Raising minimum wage increases unemployment

[_Kevin Graham]

That book is just one of many resources that refute the prevailing theory in Right Wing circles. Posting reviews from the corporate whores at your favorite "think tanks" is hardly impressive. I've been posting the latest studies on this issue that makes the Right Wing assertion a relic, not a fact. Here is another:

Business Insider

A 2011 Study Exploded One Of The Biggest Fears About Raising The Minimum Wage


President Obama proposed increasing the minimum wage to $9.00 from the current level of $7.25 during his annual State of the Union address.

Right now, proponents and opponents are duking it out over what possible effect this would have on the economy and for workers.

The main confusion comes with the dissonance between what "should" happen to the labor market when the minimum wage goes up and what does historically happen.

(chart too big to post)

They also tapped into other costs to cut:

(chart too big to post)

This far from settles the fight over raising the minimum wage, but does address concerns that a rise in the minimum wage would lead to across the board job losses.

In the abstract, increasing the price floor of labor should result in wage cuts. However, that hasn't historically been the case. Historically managers will cut other expenses in order to compensate for an increase in the minimum labor cost and the increased minimum wage functions as a form of stimulus. Given the controversial nature of fluctuations in the minimum wage — billions of dollars hang in the balance for all parties involved — it's going to be a very tough fight.

Still, a November 2011 study from Barry Hirsch and Bruce Kaufman of Georgia State University and Tetyana Zelenska sheds light on how businesses respond to increases in labor costs, and the results were surprising.

The group surveyed managers of fast food restaurants in Georgia and Alabama as they contended with three annual increases in the federal minimum wage between July 2007 and July 2009.

They asked the managers if they were taking any steps to offset increases labor costs.

Here is what managers did with regards to human resources:

(chart too big to post)

Notice that only 8 percent of managers surveyed thought that firing current employees was at all important to make up for lost wages.

Indeed, raising the minimum wage allowed management to extract more performance from current employees in more than half of all cases.

Higher labor costs weren't only offset from cuts to total labor cost, either. Management also took several steps to increase efficiency and productivity to compensate for the higher costs

[_Kevin Graham]

Minimum wage hikes don’t eliminate jobs, study finds

Increasing the minimum wage does not lead to the short- or long-term loss of low-paying jobs, according to a new study co-authored by University of California, Berkeley, economics professor Michael Reich and published in the November issue of the journal The Review of Economics and Statistics.



The study resolves the often conflicting research on the minimum wage in the United States and may provide guidance in future policy debates on the topic, said Reich, who is also the director of UC Berkeley’s Institute for Research on Labor and Employment.

While the study focused on restaurant workers, he and his research colleagues reported evidence that their findings apply to workers in other low-wage industries as well.

“This is one of the best and most convincing minimum wage papers in recent years,” said Lawrence Katz, an economics professor at Harvard University and a specialist in labor economics.

Much economic policy discussion today is more focused on a general lack of jobs rather than on inadequate pay, said Reich, but that doesn’t negate the need for adequate or “living’” wages.

Although increasing the minimum wage can stimulate the economy by putting more money in the pockets of those most likely to spend it on necessities, he said, suggestions to raise minimum wages typically trigger fears. These fears center around the idea that raising the minimum wage would force many employers to reduce job offerings to meet a more expensive payroll, or that a “tipping point” where the minimum wage becomes too high has already been reached.

Reich noted that the federal minimum wage was first adopted as part of the Fair Labor Standards Act of 1938, in the midst of the devastating Great Depression. More than 87 years later, the federal minimum wage of $7.25 an hour provides a full-time worker an annual salary of approximately $14,500 a year. Over 32 states plus the District of Columbia have had minimum wages higher than the federal level. Washington state’s is the highest at $8.55 per hour, and San Francisco has a citywide minimum wage that is about to increase to $9.92 per hour.

“It seems likely that we will have a number of state minimum wage campaigns next year, with more in 2012,” Reich said. “Bill Clinton was able to get a Republican House of Representatives to pass a federal increase in 1996 – that could happen again.”

Reich’s co-authors included Arindrajit Dube, an assistant economics professor at the University of Massachusetts, Amherst, and a research associate at Amherst’s Political Economy Research Institute, and T. William Lester of the University of North Carolina at Chapel Hill, an assistant professor at UC Berkeley’s City and Regional Planning specializing in economic development. They said their findings indicate that an entire generation of previous minimum wage studies that found negative effects on jobs is fundamentally flawed.

The two sets of minimum wage studies cited most often in debates about raising the minimum wage reach different conclusions. One group of researchers relied on local case studies and the other on national level data and state variation over time.

The main problems, said the authors of the new study, are that the case study research could not be generalized to other areas and covered very short time periods, while the other research approach failed to account for critical differences in employment growth between minimum wage and non-minimum wage states that are unrelated to the minimum wage.

“Our reading of the literature suggests that this difference in methods may account for much of the difference in results,” the researchers wrote.

For example, they said in the article, both minimum wages and overall employment growth vary substantially over time and location, as seen in the South, where the economy has been growing faster than it has in the rest of the country for reasons unrelated to the South’s lack of state-based minimum wages.

The article noted that 17 states and the District of Columbia had a minimum wage higher than the federal level in 2005 and consistently lower job growth than the rest of the country from 1991 to 1996. However, those 17 states and states on the other end of the minimum wage spectrum experienced almost identical job growth between 1996 and 2006.

For their paper, “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties,” Reich, Dube and Lester built upon the earlier studies, pulling together local and national level data covering 16 years.



They crunched data from across the country on county pairs that straddle state borders and have a minimum wage differential, examining differences between the pairs in terms of the number of jobs and pay for workers in restaurants, retail, accommodation and food services.

The researchers used data supplied by the Quarterly Census of Employment for 66 quarters from 1990 to 2006. They merged this data with information on the local, state and federal minimum wage in effect during each quarter.

About 33 percent of restaurant workers across the country are paid no more than 10 percent above the minimum wage. Restaurant and retail workers together account for almost half of all employees in the United States who are paid within 10 percent of the federal or state minimum wage.

The new study is available online.

[_Droopy]

One study overturning many studies over decades all showing clear negative employment effects of minimum wage hikes?

Nope.

One of the CATO studies I linked to actually mentions this paper, but only to show its useful catalog of other effects of rising minimum wages, mostly negative.

A 2011 study by Barry Hirsch and coauthors
found yet further methods of business adjustment.
36 Some firms partially offset increases
in the minimum wage by awarding smaller
than normal pay increases to their workers
who earn more than the minimum wage.
Some firms try to increase worker productivity
by requiring better attendance, insisting that
job duties are completed faster, imposing additional
tasks on workers, minimizing hours
worked with better scheduling, and terminating
poor performers more quickly.

That same study also points out that:

Aside from changes in employment, empirical
studies have documented other methods
by which businesses and markets adjust to
minimum wage increases. The congressional
Joint Economic Committee published a major
review of 50 years of academic research on the
minimum wage in 1995.32 The study found
a wide range of direct and indirect effects of
increased minimum wages that may occur.
These include
● Increasing the likelihood and duration
of unemployment for low-wage workers,
particularly during economic downturns;
● Encouraging employers to cut worker
training;
● Increasing job turnover;
● Discouraging part-time work and reducing
school attendance;
● Driving workers into uncovered jobs,
thus reducing wages in those sectors;

The state cannot rationally or intelligent set wages, has no competence to do so, and can only distort and corrupt market forces and incentives in so doing. As CATO scholar Matthew B. Kibbe explained:

The supply of and demand for particular skills determine the market price of an individual's labor--that is, his wage. Employers attempt to purchase the specific skills they need at the lowest available price, while individuals selling their labor attempt to find the highest-bidding employer.

Every market price, including a wage, is simply the outward expression of what employers perceive to be consumers' preferences. If consumers do not value a particular good or service offered on the market, labor, as well as the other factors involved in producing the good, will be worth little. Thus, it is the individual--the sovereign consumer--who has the final say in determining wages.

Aside from a shift in consumers' preferences, there is only one noncoercive method through which real wages can rise: workers must become more productive. The most obvious way for workers to enhance their productivity is to increase or improve their skills through education, experience, and effort.

Wage rates can also be improved if employers increase their investment in future production. Increased capital investment renders labor more productive by providing workers with better tools. A simple example of this principle is the case of two equally productive workers assigned to clear a wooded lot. The first worker is given a shovel and an ax, the second, a bulldozer. Obviously, the second worker will be much more productive, which illustrates that all the hard work in the world cannot compete with a high rate of capital investment.

To increase wage rates without either an increase in productivity or a shift in consumer preferences requires coercion. It is quite possible to raise certain wages by excluding competing labor from the relevant markets. This distinction between voluntary and coercive methods of increasing wages is essentially a difference between creating wealth and redistributing wealth.

Contrary to the claims of many members of Congress, government cannot create wealth by simply passing new laws. Otherwise, Congress would long ago have passed laws prohibiting poverty and establishing a minimum wage of $100, or even $1,000, an hour. In such a world, everyone could be a millionaire. But ours is a world of scarcity, and wealth is a product of the market process, not of legislative fiat.

[_beastie]

Since it's expensive to have a high employee turnover, it seems to me that raising wages would have a positive impact on productivity. And, in fact, that's what companies like Costco have discovered.

http://www.raisetheminimumwage.com/pages/business-case

This fuss reminds me of the Papa John bit of stupidity. Remember that fiasco? The Papa John CEO complained about Obamacare because it would have to raise the cost of pizzas by fourteen whole cents.

[_Droopy]

Since it's expensive to have a high employee turnover, it seems to me that raising wages would have a positive impact on productivity. And, in fact, that's what companies like Costco have discovered.

http://www.raisetheminimumwage.com/pages/business-case

This fuss reminds me of the Papa John bit of stupidity. Remember that fiasco? The Papa John CEO complained about Obamacare because it would have to raise the cost of pizzas by fourteen whole cents.

The fact of the matter is that the overwhelming empirical weight of evidence here has been in for decades, and the only outliers around are the ideologically driven worshipers of state power who grind out a few sauteed studies and deep fat fried graphs and charts now and then in an attempt to overturn what a well-climbed mountain of empirical research has been saying for generations: minimum wages kill employment, especially among those who need it most.

The only economically legitimate way to increase wages in a way that represents actually existing economic conditions (increased wealth creation) is to increase productivity. Government cannot set wages without setting in motion numerous interconnected ripple effects throughout the economy, any number of them more destructive and counterproductive than the problem they thought they were fixing (which was not a "problem" to begin with, and please, most of the politicians given to this kind of legislation are just trolling for loyal voters, not extending government gratuities from the bottom of their altruistic hearts).

[_Kevin Graham]

Again, CATO is a joke and always has been. You pass up legitimate economics for your "think tanks" who are paid to produce a certain point of view no matter what the evidence. This is why no one outside of CATO considers this "review" a refutation of this paper.

[_Droopy]

Again, CATO is a joke and always has been.

Yup. All those high school drop-outs and monobrowed moonshine guzzling rubes over at CATO. Once again, Kevin, all you have is your ad hominem circumstantial barking to paper over what has always appeared to me and a number of other observers to be your glaring lack of education, knowledge, and critical thinking abilities.

I expect nothing less from you, at this point. I wish I could say it was otherwise.

You pass up legitimate economics for your "think tanks" who are paid to produce a certain point of view no matter what the evidence. This is why no one outside of CATO considers this "review" a refutation of this paper.

The transparency with which you make stuff up as you go along, Kevin, is actually a bit embarrassing. I'm just not sure you can be embarrassed.

So I'll just be embarrassed for you, as I token of good will.

[_EAllusion]

CATO is not a joke anymore than Brookings or other upper tier think tanks are. The only major think tank that is a bit of a joke is Heritage, otherwise you get reasonable mixed bag of good research and ideological posturing from them.

[_EAllusion]

I actually am in a business that faces living wage hikes every single year. We're supposed to be funded by the government for the COLA increase, but we aren't always, and often when we are our budget is slashed elsewhere by the same governmental body to compensate. I'm not in accounting, but I am the head of a few million dollars worth of revenue on the operations side. That requires me to have some level of sophisticated budgetary training. I can say without a doubt that this absolutely kills us. We haven't ever just fired people in light of the budgetary pressure, but we do all sorts of other things to eat the increase. Most notably, when we lose employees through natural turnover, we don't necessarily backfill the position. We are absolute sticklers with intelligent scheduling to avoid overtime because it's an area we can actually affect. We also cut services, which in this case means support systems for vulnerable adults, but we fiddle with employment to the best it can be managed.

[_Kevin Graham]

CATO is not a joke anymore than Brookings or other upper tier think tanks are. The only major think tank that is a bit of a joke is Heritage, otherwise you get reasonable mixed bag of good research and ideological posturing from them.

Yes, I take that back. I had Heritage in mind, but Droopy cites them both so frequently I get them mixed up. Heritage is the one that defended the Tobacco industry, arguing for them that scientific studies show nicotine isn't addictive. CATO was the Libertarian outfit that corrected the Right Wing myth that deficit for fiscal year 2009 was all Obama.

Either way the overwhelming evidence seems to be that economists are divided on this issue. Which suggests the "empirical" data Droopy alludes to isn't nearly as conclusive as he would like to believe.

Six years ago over 650 Economists signed a statementasking for an increase in the minimum wage, precisely because they rejected this notion that it killed jobs. And just this month John Schmidt released a study explaining why the minimum wage has no discernible effect on employment.

I've read about a dozen articles/studies on this issue the past few days and the overwhelming consensus is that there simply is no consensus - which is good enough to support it. What was once believed to be standard Econ 101 axiom is now losing adherents in droves because of the simple fact that employers do not appear to be responding to the minimum wage increases as expected. In some cases they respond contrary to expectations. And the more I think about it the more it all makes sense. I've managed businesses during minimum wage increases and don't ever recall there being a big deal about it. If anything, the talking heads at corporate headquarters will try to increase profits in other ways. You see most corporations allocate salaries in a truly warped way as it is, so what tends to happen in some cases is that executives making multi-million dollar salaries might have to take a slight pay cut in order for the company to recoup whatever losses from the minimum wage increase. And who is going to be pissed off about that? Republicans? Well, they supported it when Bush was in office, but they've decided to object to anything Obama does even before he tells them what it is he wants to do.