US economy can take $15 wage floor in its stride

  • July 11, 2019
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The minimum wage debate rages on in the US, where the federal wage floor has not been uprated for a decade. Democrats in the House of Representatives have introduced a legislation fix that, if passed, would raise the federal minimum wage to $15 an hour by 2024.

Dutifully, the Congressional Budget Office has produced a report on what the effects might be. As the chart below shows, the reform would lift the wage floor higher relative to the bottom of the current income distribution than it has been in the past half-century.

The highlighted results are instructive but unsurprising. A $15 federal minimum wage would boost the wages of 27m workers, of whom 17m would otherwise make less than $15. The remaining 10m are those who would have made more than the new minimum wage but whose pay is boosted in a spillover effect to higher earners. About 1.3m workers would come out of poverty, but the same number, in the central estimation, would end up without a job.

Some of the most interesting results are those you have to dig through the report to notice. For example, even in the scenario with the biggest change, almost half of the jobs lost (600,000 out of 1.3m) are those of teenagers, and two-thirds are part-time jobs (fewer than 35 hours a week). Also notable is the strong redistributive effect of a higher minimum wage. A $15 US-wide minimum wage would boost the income of a family below the poverty threshold by $600 (or more than 5 per cent), while family incomes more than six times the threshold would drop by $700 on average (or 0.3 per cent). But the report declines to examine the many other benefits wage floors have been shown to have, such as lower rates of suicide and criminal recidivism, more productive workers, lower job churn encouraging more investment in job-specific skills and greater job participation among the elderly.

All of this sounds like rather good news. Even the estimated job losses — less than 1 per cent of the US labour force — are modest in relation to the clear gains. But many economists may worry that even this is too conservative. One wonders whether the CBO research has fully followed the centre of gravity of the economics profession in its shift — started by the minimum wage work of the late, great Alan Krueger — towards the view that minimum wage increases have few, if any, negative employment effects, which empirical evidence now overwhelmingly supports. Indeed an academic assessment of the same $15 proposal finds no negative effects on employment.

The main explanation why minimum wage rises need not harm job opportunities has to do with the power of employers to keep wages well below the value of employees’ work — for example, because the local labour market for certain kinds of jobs is so concentrated that workers have no choice where to work. When a minimum wage mandates employers to pay more than the value a worker produces, it is natural to expect them not to hire such a worker at all. But this motivation disappears when unequal bargaining power has left market wages below workers’ level of productivity. In such a situation, employers will still benefit from employing people, but a bigger part of that benefit will go to the worker instead, depending on how high the legal wage floor is.

An implication of this is that minimum wages will have different effects in different places, depending on the local productivity level and balance of power between employers and workers. Economists Ioana Marinescu, Bledi Taska and Till Von Wachter prove precisely this in a new study of county-by-county US labour markets for stock clerks, retail salespeople and cashiers. In counties where the employers of such workers are most competitive (least concentrated), wage floor increases reduce their number, whereas in places where few employers offer most of the jobs and hence have a lot of market power, higher wage floors go with more employment.

Here is one conclusion for policymakers (from one of the authors’ Twitter thread that usefully summarises the results): “minimum wage effects can vary substantially with employer market power . . . This lends support to a flexible minimum wage policy that adapts to local conditions.”

But note that this argument does not justify the claim that minimum wage rises should be less aggressive in places with lower wages. If anything, it is the other way round: if low wages reflect greater employer market power, these areas can take more aggressive minimum wage policy.

There may be a point where raising legal wage floors starts to hurt employment. But the US, at least, is far from that point. And that, paradoxically, may be more true in the parts of the country where wages are lower and a higher minimum wage may have more “bite”. Those are good reasons to push ahead.

Other readables

  • Martin Wolf writes on the 75th anniversary of the Bretton Woods conference.
  • Vox reports on how some researchers and universities are challenging the pricing model of academic publishers.
  • It turns out the methodology behind research “proving” that fiscal austerity could lead to growth produces estimates that are biased in favour of that conclusion.

Numbers news

  • In an FT op-ed, the Peterson Institute’s William Cline makes an extremely important observation. The story we often tell about the stagnation of middle-class incomes in inflation-adjusted terms over recent decades hinges precariously on the way we choose to measure inflation. If you use the (better) Personal Consumption Expenditures price index — the one used for the inflation measure targeted by the Federal Reserve — instead of the (more flawed) Consumer Price Index, the picture looks quite different. Free Lunch discussed this a few years ago, looking at the real average hourly wage for US workers over the decades. The graph below shows that average earnings look a lot better when deflated by the PCE rather than the CPI, and above all that wage stagnation was largely a phenomenon of the 1970s and 1980s.

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