California, predictably, has passed a $15/hour minimum wage. New York is likely to. A few cities have done it already. Bernie Sanders wants a Federal wage of $15, while Hillary Clinton wants a $12 wage. And so the issue is once again on the table, at a time when wages are stagnant and unemployment is tepid. In fact that is why the issue has become so important again to its advocates. It looks like the high minimum wage is being pushed by two groups: the organized low-income workers, operating through various interest groups and, in California, the public sector unions. Both those are expected advocates. But my concern here is with the actual effects of the wage increase.
Some people—all too many—don’t know anything about economics. Now right away, I will have a few responses saying that the research on the effects of minimum wage is ambiguous. It is true that there is some research that appears to indicate that the minimum wage does not result in more unemployment than before. I submit that those studies are either limited or flawed, limited in that they do not address what actually happens to low income, low skill workers, and lump the numbers together with all workers/potential workers, flawed in that some fail to make the right comparisons. The New York Times published an editorial on February 17 that said a wage increase to $15/hour (essentially a doubling) would have no economic effect. The editorial board invoked studies for support. But what do the best studies show?
One example of a useful study comes from the recent work of Jonathan Meer and Jeremy West.
at Texas A&M and MIT (“Effects of the Minimum Wage on Employment Dynamics” Journal ofHuman Resources published ahead of print November 30, 2015), who found that “Using three separate state panels of administrative employment data, we find that the minimum wage reduces job growth over a period of several years.” (Ibid.). Another by Jeffrey Clemens at UC san Diego (“The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers,” NBER Working Paper No. 20724, December 2014, NBER Program(s)):
“We estimate the minimum wage’s effects on low-skilled workers’ employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a “target” group, whose baseline wage rates were directly affected, and a “within-state control” group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation. Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage’s effects on aggregate employment. Over the late 2000s, the average.” effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.” (Ibid., Abstract).
Finally, a European study involving a few contries one would have expected to already have minimum wages. Steve Hanke of Johns Hopkins University published an article in which he compared unemployment rates in EU nations that had a minimum wage with those not implementing one. The results are below in graphic form:
Remember that EU nations are geographically close to each other, which helps control for cultural differences. In addition, their economic systems are much the same and they interact with one another economically. The one variable that is most important then is the minimum wage. The differences are striking. If we look at youth unemployment, they are even more striking:
It is also interesting to note the seven EU nations that don’t have a minimum wage: Austria, Cyprus, Denmark, Finland, Germany, Italy, and Sweden. Notice Sweden, the epitome of what modern liberals think the United States ought to resemble. In fact, Sweden has backed off of some of its social democratic policies in recent years.
It is those who need a job the most—low skill, low income—that cannot get one because an employer calculates that he can’t afford to hire them compared to the cost and lack if skills. Moreover, highly paid workers who are not in professional or white-collar fields, are usually found in unions. It is unions that have advocated for the minimum wage. But as long as they have work at all, they are likely to be unaffected by the higher wage, though their overall wage rate may go down if a minimum wage is not implemented. But this would depend on the prevailing wage for skilled workers—and would not help the unskilled worker at all if the wage is increased. It is not that his or her wage would be increased. It would be if he had a job. But it is that he or she will not now be able to find a job as easily if at all. Jobs will simply not be there.
Why do we insist on a policy that harms the very people we say we want to help? Modern liberals cannot seem able to innovate in the realm of policy ideas. I can’t decide whether it is because they are ideologues or, more cynically, that they want to either control people’s lives, “buy” votes, or just spite political opponents. Whichever the reason, if any of them, it is time to eliminate the minimum wage and put people—real people—back to work.