Reconciling the Minimum Wage Literature

I'm a health and fitness nut, so I read a lot of health studies as well as using my own body as a guinea pig.  I've discovered a lot of things - for instance, I don't know if using creatine monohydrate leads to more strength gains than using a placebo, but I do know it makes you pee every 15 minutes.

Reading health studies (or even worse, hearing reports of health studies) can be incredibly frustrating as they often appear to be contradictory.  Caffeine is good for you. Caffeine is bad for you. Ephedrine and ECA stacks are dangerous. Ephedrine and ECA stacks are effective and safe to use, etc.  What to believe?

When you dig deeper, however, a lot of the studies aren't contradictory at all, because they're making different claims.  A substance can have both good and bad properties - aspirin has all kinds of positive qualities, but it also increases the risk of gastrointestinal bleeding.  The studies may be testing different quantities of a substances; as we often say at Nexreg the dose makes the poison.  Of course, it could be that the studies are in fact contradictory and the results of one (or both) studies is wrong.  More often than not, however, we can reconcile the results of two studies (or sets of studies) that at first glance appear to be contradictory.

There are dozens of studies that show increasing the minimum wage has an adverse effect on employment.  However, Card and Kreuger (1993) and an excellent paper shared by Erin Weir, Dube, Lester, and Reich (2010) show that there is no reduction in employment when the minimum wage is raised.  How can we possibly reconcile this?

There are a few ways.  Back in 2006 Stephen Gordon wrote a blog piece When the minimum wage bites which looked at the work of Pierre Fortin (and others) and concluded:

So what have we learned from all this?

• When minimum wages are 'low' - say, less than 40% of the average hourly wage - then moderate increases won't have a significant short-run effect on employment.
• When minimum wages are around 45% of the average, they significantly reduce employment.

That is one explanation - that the studies that show no adverse effect had minimum wages below the 40% threshold.  I believe there may be another explanation.  In Three Changes Making It Difficult To Find a Low Skill Job I discuss the three substitutes for minimum wage labour:

 

Find a technological solution. Rather than hiring another worker, is there a piece of equipment or machinery that will do the job, or make existing workers more productive so another person is not needed?  The automated checkouts in grocery stores might be a good example, though I've often wondered how much labour they truly save.

Outsource/offshore/subcontract. Instead of doing the work in-house, can we pay someone else to do it?  Off-shoring has become easier than ever for even the smallest of businesses thanks to services such as eLance and Mechanical Turk.

Do without. Instead of having 8 cash-registers open, can we get away with having only 7?

 

Both the Card and Kreuger (1993) and the Dube, Lester, and Reich (2010) have something in common - they both consider the fast food industry.  Suppose the minimum wage is raised in that industry.  What substitutes do they have? They clearly can't outsource the work to India. There may be some technological solution, but it is not obvious that there are large solutions.  Can we replace a cashier with a robot? The only one of the three that obviously applies is to do with less labour.

Contrast this with, say, an incoming call centre, where all 3 apply.  You can outsource the entire operation to India.  You can build systems where algorithms attempt to answer your questions so a human does not have to (in other words, hire Watson's kid brother), or you can just have fewer staff and have your callers on hold longer.

I cannot think of too many minimum wage industries that have less substitutes than fast-food (and restaurants in general).  If you were looking to find a situation where employers had to just 'suck up' the increase, that would be a good choice of industry.  Now, I don't believe that the industry was chosen by Card and Kreuger (1993) or the Dube, Lester, and Reich (2010) for this reason.  A good rule of thumb in economic research - if you find an assumption that looks strange in an applied paper, it's due to data availability.  If you find an assumption that looks strange in a theory paper, it's due to mathematical tractability.

Now the Dube, Lester, and Reich (2010) team do consider this issue:

Do our findings carry over to affected groups other than restaurant workers? Although we cannot address this question directly, the results in a companion paper (Allegretto, Dube,& Reich, 2008) using the CPS suggest an affirmative answer. In that paper, we find that allowing spatial trends at the census division level reduces the measured disemployment level substantially when we consider the response of teen employment to minimum wage increases. Additionally, and parallel to our findings here, we find that the measured disemployment effects disappear once we control for state-level trends in the underlying teenage employment. This evidence suggests that our findings are relevant beyond the restaurant industry.

Unfortunately the 2008 paper is unavailable online. I'm not as confident that the results are universal as Dube, Lester and Reich (and then there's Pierre Fortin's 40% argument to consider).  Since teen labour is over-represented in the fast-food industry, the two studies may be largely measuring the same thing.

I believe we can reconcile these seemingly contradictory results.  I hope we one day do to everyone's satisfaction, as we will have learned a lot about the functioning of labour markets in the process.

Comments

[Stephen Gordon]

I should point out that it was UQAM's Pierre Fortin who came up with the 40% conjecture.

[Mike Moffatt]

Good point.. I'll update the post to reflect that. Thanks!

[Thorfinn]

There also may be short-term/long-term difference. With taxes, for instance, many empirical studies that look directly before/after a tax change find small results, unless the change in taxes is sufficiently large. One plausible explanation, as Chetty suggests, is that small frictional costs result in an effect more pronounced on the long-run steady state.

Similarly; it's a lot easier to make the adjustments you discuss over a long time frame, and the immediate cost of failing to adjust labor is fairly low. On top of the list you have, there is also firm entry/exit due to higher labor costs, moving workers to part-time (never directly tested in the empirical literature, AFAIK), hiring more skilled workers, or cutting back on benefits. It's easy to cut labor compensation in general, even while maintaining the same level of "employment."

[Craig Burley]

I think you left off one substitute for minimum wage labour: sub-minimum wage labour. Going extra-legal is pretty common in these scenarios.

[tomslee]

They clearly can't outsource the work to India.

I have heard that the order relaying service at the drive through can be centralized and automated. Instead of one person at the restaurant taking drive through orders, everyone across the country speaks to a small room (or so) of people in one location, and the orders get sent back out to the restaurant. But probably that's a small faction of the labour involved.

[Craig Burley]

Obviously, that won't work for fast food or a typical retail operation. But for a lot of businesses, it works for everyone to hire and pay under the table, and even if you pay the minimum your labour costs are considerably below.

[marcel]

Mike:

Try this link for Allegretto et al. (2008)

http://www.irle.berkeley.edu/workingpapers/166-08.pdf

It's a revised version (from June 2010), easily available on line.

[marcel]

PS - I found it by googling (not even google-scholar) the title.

[Erin Weir]

Minimum-wage workers actually are concentrated in service industries like fast food and retail where employers have to just suck up the increase.

The same results may not apply to manufacturing, but that’s not where the minimum-wage workers are.

[Stephen Gordon]

The thing about 'sucking it up' is that it's a short-term argument. If you treat capital investment as fixed, then the only thing entrepreneurs who have paid the sunk cost of investment is try to pass increased wage costs on to consumers. And they may not be able to do that, so they best they can do is try to suck it up as best they can.

But in the medium- to long-term, things are different. Over time, some fast-food owners will simply shut down rather than accept negative/low returns for the rest of their lives, and they won't be replaced. Fortin makes this point in his literature survey, and the Benjamin, Baker and Stanger paper finds that long-run effects are significant, even if short-run effects may not be.

Any policy based on exploiting the fact that much/most investment is a sunk cost is going to end in disaster. Capital depreciates, and pretty rapidly, too.

[Mandos]

Since a floor on the wages a human being can earn is an obvious prerequisite for a humane society, this seems to be an obvious argument that outsourcing to lower-wage countries should be illegal or difficult so that employers cannot escape the requirement of giving their workers a living wage.

That's assuming it is true that the findings for fast food workers do not carry over to other, offshorable sectors, of course.

[Patrick]

Anecdote (FWIW): in AB during the last boom as low skill labour became expensive, the fast food joints raised prices and reduced hours. The fast food joint in the nearby strip mall would close at 9pm because it wasn't profitable to be open during non-peak hours. It's now open 24 hrs.

My guess is that they would react similarly to a large increase in minimum wage.

[Stephen Gordon]

Since a floor on the wages a human being can earn is an obvious prerequisite for a humane society

Boldly asserted, weakly defended. Ever read Paul Krugman's In praise of cheap labor?

[Mandos]

You already know (from your sojourn at babble back in the day) that I am well aware of that bizarre argument in favour of neoliberal globalization. It totally obscures the question of who is in control of the resources, which is why Krugman's leftward critics would say it is a naive or corrupt argument. It is also a false dichotomy.

The entire point of the argument pits the gains of the middle class that emerged from poverty against the currently poor. We are currently finding out that the only one who benefits in the long term from that entire philosophy are fraudulent banksters and grifters and sheep-shearers of various sorts.

The use of cheap labour against not-so-cheap labour is an unequivocal ill. Those who are concerned about poverty (as they should be) should focus on reducing global and national inequality, through these much vaunted wealth transfers from the very rich that never seem to trickle down.

[Mandos]

Another way of putting that argument in moral terms that pretty much also covers the minimum wage case is this: you would have us believe that there is no way to enrich the poor than to risk the immiseration of the not-so-poor-but-not-rich.

That's what it boils down to---whittling away the gains of class struggle through the Argumentum Ad Trash Pile.

And what it leads to is what we see now in the USA, Europe, Mideast, and so on, and it's eventually coming to a China near you.

[Mandos]

I mean, let's take Krugman's strange incomprehension of the motives of globalization's critics:

The main answer, I think, is a sort of fastidiousness. Unlike the starving subsistence farmer, the women and children in the sneaker factory are working at slave wages for our benefit--and this makes us feel unclean. And so there are self-righteous demands for international labor standards: We should not, the opponents of globalization insist, be willing to buy those sneakers and shirts unless the people who make them receive decent wages and work under decent conditions.

But that's NOT the objection of globalization's leftward critics. That would be a really childish and risible objection. The objection is that these workers are used as a lever against, e.g., unionization and worker protection in countries that we call developed, but have really only had protections for workers for a few generations. Once these lever has been used, do you think that the world's workers are all going to end up like American workers in the 50s or like present-day Egyptians? If you think that the heyday of the Western middle class is the endgame, more power to you.

Forgive me if I am not so sanguine.

[Stephen Gordon]

If you want to make the case for a minimum income, I'm already on board with that.

But if you insist that this income take the form of wages, then I would accuse you of a sterile insistence on points for style, at the cost of real progress.

[Stephen Gordon]

Oh, and if your refutation of Krugman is that "real progressives care about the plight of rich-world workers, not of those in desperate poverty in desperately poor countries", then you should give yourself a shake. Jeebus.

[Joseph]

The aspirin analogy is really interesting. The way we handle this in Epidemiology is to try and sub-group patients into groups where the risks may or may not exceed benefits. My conjecture, based on this post, is that we might discover one to two things:

1) Optimal minimum wage policy may vary by industry
2) There is a threshold beyond which increases in the minimum wage are counterproductive

Most of my tacit (and non-rational) support for the minimum wage comes from my instinct that there is a power asymmetry between low wage workers and employers. But that is not actually grounded in empirical evidence, it's just my gut instinct (having been on the powerless side of this divide as a younger person).

[marcel]

Joseph above:

Most of my tacit (and non-rational) support for the minimum wage comes from my instinct that there is a power asymmetry between low wage workers and employers.

Sounds like an argument for unions, as well.

[anon]

"The objection is that these workers are used as a lever against, e.g., unionization and worker protection in countries that we call developed,"

Are they? Wages in poor countries are soaring as their "reserve armies" of cheap labor are rapidly exhausted. Emerging countries will demand worker protection as they grow richer, just as they demand increasingly stringent environmental standards. We saw this process play out in Western Europe after WWII, and again in East Asian countries such as Japan, South Korea and Taiwan. (You may be right about unionization, though. But unions tend to act as sector-based cartels, which do not necessarily further the interests of workers in the aggregate.)

I'm not sure how world workers are going to end up--that will depend on the extent of economic development in poor countries. However, I do know that "Americans in the 1950s" and "Egyptians in 2010" are extreme outliers: by one measure, Egyptian workers are the least productive in the world [NYT link] when adjusted for their skills. That's a key reason for the recent protests and revolts against their oppressive government: one thing this shows is that class struggle is not the province of rich Western countries.

[Mike Moffatt]

"I think you left off one substitute for minimum wage labour: sub-minimum wage labour. Going extra-legal is pretty common in these scenarios."

There was a really good piece at Maclean's: The backlash against unpaid internships. That's one way around it.

Another way is Mechanical Turk style outsourcing. I could put a non-complex but time-intensive project on there that would take at least 20 hours and I'm sure I could find someone to bid $100 or less. (That is, if I were in the U.S. - last I checked the service wasn't available in Canada). At $5/hr it's less than minimum wage.

[Mike Moffatt]

marcel: Thanks! For some reason I couldn't find it online when I did a Google search earlier. Odd.

Joseph: "my instinct that there is a power asymmetry between low wage workers and employers. But that is not actually grounded in empirical evidence, it's just my gut instinct (having been on the powerless side of this divide as a younger person)."

I have no doubt that's true and I think most of us have been there in our youth. Though I lived in upstate New York pre-9/11 when the unemployment rate was around 3% or so and everywhere you went had a 'help wanted' sign and it was difficult to get fired from a fast-food job. That's obviously the exception to the rule, but a strong economy will help balance that asymmetry pretty well.

Having moved around a lot, I've noticed in my life that the weaker the economy is in an area, the more competent are fastfood/coffee employees and the more young and attractive wait staff are. When the economy is weak these companies can be picky. When the economy is strong they have to take who they can get, and all the low-to-medium skill young and attractive types are working in higher end sales and marketing jobs.

[Frances Woolley]

Good post, Mike.

[Nick Rowe]

Assume it is impossible to substitute away from minimum wage labour in fast food restaurants. Y=AL, where A is a constant. If the demand curve for fast food slopes down, and if an increase in minimum wage causes an increase in price, we would still expect to see a drop in employment.

Are there any (plausible) *mechanisms* where an increase in the minimum wage would not cause a decrease in employment?

1. There's the monopsony labour market model. As long as the minimum wage is below the competitive equilibrium, an increase in minimum wage will increase employment.

2. Mike's story above. When the minimum wage is increased, employers hire the same number of workers, but higher quality (cuter) ones. The lower quality workers are now unemployed, so total employment falls, but employment in fast food stays the same. The price rises, but you get higher quality service, so quantity demanded stays about the same? (But this story needs to be consistent with a model in which employers would not be paying efficiency wages to get higher quality staff in the first place.)

[Sergei]

I love those mcdonald's type of arguments. This is a feature of a proper science. So to paraphrase your argument: are there any (plausible) *mechanisms* where an DECrease in the minimum wage would not cause a INrease in employment at mcdonalds'?

And finally we shall all be happy to work at mcdonalds! We even get one free meal per day. Consumer paradise!

[Patrick]

Rigging the price of labour isn't going to fix an investment problem. A sure way for us to end-up with a lower standard of living is to stick with magical thinking. "Expansionary austerity" and "tax cuts always pay for themselves" are to the right what "increased income and investment through price fixing" are to the left. There's plenty of blame to go around.

[Jim Rootham]

The argument from the left isn't about "increased income and investment". The argument from the left is that a policy that makes the under classes better off is a good thing even if it reduces total output. For most people living in a rich plutocracy is less desirable than living in a somewhat poorer equitable society. See France, Germany, and Scandanavia vs the US, Canada, and England. And no, it's not the tax structure that makes the difference, it's the politics, and in particular, the electoral systems.

[Patrick]

Jim: Sweden's, Norway's and Denmark's per capital GDP is higher than Canada's. And I bet if you dropped the old East Germany from the German number, they'd also be higher than Canada.

I could be wrong, but I suspect that these countries invest more in their people and in infrastructure to make them productive. Sure, part of that is Robin Hood policies to redistribute income. But I think the big thing is public investment in education, health, transportation, communications, etc ...

[anon]

"See France, Germany, and Scandanavia vs the US, Canada, and England."

I'll give you Scandinavia, but the underclasses in the U.S. and Canada are far better off than in France and Germany. The standard of living in French suburbs (banlieues) and in former East Germany is abysmal, and much of that is due to bad economic policy.

[Stephen Gordon]

Jim, you're going to have to be more precise when you haul out the "it's the politics" line; it reads too much like "it's God's will", and as such, an excuse for rejecting evidence-based policy.

[miep]

What are you smokeing anon?
This is so blanted wrong just from looking at peoples teeth. Looking at comparative healthcare acess life expectancy or improsonmen data isnt even worth bothering.

[miep]

What are you smokeing anon?
This is so blanted wrong just from looking at peoples teeth. Looking at comperative healthcare acess life expectancy or improsonmen data isnt even worth bothering.

[btgraff]

apart from the 3 substitutes, there are 3 other outcomes:

1. The company increases prices.
2. The owner/shareholders have reduced profits.
3. The company cannot afford the increase and goes out of business.

1. The company increases prices - if all its competitors face the same minium wage increase, this is not going to have a huge impact, except that higher prices might reduce reduce the amount of goods sold - this is a shift in the supply curve.
2. The long term impact of this might be to reduce the number of suppliers, or to reduce the resale value of businesses.
3. If particular companies are poorly run or lacking in capital to improve productivity, these businesses might go out of business, which would mean that other remaining, more productive businesses, get more business.

Personally, I think that one of the reasons why Canada's productivty performance has been so poor is because minimum wages have been kept low, and because our high levels of immigration have created a surplus of labour, pushing down wages and increasing unemployment. Had the minimum wage gorwn to a reasnable level, like $15.00 in most provinces, unemployment would be higher - but this would only make it i clearer that we don't need the high level of immigration we have had for the last 20 years, since Mulroney cranked it up to current levels, and then we have kept these levels high even in bad times - why is it that we allowed in a record 280,000 immigrants last year, plus temporary workers, when unemployment was still so high? Under Trudeau, in his last years in office, immigration levels were cut when unemployment was high - to about 80,000-95,000 in the early 80s.

Adjusting the minium wage to 40% of the average is only one adjustment we can make, but it is dependent on the other factors in the economy that determine the growth of average wages - like immigration.

[Patrick]

Lump of labour rears its ugly head.

btgraff: you clearly have no idea how the Canadian immigration system works.

[Bob Smith]

Jim Stanford had an article on this in today's post (http://fullcomment.nationalpost.com/2011/02/22/debate-boost-the-wage-help-the-worker/)

I thought two of his points were interesting.

First, was his observation that there was empirical research suggesting that minimum wage increased productivity. I'm sure that's true, but I'm not sure why an economist employed by a labour union would think that's a good thing. If you think that minimum wage drives down employment, than of course it will drive up productivity as marginal workers are let go. This is the logic of downsizing. I'm pretty sure Jim Stanford opposed that kind of productivity improving tactic when it's employed by GM, Ford, Chrysler, etc., so I'm not sure why it's a good think when the government does it (albeit indirectly) with a minimum wage.

Moreover, even in the absence of employment effects, productivity increases can be readily explained by employers working their workers harder (shorter breaks, closer supervision, harsher discpline, etc.). Indeed, I seem to recall some recent literature (though, for the life of me I can't remember by whom) to the effect that increased minimum wage had precisely that effect in the fast food sector (i.e., that it was offset by having workers work harder or by cutting back on other fring "benefits" - i.e., making Mc-workers pay for their uniforms). Query whether this is really welfare improving for minimum wage workers since, while they're paid more in cash money, they have to work harder (and possible less safely) and lose other fringe benefits. Also, query whether, if they could, those workers would have freely accepted to work harder for the same increase in the absence of a minimum wage (and, in fairness, I can imagine a model that says they would have, but were unable to do so imperfect contracting - say an imperfect ability of employers to monitor employee specific productivity). And if not, query why Jim Stanford thinks its a good thing to impose it upon them (I'm pretty sure, for example, that the CAW might be somewhat miffed if the government were to say - "hey, we're going to mandate that GM pay you an extra 10% but, BTW, you're all going to have to worker 10% faster.")

Second, was his statement that: "So long as levels are set realistically relative to productivity and profitability, minimum wages can be increased with no measurable damage to employment." Nothing controversial as far as it goes, but it kind of misses the point. Yes, if a minimum wage is closely tied to productivity than it won't have any employment effect (although, one has to ask, has labour productivity amongst low skilled workers in Ontario really increased by 50% over the past 6 years?) Of course, in a competitive labour market, query whether it really binds on employers either (since, all real wage increases are driven by productivity growth).

[Andrew F]

I work for a large retailer. Let me assure you that labour demand is sensitive to labour costs. Many retailers provide services in store that might be regionally centralized and performed using more capital equipment and less unskilled labour. Other changes are mere investments in IT, fixturing, packaging, processes, etc. to reduce the need for unskilled labour at store-level. Anything in the store that is not customer-facing is potentially wasteful and examined carefully.

And where that fails, the industry typically responds by reducing square footage per capita--typically demanding stores be more productive. Fewer stores to serve the same demand typically reduces labour requirements, even if head count at the remaining stores increases slightly.

These investments take time, of course, but within 5 years you should be able to observe significant responses to large increases in minimum wage. For instance, you should be seeing this in Ontario over the next few years.

[Mandos]

If you want to make the case for a minimum income, I'm already on board with that.

But if you insist that this income take the form of wages, then I would accuse you of a sterile insistence on points for style, at the cost of real progress.

No. This is not a style point. The standard neoliberal MO in these discussions is to do this:

1. Identify something notionally considered "inefficient" using the rather limited ontology of concepts and criteria deployed by mainstream economics.

2. Propose its elimination.

3. Propose that in order not to impoverish the losers overmuch, they should be compensated through some form of direct welfare/wealth transfer mechanism.

My response to this to compare it to this style point to demand that those who want to replace good wages for honest and productive labour with wealth transfer first account for the politics and actually do the homework to make sure that (3) is unconditionally tied to any attempt at (2).

Perhaps we will all be equally automated away by robots and live in a beautiful society of true creative leisure. That's fine. It's not fine to play us off against one another in the already-apparent global game of musical austerity chairs. An unsustainable game at that.

These are not style points.

[Mandos]

[Grr, stupid unclosed tag ate most of my post. What an anticlimax ;) Let's try that again:]

If you want to make the case for a minimum income, I'm already on board with that.

But if you insist that this income take the form of wages, then I would accuse you of a sterile insistence on points for style, at the cost of real progress.

No. This is not a style point. The standard neoliberal MO in these discussions is to do this:

1. Identify something notionally considered "inefficient" using the rather limited ontology of concepts and criteria deployed by mainstream economics.

2. Propose its elimination.

3. Propose that in order not to impoverish the losers overmuch, they should be compensated through some form of direct welfare/wealth transfer mechanism.

My response to this to compare it to this classic cartoon panel. In case it isn't obvious, Lucy is step #3.

It's not a style point to observe that the very conditions under which the alleged inefficiency can be addressed are conditions under which the losers are politically weak. It's not a style point to observe that the political forces that usually propel the inefficiency reduction are often openly opposed to part (3). It's not a style point to observe that the productivity gains from capital mobility, etc, have not been redistributed as welfare to the losers. It's not a style point to observe that no matter what you call it, when work is replaced by welfare under whatever name, there are attendant social and psychological ills---particularly in societies deeply infused with the so-called " rel="nofollow">style point to demand that those who want to replace good wages for honest and productive labour with wealth transfer first account for the politics and actually do the homework to make sure that (3) is unconditionally tied to any attempt at (2).

Perhaps we will all be equally automated away by robots and live in a beautiful society of true creative leisure. That's fine. It's not fine to play us off against one another in the already-apparent global game of musical austerity chairs. An unsustainable game at that.

These are not style points.

[Mandos]

*sigh* Today I am not winning at the HTML. HTML is clearly a neoliberal conspiracy. I should love "preview" more.

"...societies deeply infused with the so-called Protestant work ethic."

[Stephen Gordon]

In the absence of empirical evidence supporting the claim that increasing the minimum wage will reduce poverty and inequality - or even a counter-argument against the available evidence suggesting that increasing the minimum wage increases poverty - I'm going to stick to my claim that you share a sterile obsession with points for style.

[RSJ]

I think people are talking past each other here.

Hypothesis A:

There is a (small) subset of employers who, due to power asymmetries with the types of workers that they hire, are able to pay workers less than their marginal product under the ideal capital/labor ratio that would be obtained by transformational efficiency.

And so, over the long run, they use relatively more labor and less capital than is optimal. But because the wage is less than the equilibrium wage, there is less involuntary unemployment and more voluntary unemployment and total employment is lower than optimal, productivity is lower than optimal, and the capital stock is lower than optimal.

Hypothesis B:

Workers are already being paid their marginal product, and any minimum wage will, over the long run, reduce total employment and total output.

Both hypothesis would predict a long run increase in (BLS) unemployment as a result of the minimum wage or of an increase in the minimum wage, as we only measure involuntary unemployment as unemployment.

You would need to look for other ways to distinguish between these hypothesis -- for example, look at capital/labor ratios or effects on total output or total employment (not involuntary unemployment).

But this is hard as the effects are going to be small, and national income data is volatile. We don't know the ideal capital/labor ratios.

Moreover it makes a difference whether the minimum wage is higher than the ideal wage for those workers. And the ideal wage will vary with industry as well as technology. We don't know the ideal wage, either.

In that case, what would be an "evidence based" policy approach, as the two hypothesis recommend different policies?

Clustering of employment at the minimum wage, plus our own anecdotal experience is some evidence for hypothesis A, and anecdotal examples of fast food restaurants reducing their hours is some evidence for B.

Having said that, even if you believe in A, increasing the minimum wage may not be the best solution. A basic income might do more to fix the power imbalance than a minimum wage, and would be a solution that would work regardless of which hypothesis you believe.

But those on the left who believe in Hypothesis A do not believe that a basic income is a politically viable solution, whereas the minimum wage exists now, so they are not prepared to give up the imperfect tool that they have for a better tool that they wont get.

I don't think any of these views are irrational. I see no convincing case for hypothesis B in the data, and not much of a case for hypothesis A. They could both be wrong. This is not a debate of rationalists versus irrationalists, but of people who start with different hypothesis, and both see their own hypothesis supported by data.

[Matthew]

"The use of cheap labour against not-so-cheap labour is an unequivocal ill. Those who are concerned about poverty (as they should be) should focus on reducing global and national inequality, through these much vaunted wealth transfers from the very rich that never seem to trickle down."

Mandos, take it to the Toronto Star. This blog is for people who want to discuss economics.

[Mandos]

RSJ's last few paragraphs put the argument in the correct jargon. The minimum wage is a perhaps imperfect tool in the absence of a society of well-paid and equitably distributed vacations (ie, any kind of nontrivial minimum income scheme). The minimum income will never come, because those with the interest and the power to replace the minimum wage with the minimum income have a huge incentive to remove the minimum wage and no incentive to replace it. And that is a chronic flaw with EVERY such proposal incurs, including---perhaps especially---trade liberalization. But that seems to be pretty much endemic to the dominant mode of economic thought.

I suggest that that is because economists have been allowed to pretend that the moral and political dimensions of their advice is orthogonal to their alleged science. That is why

This blog is for people who want to discuss economics.

is such an interesting response. That this discussion of moral and social desiderata is considered by some to be orthogonal to an economics blog rather than the central issue and stumbling block over which the entire discussion must pass is interesting and troubling.

[Mandos]

In the absence of empirical evidence supporting the claim that increasing the minimum wage will reduce poverty and inequality - or even a counter-argument against the available evidence suggesting that increasing the minimum wage increases poverty - I'm going to stick to my claim that you share a sterile obsession with points for style.

Let us return to Mike Moffatt's OP for the response to this. Mike Moffatt argued, as I understood it---and you can correct me if I've misread him---that the reason why some evidence looks like employment is not sensitive to increases in the minimum wage is that said evidence is obtained from forms of labour that are not easily replaced.

Then there are two possibilities. One can either

1. imagine that replacement through outsourcing, etc, to lower-wage areas is simply a given, and hence the results do not really apply, and it remains true that increases in the minimum wage also increase unemployment in the general case.

2. decide that one's moral goal is to ensure that existing hard-won safeguards for workers are protected, and hence anything that threatens the ability of the minimum wage to improve the health of society should be curtailed---ie, outsourcing.

Let's just say that the thinking that leads everyone to conclude (1) is the thinking that has led the world into an ongoing unsustainable game of musical austerity chairs, as every cut in existing protections to workers---no matter how allegedly inefficient---has been turned into an opportunity for the shearing of us sheep.

[Andrew F]

I really can't see any meaningful reduction in the minimum wage occurring absent the creation of a basic income. I wouldn't support the former without the latter, either. The fear that there would be a bait and switch, or that the minimum wage reduction would occur before the creation of a basic income seems unfounded.

My brother-in-law is receiving disability payments and my sister is losing her job in a few months (layoff). He might be able to return to work, but is unsure whether he would be able to keep a job if he can't work full 8 hour shifts. They are terrified of losing their disability benefits. The incentives here are so peverse, and it causes a lot of stress and low self-esteem. Why anyone defends this system is beyond me.

[Jim Rootham]

This is (I think) a repost.

I went and looked at data.

Denmark 24.7
Sweden 25
Norway 25.8
Finland 26.9
Germany 28.3
Canada 32.6
France 32.7
UK 36
US 40.8

So I was wrong about France.

Stephen, to say something is decided by politics is the antithesis of it being divine will. It means it is under our collective control and can therefor be changed.

[Blikktheterrible]

"The argument from the left is that a policy that makes the under classes better off is a good thing even if it reduces total output."-Jim Rootham

I agree with that argument 100%. The only problem is that I remain utterly unconvinced that the minimum wage does that. The question for me (and I think Mike and Stephen as well) is whether a minimum wage helps or hurts the poorest of those it affects. That's the question. That's it. If you can convince us that it helps them, you win and we all leave happy.

[Robert]

The post does not live up to its title. Apparently Mike Moffatt is not aware of the existence of some of the relevant literature. I cite, for example, meta-analyses performed by Doucouliagos and Stanley. Decades of work have produced theoretical arguments that wages and employment cannot be explained by the supply and demand model, even on its own terms.