Minimum Wage: The Long Game (Updated)

ECON 101: As the relevant time-horizon increases, so does the elasticity of demand.

Update. Well, as Glenn points out in the comments, we only had to wait a few more days for evidence to emerge against Seattle’s minimum wage.

When Seattle officials voted three years ago to incrementally boost the city’s minimum wage up to $15 an hour, they’d hoped to improve the lives of low-income workers. Yet according to a major new study that could force economists to reassess past research on the issue, the hike has had the opposite effect.

The city is gradually increasing the hourly minimum to $15 over several years. Already, though, some employers have not been able to afford the increased minimums. They’ve cut their payrolls, putting off new hiring, reducing hours or letting their workers go, the study found.

The costs to low-wage workers in Seattle outweighed the benefits by a ratio of three to one, according to the study, conducted by a group of economists at the University of Washington who were commissioned by the city. The study, published as a working paper Monday by the National Bureau of Economic Research, has not yet been peer reviewed.

Yeah, I’m not sure it’s literally true that the paper ‘has not yet been peer reviewed.’ NBER is the most prestigious working paper series in economics, and although I don’t know for sure, I would guess that they do peer review their papers. That at least has been my personal experience with less prestigious working paper series. In any event, NBER does not publish crap, and this study is in fact state of the art.

[W]hile employment overall did not change, that was because employers replaced low-paying jobs with high-paying jobs. The number of workers making over $19 an hour increased abruptly, while the number making less than that amount declined, Vigdor and his colleagues found.

Vigdor said that restaurateurs in Seattle — along with other employers — responded to the minimum wage by hiring more skilled and experienced workers, who might be able to produce more revenue for their firms in the same amount of time.

That hypothesis has worrisome implications for less skilled workers. While there those with more ability might be paid more, junior workers might be losing an opportunity to work their way up. “Basically, what we’re doing is we’re removing the bottom rung of the ladder,” Vigdor said.

This result explains the seeming paradox of why Big Labor devotes enormous resources to lobbying in favor of increasing the minimum wage when unionized workers already earn far more than the minimum. Since wages of union members are not directly constrained by the legal minimum, why should Big Labor be so concerned with raising the wages of others? The answer is that, in accordance with the results of the aforementioned study, a higher minimum wage gives employers the incentive to replace a number of unskilled workers with a smaller number of skilled workers. This increases the demand for skilled workers, increasing their wages and job security, at the expense of unskilled workers.

The minimum wage hurts precisely those people it is supposedly intended to help. That’s because helping the poor is never the real motivation for imposing a minimum wage. That’s just the excuse used to obscure the real–and far less noble–motive.

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4 thoughts on “Minimum Wage: The Long Game (Updated)

  1. It has only been $15 since the beginning of the year. It was phased in, almost like they know substantially raising the price of a major input would have drastic effects but hope someone else will figure out how to deal with the problems they’re creating.

    • Good point; The pro-minimum-wage faction says that raising the min wage is essential and with no downside, but somehow it can only be phased in gradually over years. If raising the wage is all good with no costs, then it should have been raised yesterday.

      I suppose a similar argument (in reverse) applies to the GOP’s approach to ‘repealing’ Obamacare. They claim that Obamacare is destroying the health care system and strangling the economy, and therefore as soon as they get the chance they’re going to…brace yourself…phase out only certain parts of the program by sometime around 2024!

  2. A few days later….

    The idea that an increase on minimum wage leads to a reduction of low-skilled workers reminds me of the Laffer Curve. Both ideas of each spectrum have value but that doesn’t mean the downsides are going to be felt regardless of context.
    What matters is the distinction. How high the minimum wage is and how big of an increase occurs; where exactly on the Laffer Curve we currently are. Republicans rely on the fact that these ideas have value and will in some contexts create detriments that outweigh the benefits to mean that the minimum wage should be eliminated and taxes reduced. Democrats take the fact that the negative consequences are only likely in certain contexts to mean that we should raise the minimum wage and increase taxes.

    • There could be a kind of Laffer Curve for the minimum wage, yes, depending on what you’re measuring on the vertical axis. If the vertical axis is ‘net benefit to low-skilled workers,’ then there might exist an above-market wage floor that maximizes their net benefit. If this wage exists, however, it would seem to be less than $15, since your linked study of the $15 wage found that costs to workers outweighed the benefits.

      In any event, that analysis considers only workers, but there are other parties involved who matter including employers and consumers. If we aggregate the net effect of the wage on everyone to obtain what economists call the ‘social surplus,’ then the optimal wage that maximizes social surplus is the free market wage, or something fairly close to it.

      The upshot is that, even if the minimum wage could be set at a level that creates net benefit for workers (and such a wage at the very least would have to be less than $15 if it exists at all) there still must always be some more efficient way to help workers such as job training, reducing taxes and regulations, or the earned income tax credit.

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