fields, women earn more. The supposed "wage gap" is mostly a function of the choices men and women make in the labor force and has very little to do with discrimination.

Here's a helpful video:

Richard Vedder on the Transformation of Economics

Richard Vedder, who is well-known for his work on the minimum wage, wrote a short op-ed in the Wall Street Journal about a month ago that I thought was pretty interesting. Vedder makes 5 observations about changes to economics over his career. Below I'll share three of them but the whole piece is worth reading.

Vedder starts off discussing ideological creep in the profession:

Economics as ideology in camouflage. Economists who achieve fame for genuine intellectual insights, like Paul Krugman, sometimes then morph into ideologues—predominantly although not exclusively on the left. The leftish domination of American academia is partly explained by economics. Federal student-loan programs, state appropriations, special tax preferences and federal research-overhead funds have underwritten academic prosperity, even at so-called private schools. The leftish agenda today is one of big government; academics are rent-seekers who generally don’t bite the hand that feeds them. The problem is even worse in other “social sciences.”

On a related note, he describes the rise of policy think tanks:

The rise of the nonuniversity research centers. A reaction to the liberal ideological orientation and inefficiencies of colleges has spawned this phenomenon. When I was attending college around 1960, the Brookings Institution, National Bureau of Economic Research and the Hoover Institution were among relatively few major independent think tanks. Today there are many, especially ones funded on the right to provide intellectual diversity, including nationally or regionally oriented centers such as the American Enterprise Institute, Cato Institute, Heritage Foundation, Heartland Institute and the Independent Institute, as well as dozens of state-policy think tanks. Universities have lost market share in social-science research.

Vedder then turns to his own work on labor economics:

A major cause of America’s economic malaise: the government’s war on work. My own research with Lowell Gallaway has stressed the importance of labor costs in explaining output and employment fluctuations. If the price of something rises, people buy less of it—including labor. Thus governmental interferences such as minimum-wage laws lower the quantity of labor demanded, while high taxes on labor reduces labor supply, as do public payments to people for not working. 

The Costs of Coordination

Sometimes the most mundane subjects can be great illustrations of basic economic concepts. Earlier this week, Alex Tabarrok (George Mason U) blogged about the benefits of coordinating leisure time. I emphasize the word "benefits" because Tabarrok completely leaves out the costs.

He starts off by citing a paper in Sociological Science whose authors find that both unemployed and employed people experience more positive emotions and and fewer negative emotions on weekends. They claim that this is evidence that time is a network good and that everyone benefits by coordinating leisure time.

Tabarrok then complains that his employer's spring break is different from his children's. He says that not only would he and his family benefit from greater coordination of spring break time, but that his employer would as well. After all, this would amount to a free benefit to employees. He ends by advocating a national holiday that would, presumably, benefit everyone. The irony here is that George Mason U is a public school and could quite easily coordinate with the local primary and secondary schools.

If the benefits are so clear, why hasn't this national holiday materialized? The simplest answer is that there are also costs of coordinating in this way. A national holiday would likely mean very high ticket prices at Disneyland and extremely long lines at the rides at Six Flags. Anyone who has ever tried to fly, go to a beach, or head to a nearby amusement park during the two weeks of spring break in mid-March has known the boredom and frustration of sitting in traffic, paying high ticket fees, and waiting in very long lines.

Contrary to Tabarrok's calls for a national holiday, it could be the case that many of us could benefit from less-coordinated holidays. There are, in many areas of the country, plenty of fine days in April and May for visiting popular attractions yet most of us have the same 2 or 3 weeks off in March. The fact that many schools are moving to a non-standard "year-round" school year in which there are several week-long breaks dotted throughout the year is an indication that the costs of coordinating leisure time may be quite high in our present system.

In any discussion of the benefits of some new social arrangement, don't forget to include the costs!

Tradeoffs Between Social Policy and Growth

Mark Thoma's recent Fiscal Times column seems to me to be heavy on politics and light on economic analysis. He sets out to convince the reader that there is no tradeoff between social insurance provided by the federal government and economic growth, but I think there are good reasons to doubt this notion.

Potpourri

Bob Murphy of the Texas Tech Free Market Institute goes through the recent literature on the minimum wage.
Bob concludes:

In the 1980s, there was a genuine consensus that a 10-percent hike in the minimum wage would reduce teenage employment by 1 to 3 percent. However, in the 1990s, various "case studies" began challenging this orthodox view, and more recent studies have generalized techniques to apparently find negligible employment effects. Many economists have used this new research to assure policymakers and the public to pay no heed to warnings about harmful job losses from even aggressive minimum wage hikes.

However, in reality, the employment effect of the minimum wage is still an open question even for modest hikes. Since the 1990s, scores of articles have found negative effects of minimum wage increases. These include "case studies," with one serving as the mirror image of the famous Card and Krueger study. Furthermore, critics have challenged the entire premise of the new techniques, which claim to construct better control groups than the traditional approaches.

Finally, even if we take the very best examples of the "new" results at face value, they provide little comfort that large hikes in the minimum wage—such as a doubling to $15 per hour—will have modest impacts. Policymakers and the public should be wary of the glib assurances of some prominent economists when they claim that such large hikes will not cause teenagers to lose their jobs. The odds are very high that they will.

Arnold Kling has some more thoughts on economic methods.

Two blogs I follow both posted on Instrumental Variables regressions on the same day (here and here). I pointed this out on Twitter and they both wrote responses (here and here). Interesting stuff, but certainly wonkish.

Some interesting commentary on globalization and poor cities in the US from Kevin Williamson.

Peter Klein (and Larry Summers) on behavioral economics as a re-statement of clever (but old and well-known) business practices.
From the article Peter points to:

Have behavioral economists really discovered anything new, or have they simply replaced some wrong-headed notions of post-World War II economics with insights that people in business have understood for decades and maybe even centuries?

What Should We Make of the Gig Economy?

Noah Smith's recent column on job outsourcing does two things: it repeats mistaken claims about the plight of the average worker in the U.S. and it accurately identifies market-generated opportunities that could deliver economic improvements for everyone. In this post I'll respond to the former and give my thoughts on the latter.

Here are the problems Smith identifies. In some cases he's factually incorrect. In others I think it's important to shed light on the causes of the problems.

The average American worker is confronting a number of problems right now -- stagnant income,  an overhang of debt from the housing bubble, the high cost of college and the replacement of pension plans with high-fee, low-return 401(k) plans. But few would deny that one huge challenge is economic insecurity. Political scientist Jacob Hacker’s 2006 book, "The Great Risk Shift," discusses how many risks that were once borne by companies are now shouldered by individuals. ... Basically, the era of "good jobs” is a memory for most workers. Private-sector unionization is disappearing, average job tenure has plunged and benefits have been cut. 

First on the list is income. Data on total compensation shows that people are better off in real terms than they were 5, 10, and 15 years ago. Wage growth isn't stagnant. Neither is non-wage compensation, implying that benefits are not being cut. If medical benefits have been cut recently, it's likely a result of the "Affordable Care Act."

Does Lower Unemployment Imply a Stronger Economy?

With all the buzz about a $15 minimum wage, or a $10.10 minimum wage, there's been a lot of discussion about the effects of minimum wage on the labor market. While some of the empirical work on the subject says the minimum wage doesn't affect employment, most of it says otherwise.

Another popular topic these days is Federal Reserve policy; specifically how and when the Fed will raise interest rates. A major concern is that raising rates "too soon" will cause unemployment to stop falling or start rising again. The Fed has cited improvements in labor markets as a sign that it could start raising interest rates soon. Looking only at the unemployment rate, the idea that labor markets are improving makes sense.

In this post I'll discuss unemployment and labor force participation rate data since the recession, then give a numerical example that shows that even if the unemployment rate is falling, the labor market and the economy overall may not be improving as much as we'd like to think.

Potpourri

I haven't done one of these in awhile, so I thought it was time to share a handful of links to some great stuff I've read recently.

Richard Ebeling at The Citadel offers a fantastic take down of the Keynesian view of recessions for the layman. It's certainly worth a read for the non-specialist in macro.

The always-insightful Don Boudreaux recently discussed the role of theory in measuring the effects of the minimum wage. He also provided a short note on the role of institutions in economic analysis in response to a reader's question and an interesting take on the economic way of thinking. Very good stuff.

Jayson Lusk recently weighed in on the fight between scientific integrity and consumer sovereignty in the food world. He also provided a short discussion of an article on crop insurance subsidies and risk taking.

John Tamny reviews a recent book on the myriad ways gov't policy has and will negatively affect the millennial generation.

Potpourri

David Widmar has an interesting post detailing the usage of irrigation water across the country. The bottom line? The use of irrigation has increased in the Corn Belt and Southeast but has declined in the Southwest and West.

Matt Bogard asks (and answers) some big questions on the effects of ag policies. Matt argues that the distortions of policy in terms of the production of GMOs are relatively minor.

Jayson Lusk presents some summary information from the Food Demand Survey (FooDS). Increases in beef demand over the last two years are particularly apparent.

Shawn Regan dissects the claim that National Park attendance is at an all time high.

Matt O'Brien has an article summarizing new research on unemployment. A better measure of unemployment indicates that the U.S. economy is short 3.5 million jobs, not the 1 million jobs that headline unemployment would indicate. This implies that the economy is weaker than some might believe and that Federal Reserve policy is likely to remain accommodative longer than many expect.

Potpourri

Jayson Lusk provides an update and some thoughts on meat prices. Beef prices are predicted to stay relatively high due to biological factors affecting supply.

Here's an interesting comparison of unemployment rates for European countries with and without the minimum wage. The standard supply/demand story apparently applies in the case of wage controls.

Matt Bogard productively and convincingly tackles the inequality puzzle. Real wealth consists in the goods/services available to us, not our dollar incomes.

Don Boudreaux dissects the "You didn't build that!" meme.

Potpourri

Don Boudreaux discusses the issue of monopsony power and the minimum wage in an interesting fashion.

Prompted by criticism from local food advocates, Jayson Lusk clarifies his position. It continually baffles me that so many people equate opposition to subsidies for or outright government provision of some good or service with opposition to that good or service itself.

Paul Krugman's most recent comments on the minimum wage have sparked several productive discussions in the blogosphere. One post in particular stands out to me. In it, Scott Sumner uses this episode to illustrate the difference between economists who take basic theory seriously when it comes to practical matters of policy and those who don't.

The EPA continues to generate policy uncertainty in the corn markets by failing to set volume obligations. On top of this, repeal of the Renewable Fuels Standard continues to garner support on both sides of the aisle. What exactly this potential repeal would mean for corn producers, I don't know. My initial thought would be that corn prices would fall, causing losses in the short run, but that input prices and planted acres would adjust (over time) and the policy-change-induced losses would cease. Additionally, we could expect lower fuel costs and slightly lower food prices if the RFS were repealed.

Potpourri

It's been awhile since I've posted anything here. That's largely due to some projects with (self-imposed) deadlines I've been working on day and night over the last 7 days or so. I was able to get a draft of the regulatory impact paper off to my co-authors this evening, so when I get their feedback, I'll be posting a couple of things on it.

Caroline Baum of the Manhattan Institute has an informative article on recent changes in Fed policy and interest rate projections over the next few years.

I recently ran across this old post by David Henderson at EconLog. David calls these the "Ten Pillars of Economic Wisdom" and I have to agree that these would be a great way to start the semester in really any economics class.

Even though he has recently backed off his comments, I think this short post by Jim Clifton, chairman of Gallup, makes some good points. Labor force participation in the crucial 25-54 age range fell during the early 00's recession, never recovered, fell again in the 2008 recession, and has been falling since. Meanwhile, the teen labor force participation rate crashed in the 2008 recession and has been flat since. I fail to see how any of that is evidence of a recovery.

An interview with Thomas Sowell. Not much else needs to be said.

Don Boudreaux on the distributional effects of government debt. Short version: "We owe it to ourselves" is an absurd justification for gov't debt.