Dartmouth Remarks On the Minimum Wage

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Below the fold are the remarks that I prepared for my 15-minute opening statement during last-month’s debate at Dartmouth College on the minimum wage. Because I was the last of the three panelists to give his or her opening statement, I did some ad-libbing in response to the two other panelists. Nevertheless, the written remarks shared here capture pretty well my actual opening statement.

…….

Thanks. I’m delighted and honored to be here. I thank especially Doug Irwin for inviting me.

I’ve two prefatory remarks.

First, I trust that everyone here shares the goal of having low-skilled workers paid incomes as high as possible with no one forced into the ranks of the unemployed or obliged to suffer other negative consequences. That is the value judgment that I carry with me throughout tonight’s discussion and in every discussion that I have about the minimum wage.

Second, my concern is exclusively for the well-being of low-skilled workers. My assessment of the minimum wage turns only on how well or how poorly it is likely to benefit such workers. I don’t care about the effects of the minimum wage on the welfare of employers, business owners, or investors.

You might disagree with my conclusions, but that disagreement will be over the predicted consequences of the minimum wage and not over values or goals.

II.

I oppose the minimum wage. I oppose it in part because my economic reasoning makes me worry about its consequences for low-skilled workers.

I worry that, by raising employers’ costs of employing low-skilled workers, it makes the employment of such workers less attractive and, thus, reduces and worsens their employment options. The result is unintended harm to at least some – and perhaps many – low-skilled workers.

I worry, further, that the effects of the minimum wage – both positive and negative – are not distributed randomly. By reducing the number of jobs for low-skilled workers while simultaneously drawing more workers into the pool of those who compete for minimum-wage jobs, the risk is real that those who get and keep jobs at the higher minimum wage are workers who need higher incomes the least, and the workers who are denied jobs are those who need any incomes the most.

Choosing from a larger pool of applicants for a smaller number of jobs – a pool of applicants that includes college students and retirees drawn into the workforce by the higher minimum wage – employers are too likely, too often, to choose the ‘safe’ applicant over the recent immigrant, the single mom, or the inner-city minority teen.

Finally, I worry that this ignorance of the possibility that minimum wages actually harm some low-skilled workers – and harms those who can least afford to be harmed – causes voters and government officials to assess minimum-wage legislation more favorably than they would assess it were the possibility of such harm more widely recognized.

III.

Let me explain in more detail why I have these worries.

The potential for the minimum wage to destroy jobs for many low-skilled workers is the effect most widely feared, most widely discussed, and most widely researched by economists. I believe this fear to be justified, although job destruction isn’t the only negative consequence that economics suggests minimum wages might cause. More on these other consequences in a moment.

This classic economic argument against the minimum wage rests on the central pillar of modern economics: the law of demand.

The law of demand says that if the cost of taking an action rises, people will take that action less frequently. Importantly, this law lies not only at the heart of economics; it’s a proposition that every one of us accepts as a practical rule of reality.

For example, many environmentalists want to tax carbon emissions because they correctly understand that such a tax will reduce carbon emissions. Many conservatives oppose such a tax because they correctly understand that it will reduce industrial activities that emit carbon.

Many skeptics of globalization want a “Tobin tax” on short-term currency speculation because they correctly understand that this tax will reduce the frequency of such speculation. People who believe that such speculation plays a useful role oppose the Tobin tax because they, too, understand that it will reduce the frequency of such speculation.

By the same logic it’s sensible to worry that a government-imposed requirement that employers raise the pay of low-skilled workers will make the employment of such workers less attractive and, thus, destroy jobs for some such workers.

For this reason, most economists – until 20 years ago – opposed the minimum wage. This opposition was supported not only by economic theory but also by empirical research – perhaps the most famous of which is the 1981 report of the Minimum Wage Study Commission which found that a ten-percent rise in the minimum wage causes the employment of teenagers to fall by as much as 3 percent.

But starting in full in the mid-1990s a new wave of empirical research commenced, much of which finds that minimum-wage hikes have no – indeed, in some cases have even positive – employment effects for low-skilled workers.

This new research has undone what might fairly be called the pre-1990s consensus among economists that the minimum wage destroys jobs for low-skilled workers. However, it hasn’t, yet at least, convinced a majority of economists that the classic prediction of job losses is wrong.

IV.

Exactly one month ago today the University of Chicago’s Booth School of Business released the results of a survey that it took of 42 top economists (including two Nobel laureates, Eric Maskin and Angus Deaton). These economists were asked to agree or disagree with the proposition that “If the federal minimum wage is raised gradually to $15-per-hour by 2020, the employment rate for low-wage US workers will be substantially lower than it would be under the status quo.”

Twenty-five percent agreed (some strongly) with this proposition, while 24 percent disagreed (and none strongly). (38 percent were uncertain, while some others didn’t answer.) In other words, if this survey is representative of the opinion of professional economists, slightly more of them agree that this size hike in the minimum wage will shrink substantially the employment prospects for low-skilled workers than disagree. (The fact that 62 percent of the surveyed economists are either “uncertain” or actually disagree that a 107 percent hike in the minimum wage will substantially shrink the employment prospects of low-skilled workers makes me rather embarrassed for my profession. I wonder how many other goods or services that have lots of substitutes – as does low-skilled workers – would these economists suppose can have its price more than double without the result being a substantial decrease in the quantity demanded of that good or service?)

This survey question, though, asks about an unprecedentedly large hike in the minimum wage. What about economists’ opinion on a more representative hike – say, a hike of a ‘mere’ 24 percent? A 2013 survey, also by the University of Chicago – and this one of 38 top economists (including the same two Nobel laureates, Eric Maskin and Angus Deaton) – asked the surveyed economists to agree or disagree with the proposition that “Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment.”

Here, a plurality – 34 percent – agree. Thirty-two percent disagree. Twenty-four percent are uncertain. So only about a third of these surveyed economists disagree with the classic economic prediction that even a relatively modest hike in the minimum wage (in this case, again, a hike of 24 percent) will make jobs more scarce for low-skilled workers.

In neither of these surveys do a majority of economists seem persuaded by the ‘new’ minimum-wage research – a fact that tells me that, at the very least, the jury on this question is still out.

I’m with those economists who agree that raising the minimum wage even modestly will reduce the employment prospects of low-skilled workers.

The reason is not because I reject empirical evidence. I do not do so. Instead, the reason is that extraordinary claims require extraordinary evidence. And it’s an extraordinary claim – by which I mean an out-of-the-ordinary claim – that the standard prediction of the law of demand does not hold in the market for low-skilled workers when minimum wages rise modestly.

V.

So in my assessment, the empirical evidence is not sufficiently strong to permit us to conclude that even a modest increase in the minimum wage – much less a 107 percent increase to 15 dollars! – won’t create artificial unemployment among low-skilled workers.

Of course I don’t deny the existence of the recent, statistically significant empirical evidence in support of the proposition that modest increases in the minimum wage cause no job losses. Prof. Dube is a skilled and justly prominent contributor to this ‘pro-minimum wage’ literature. But there is also recent, statistically significant empirical evidence that the minimum wage does cause job losses. David Neumark and William Wascher are perhaps the most skilled and prominent contributors today to this ‘anti-minimum-wage’ literature.

Here’s Neumark’s and Wascher’s 2008 book, Minimum Wages, published by MIT Press. They supply an exhaustive survey of the empirical literature. By their count, two-thirds of the empirical studies find evidence of job loss.

Their survey of the empirical literature leads them to this conclusion [p. 287]:

“Summary of evidence

“Minimum wages reduce employment of low-skilled workers; adverse effects even more apparent when research focuses on those directly affected by minimum wages

“Strength of conclusions

“Fairly unambiguous: a handful of studies find positive effects, and some find no effect, but the preponderance of evidence points clearly to negative effects, and even more so when one focuses on the most convincing evidence.”

Of course Neumark and Wascher might be mistaken. My point now is not to defend their conclusion as much as it is to emphasize the fact that the empirical literature on the effects of the minimum wage does not contain extraordinary evidence against the standard proposition that the minimum wage leads to job losses for low-skilled workers.

Remember, no economist is testing to see if the law of demand is true. The reality of that law is taken as given. All economists accept its validity (and, I repeat, I’m pretty sure that most non-economists accept its validity). The testing, instead, is to see if the market for low-skilled workers operates in a way that is an exception to the law of demand.

So I can reword my point to say that exceptional claims require exceptional evidence.

The fact that these Chicago surveys fail to find majority agreement with the exceptional claim that the market for low-wage workers behaves in ways that run counter to the prediction of the law of demand suggests that these economists do not regard the ‘pro-minimum-wage’ evidence to be exceptional.

VI.

Prof. Dube and some others will reply that the best evidence shows that modest hikes in the minimum wage do not destroy jobs. Perhaps this reply is valid. But if professors Neumark and Wascher were here they would answer that, as they see it, the best evidence does show that even modest hikes in the minimum wage destroys jobs.

And so the empirical debate goes, with advocates of each side insisting that the other-side’s evidence is invalid, and explaining how this elaborate tweak of the data or that sophisticated adjustment of an econometric technique will uncover the ‘true’ facts and show the other researchers’ conclusions to be faulty. This sort of debate is bound to be inconclusive.

It would be nice if this question were one that could be settled only by a careful investigation of the empirical record. That is, it would be nice if this question were one that intelligent, truth-seeking people of good faith could answer empirically without their conclusions reflecting any influence from their theoretical priors. But it isn’t.

The choice before us is not between deciding on the consequences of the minimum wage only by looking at the facts or deciding on those consequences by armchair theorizing. Instead, the choice is which theories, in light of the prevailing empirical record, will we use to reach a conclusion about the most-likely consequences of the minimum wage.

Put differently, the facts here simply don’t speak for themselves – which is why so much of the discussion in the papers by professor Dube – and by Neumark and Wascher, by David Card and Alan Krueger, by Jeffrey Clemens, by Jonathan Meer, are deeply theoretical: What are the appropriate control groups? What’s the appropriate time span? What’s the best source of information on the number of workers employed? Should number of employees or number of hours worked be the dependent variable? These and many other similar theoretical questions are being asked – because they must be asked.

There’s no escaping a reliance on theory.

Again, here’s what is certain: while there might be no overwhelming evidence that modest hikes in the minimum wage destroy some low-skilled jobs, there is also no overwhelming evidence that such hikes in the minimum wage don’t do so. Much on-going empirical research continues to find statistically significant, negative effects of the minimum wage on the employment prospects of low-skilled workers.

So, because basic economic theory predicts that raising employers’ costs of employing low-skilled workers causes employers to employ fewer such workers, I submit that the best way to decide which of the competing empirical literatures is correct is to stick with the one that conforms most closely to the foundational economic theory until and unless the evidence in the other direction becomes much stronger than it is now.

An important practical reason for this stance is that if the ‘pro-minimum-wage’ empirical literature turns out to be incorrect, then minimum-wage hikes undertaken because of it will – contrary to the intentions of the policy’s supporters – price some low-skilled workers out of jobs.

VII.

Let me say a word about some of the reasons why getting convincing empirical evidence on this matter is difficult.

One reason is that the minimum wage directly affects only a small portion of the workforce – in the U.S. only about five percent or less – in a large economy marked by constant, often unpredictable change, only some of which is reliably captured as data. Empirically isolating causes and effects in such an economy is notoriously difficult.

A second reason is that loss of jobs, again, is not the only negative effect that economics predicts might befall low-skilled workers because of minimum wages. Employers can adjust to a rising minimum wage by reducing the number of hours worked by low-skilled workers rather than reduce the number of workers on their payrolls. (GMU econ grad student Robyn Weaving – who has lots of experience working in restaurants – points out to me that peculiarities in the restaurant industry might, at least in the short-run, cause restaurants to hire more minimum-wage workers but in a way that causes the total amount of income paid to such restaurant workers to fall. I’ll be happy to elaborate, if you wish, in the Q&A portion.) Or employers can reduce the value of workers’ fringe benefits. Or employers can adjust by making minimum-wage jobs more onerous – by demanding more hourly output from workers.

Because empirically many such adjustments are impossible to identify, at least some employer responses to minimum-wage hikes remain invisible in the empirical record. Yet these adjustments have two relevant effects in reality:

First – By lowering employers’ costs of the higher minimum wage, these adjustments make employers less likely to reduce – or to reduce as much – the number of low-skilled workers they employ. This fact might help explain the inconclusiveness of today’s empirical record on job losses.

Second – To the extent that employers respond to a higher minimum wage by making such adjustments in non-wage work conditions – say, by demanding that workers take fewer breaks – the non-wage aspects of minimum-wage jobs become less appealing to workers. And it’s possible that the reduced appeal of these jobs is not compensated, in the minds of most workers, by the higher wage.

I emphasize that the number of different ways that employers can adjust to a higher minimum wage is huge.

My colleague Dan Klein recently offered a partial list of the many different ‘margins’ on which employers can adjust when the minimum wage rises:

– the extent and strictness of work demands

– flexibility in scheduling

– kindness and amiability in the workplace

– consideration and respect in the workplace

– upward mobility

– health insurance

– on-the-job training

– lockers for workers

– food for workers

– the quality of air conditioning and lighting

– workplace comfort

– workplace safety

– this list can be extended

I mention these many margins to highlight that the number of different ways that a rise in minimum wages can have downsides for low-skilled workers is larger than most people realize. And because it’s practically impossible for empirical investigators to observe and to quantify what occurs on many of these margins, it’s too easy to miss some potential downsides for low-skilled workers of the minimum wage.

VIII.

My main point tonight has been narrow: it is to insist that we as yet have no business discarding the standard economic prediction that raising the minimum wage inflicts harm on some low-skilled workers – harm that is often overlooked by proponents of the minimum wage. We as yet have no cause to suppose that even modest hikes in the minimum wage come at no costs to some, perhaps many, of the very workers the minimum wage is meant to help.

Whether you assess these likely costs to be worth the benefits of a higher minimum wage is a different question. It’s not one for economists as such to decide, for that’s ultimately a value judgment.

But because I believe that these costs are real and likely significant, my values lead me to oppose the minimum wage.

Again, I worry that the minimum wage is too likely to inflict unintended harm on many low-skilled workers and that the likely beneficiaries of the minimum wage are too likely to be those who need such help the least. And again I worry that, by creating an excess supply of workers for a smaller number of jobs, the minimum wage transfers opportunity and income from the poorest amongst us to the more affluent amongst us.

Of course my assessment of the consequences of the minimum wage might be mistaken. But (obviously) I don’t think it is. The evidence against my position – a position shared by many economists far more accomplished and prominent than me – is still too weak to accept as a basis for policy-making.

It’s still too likely that the minimum wage inflicts unintended harm on many of the people it is meant to help.

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