The Minimum Wage question – the data beneath a Washington Post article.

Recently I was debating the push to raise minimum wages to $15 with a conservative friend. He was taking a straightforward market view – if something is priced higher – less will be purchased – hence loss of jobs, business challenges and more. He was also convinced that any data to the contrary was likely to be tainted by people moving out of the area, and indeed that the only places to have tried it had thriving economies due to tech bubbles, so not good examples for the whole.

I mentioned an article I’d seen recently in Washington Post that took very much the other position, that raising minimum wages could be transformative. I’d like to believe this to be true. More fundamentally, I think it’s unconscionable to pay people less than a living wage.

We wrapped with my agreeing to take a closer look at the article and underlying research, given the progressive bent of the Washington Post, and the frequent misrepresentation of research by members of the press. Hence, here’s a quick analysis – hopefully to be continued at some point in the future. In summary, I was impressed by the underlying research and would like to think that it’s the start of a more positive view of minimum wage in general.

I have had undergraduate exposure to the field economics, but none professionally, so my read on this material should be taken as that of an informed amateur.

The minimum wage article was published July 8, 2019, It’s not just paychecks: The surprising society-wide benefits of raising the minimum wage, by Andrew Van Dam.

It starts:

The central question in the minimum-wage debate has shifted. Where economists once asked, “Will raising the wage floor kill jobs?” they now ask, “Just how transformative could a higher minimum wage be?”

However on reading a little further it becomes clear that the article is primarily a rebuttal of a recent CBO publication (The Effects on Employment and Family Income of Increasing the Federal Minimum Wage) that makes the claim that a $15 minimum wage would reduce employment by 1.3 million workers (median estimate).

Apparently the CBO is relying upon older/discredited research.

“According to Berkeley economist Michael Reich, the CBO appears to have picked a grab bag of high-quality and now-discredited studies, and weighted them all the same in their analysis. It “reveals an unwillingness to recognize the major differences in scientific quality among studies,” Reich said.”

This seems to be the type of mud flinging that one expects to see in academic circles from time to time as new understandings/common truths percolate slowly through a field. It’s also clearly complicated by ideological preferences – and economics is a field that’s rife with these.

On closer review, the CBO document is an interesting read, and in particular digging into some of the references was illuminating. One that they cited explores neo-classical publication selection bias in the economics literature that biases toward a negative association between minimum wages and employment.

At a later stage I’m looking forward to taking a closer look at the CBO references, to see if the claim about mixed academic quality stands up – a couple that I looked at seem to be a bit basic in premise around absolute $ increases versus relative to local conditions, etc. The document is worth reviewing in any case.

Back to the Washington Post piece.

The first paper cited in opposition to the CBO is fascinating and looks to be a substantial step forward in understanding the space. “Minimum Wage Effects in Low-Wage Areas”, Godoey and Reich, 2019. This study uses a new methodology to dramatically enrich source data and looks at relative minimum wage (compared to the median) as a way to normalize these data. Washington Post was good enough to provide a high level visualization of their findings:

The white paper:

  1. Starts by noting that much of the prior research looks at minimum wage only to $10 level, but relatively little of this shows reductions in employment, etc.
  2. They use data is by county & PUMAs (local areas based on census-defined Public Use Microdata Areas — areas of about 100,000 people) – including many that don’t have heavy high tech sector:
  3. They focus their work on where the minimum wage sits versus median wage for the local area. This seems to be an important normalization that substantially improves their analytical power.

The whitepaper concludes (emphasis added):

We use sub-state variation in median wages to array local areas according to the likely effects of minimum wages. Doing so substantially expands the range of relative minimum wages and minimum wage bites beyond the levels observed with state-level data. Our sample of relative minimum wages in low-wage areas encompasses relative minimum wages as high as .82. This ratio is comparable to the highest state-level relative minimum wages that would obtain if the federal minimum wage was gradually increased to $15 by 2024. It lies well above the .59 ceiling in previous minimum wage research.

Using American Community Survey data from 2005 to 2017, we estimate both event study and generalized difference-in-difference models to analyze the effects of minimum wages on wages, employment and poverty in areas with low and high relative minimum wages (low median wages) and with low and high minimum wage bites. We conduct these analyses among a range of high-exposure groups (those with high school education or less, and teens). The results are similar across all these groups. We find that minimum wages increase wages more in the high impact areas, validating our methodological approach. We do not detect that minimum wages decrease employment or hours in low or high impact areas. Minimum wage increases do, however, reduce poverty rates among households and children. Overall, these results close the gap between current minimum wage policy and evidence-based research.

The second major article cited by Washington Post is “The Effect of Minimum Wages on Low-Wage Jobs”, Cengiz, Dube, Lindner, and Zipperer, The Quarterly Journal of Economics, 2019.

“… showed the fall in jobs paying less than the new minimum wage had been fully offset by the jump in new jobs paying just over it.” “also confirmed findings that a rising minimum wage ripples through the organizational chart, helping workers who earn as much as $3 an hour more than the new minimum wage. About 40 percent of its wage benefits go to workers who aren’t directly affected.”

Washington Post summary of “The Effect of Minimum Wages on Low-Wage Jobs”

I didn’t have access to full text of this article, so have not yet assessed the methodology. At the highest level, they conclude no impact on number of low-wage jobs from minimum wage increases, spillover to others at the low end of wage distribution, but some impact on jobs in the ‘tradeable sector’.

Here’s their abstract – with bold sections added by me:

We estimate the effect of minimum wages on low-wage jobs using 138 prominent state-level minimum wage changes between 1979 and 2016 in the United States using a difference-in-differences approach. We first estimate the effect of the minimum wage increase on employment changes by wage bins throughout the hourly wage distribution. We then focus on the bottom part of the wage distribution and compare the number of excess jobs paying at or slightly above the new minimum wage to the missing jobs paying below it to infer the employment effect. We find that the overall number of low-wage jobs remained essentially unchanged over the five years following the increase. At the same time, the direct effect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution. Our estimates by detailed demographic groups show that the lack of job loss is not explained by labor-labor substitution at the bottom of the wage distribution. We also find no evidence of disemployment when we consider higher levels of minimum wages. However, we do find some evidence of reduced employment in tradeable sectors. We also show how decomposing the overall employment effect by wage bins allows a transparent way of assessing the plausibility of estimates.

Other research is noted that shows:

  • Reductions in recidivism
  • Older folk working longer
  • Job hopping falls
  • Benefits not cut
  • Productivity rises
  • Reduced suicides

Given that this is based around a Washington Post article, it can be expected to be somewhat biased, however the reading so far of underlying research does imply a shift in economic/data driven thinking for this area.

There remain questions about the level to which minimum wage should be pushed (my friend asked – “if $15 why not $100”), but I suspect there are likely to be good analyses or certainly reasoning around pegging around X standard deviations below the median, or some such similar.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s