Thoughts on the Minimum-Wage Debate at Dartmouth

Tweet

Here are some initial thoughts on this past Thursday’s panel discussion, at Dartmouth, on the minimum wage. Chaired by Doug Irwin, the panelists were Arindrajit Dube, Lara Shore-Sheppard, and myself.

— The discussion was high-level, scholarly, and civilized throughout – as were the questions posed by the audience.

— Both Arin and Lara are very smart and thoughtful data-driven scholars. I’m honored that Doug invited me to be on a panel with them.

— Seemingly relatively small changes in the ways used to ensure that quantitative data are as revealing as possible can result in large differences in what the data reveal. For instance, Arin showed a graph of the inflation-adjusted U.S. national minimum-wage over the years. He adjusted the nominal minimum-wage rate for inflation using the CPI-U (Consumer Price Index for All Urban Consumers). The resulting graph showed that the real value of today’s minimum-wage ($7.25) is quite low compared to the real value of the minimum wage for most of the past 77 years (since its creation in 1938). But if instead the nominal value of the minimum wage is adjusted for inflation using the implicit price deflator for personal consumption expenditures, then the result is quite different: the real value of today’s minimum wage, although not at its peak, remains rather high by historical standards. (I offer here no argument about which way to adjust the minimum wage for inflation is best. Instead, my point is to note how easily honest and true statistics can give very different impressions of the underlying reality, depending upon how the raw data are treated in order to make them more revealing.)

— Data – never speaking for themselves – speak only through those of us who use them. At one point during his presentation Arin dismissed as mistaken the often-heard claim that many minimum-wage workers are teenagers. While I don’t recall his precise wording – whether he said “many” or “most” or “a majority” – Arin’s clear intention was to argue against the claim that says that, because many (or most) minimum-wage workers are teenagers, much or most of the benefits of a higher minimum wage will go to teens rather than to older people who are more likely heads of household or, at least, people who don’t have the support of their parents to fall back upon. Yet in her presentation Lara’s data showed that 48 percent of minimum-wage workers are 16-24 – suggesting that, in fact, a not-insignificant chunk of minimum-wage workers are indeed teens. I believe that Lara’s data are correct; they are close to data that I posted here at the Cafe earlier this year. With about half of minimum-wage workers under the age of 25 – and with fewer than 30 percent of such workers older than 34 years old – it remains a plausible, indeed a probable, claim that a substantial chunk of whatever benefits the minimum wage ‘creates’ for low-skilled workers is captured by teens and others who are not heads of households.

— During Q&A, the panel was asked about the often-made claim (for example, by Robert Reich) that one reason that minimum-wage hikes lead to no job losses is that such hikes give minimum-wage workers more money to spend – and that this additional spending creates sufficiently greater demand for the outputs produced by employers of minimum-wage workers that those employers, despite their higher labor costs, have no incentive to employ fewer minimum-wage workers. I am pleased (but not surprised) that all three of us panelists dismissed this claim as being highly unlikely to describe reality. (That is, even prominent pro-minimum-wage economists – or, at least, these two prominent pro-minimum-wage economists – understand that the ‘it leads to more spending!’ argument is far-fetched.)

— I was pleased, and somewhat surprised, that Arin conceded that there are indeed trade-offs unleashed by the minimum wage. I don’t recall the precise word that Arin used (“trade-offs,” “costs,” “downsides,” or some other word), but he seemed to admit that raising the minimum wage even modestly might indeed cause some job losses for some low-skilled workers as it generates income gains to other low-skilled workers. I was pleased by this admission because, at bottom, my only scientific claim regarding the minimum wage is that it shrinks the employment prospects for some low-skilled workers – and that the higher the minimum wage rises, the greater is this shrinkage – from what those prospects would be without a minimum wage. (The extent of the shrinkage – the “elasticity” – is indeed an empirical question, but that there is shrinkage is a proposition about which my economic reasoning makes me quite confident.) As I said during the Q&A, I would have no scientific objection to a pro-minimum-wage politician or pundit saying publicly, when advocating for a higher minimum wage, “A higher minimum wage will cause the incomes of some low-skilled workers to rise but, you must know, one of the downsides is that it will cause some other low-skilled workers to be unemployed.” Yet I’ve never, ever heard a pro-minimum-wage politician admit that a higher minimum wage has “trade-offs” or potential “costs” for low-skilled workers.

— I was surprised by a third thing – a thing not obviously consistent with Arin’s admission that a higher minimum wage involves trade-offs. (Again, I don’t recall his exact wording. See the previous paragraph.) This third surprise occurred when someone in the audience asked us panelists what is our optimal minimum wage. I said that my optimal minimum wage is no minimum wage. Arin and Lara did not give a precise dollar figure. Both, though, favored raising it from its current level of $7.25 per hour. And while Arin and Lara sensibly refrained from endorsing a minimum-wage as high as $15 per hour, neither did they reject the idea that such a high minimum wage might be good. Both said (or, at least, Arin said) something to the effect that they (he) can’t speak expertly on such a proposed hike in the minimum wage because such a hike – in terms both of the magnitude of the hike (107 percent) and where it would put the minimum wage relative to the median wage in the U.S. – would be unprecedented in the U.S. Arin (and perhaps also Lara) said that because he (they) hadn’t empirically studied the consequences of such a high minimum wage in the U.S., he (they) can’t really say one way or the other if raising the national minimum wage in the U.S. to $15 per hour is desirable or not.

In response to my fellow panelists’ diffidence on this question, I wanted to ask (but didn’t get the opportunity to ask) if they really can’t figure out if a 107 percent hike in the minimum wage will have negative effects on low-skilled workers. Given Arin’s admission (see above) that there are trade-offs unleashed by the minimum wage, his diffidence on this question might be explained by his inability to know how large the benefits will be compared to the corresponding costs. That is, his reluctance either to endorse or to condemn a more-than-doubling of the minimum wage might mean, not that that he doubts that such a huge hike will indeed destroy some jobs for low-skilled workers, but that he can’t determine if such a cost would be at least offset by corresponding benefits.

At least, I hope that my fellow panelists’ diffidence on the question of raising the national minimum wage to $15 per hour reflects their belief both that the benefits to the winners should be weighed against the costs to the losers and that such benefits and costs are too uncertain. To make myself clear, I hope that my fellow panelists’ diffidence on the question of raising the national minimum wage to $15 per hour does not reflect any uncertainty on their part that such a hike in the minimum wage will indeed destroy some jobs for low-skilled workers. The fact that we have no empirical evidence of the employment effects of such a sizable hike in the minimum wage does not mean – and ought not be taken to mean – that our economic reasoning prevents us from predicting with a great deal of certainty that such a hike will destroy at least some, and probably many, jobs for low-skilled workers.

I’m left with uncertainty over just what issue is really being debated in discussions – especially among economists – about the minimum wage. Is it (1) whether or not hikes in the minimum wage shrink the employment options of some low-skilled workers; or is it (2) given that even modest hikes in the minimum wage shrink the employment options of low-skilled workers, do the resulting benefits enjoyed by the winners justify the losses suffered by the losers?

As I’ve argued earlier here at the Cafe, I believe that most people’s values lead them to reject government policies that create benefits for some people by artificially restricting the abilities of other people to pursue economic opportunities as these other people choose. Certainly, my values lead me to reject such policies. But as an economist – especially because I understand that there always indeed are winners from the minimum wage – I can’t say that those whose values differ from mine on this matter are wrong. (In contrast, I can as a human being say that such values are ones that I emphatically don’t share and that I believe are flawed or even dangerous.)

Bottom line: My economic reasoning (backed by much empirical evidence) convinces me that even modest hikes in the minimum wage shrink the employment options of low-skilled workers. This reason is for me sufficient grounds to oppose minimum-wage legislation even if the benefits it creates for the winners are on various metrics measured to be larger than the losses suffered by the losers. (Do note, by the way, that no such empirical measurement of the size of such benefits compared to the size of such losses can be objective, for knowledge of the size of the money losses compared to that of the money gains is not sufficient to determine if the minimum-wage’s benefits are worth its costs. The reason is that the people who gain differ from those who lose.)

Yet I remain uncertain if the economists who support the minimum wage do so because they believe that it has only positive and no negative effects for low-skilled workers. or because their value judgments lead them to assess the measured gains to the winners to justify the infliction of costs on the losers.

…..

The above is written from memory. Although my memory here is still fresh (the debate was less than 48 hours ago), memory is faulty. I don’t believe that I’ve mischaracterized, misunderstood, or misinterpreted Arin, Lara, or any audience member, but it’s possible that I’ve done so inadvertently. If so, I offer not only my apologies but also my sincere wish to correct the record in order to make it accurate.

Comments