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The Minimum Wage "Experiments"

The Minimum Wage "Experiments"
Profile photo of Robert P. Murphy

Noah Smith is excited about the recent minimum wage decisions in certain U.S. cities:fastfood

This is why I’m so happy about the $15 minimum wage that is being phased in in cities such as Los Angeles, Seattle, and San Francisco. We’re about to find out if minimum wage laws really have big negative effects on the economy. 

In theory, a higher minimum wage should cause increased unemployment. Imagine raising the minimum wage to $25,000 an hour. No employer could afford to pay that, so unemployment would skyrocket, and the only jobs left would be under the table. 

But that extreme example doesn’t tell us much about the real world, where minimum wage changes are usually only a few dollars. 

There is a huge literature on the impact of minimum wages on employment. Many studies show very little effect, but there is a substantial minority of studies that show the opposite. Though the general weight of evidence is on the side of minimum wage increases not being so bad, it isn’t an overwhelming consensus.

If I were making minimum wage and lived in Los Angeles, I would be very surprised to hear Noah Smith write like this, if (say) I had just been reading Paul Krugman who assured everyone that things would be fine. It’s a bit weird to now hear how excited Noah Smith is to see how many of the guinea pigs can’t find work. (And the brazenness with which L.A. labor unions want to be exempt from the new rule would really take me aback.)

In any event, Noah Smith is being naive if he thinks that these experiments will do anything. Bryan Caplan explains why:

If I were sympathetic to the minimum wage, I would say, “The worst the experiments will show is that high minimum wages hurt employment in individual cities.  That wouldn’t be too surprising, because it’s easy for firms and workers to move in and out of cities.  The experiments will shed little light on state-level minimum wages, and essentially no light on federal minimum wages.  Identificationists like Noah are looking for their keys under the streetlight because it’s brighter there.”

Are these bad arguments?  They are if you only embrace them after you incorrectly predict no change in employment.  But minimum wage supporters can and should precommit to them today.

Caplan is right: Economists who favored these hikes will always be able to come up with something, ex post, to explain what happened. Look at how Keynesians dealt with the Obama stimulus debacle, when U.S. unemployment was higher with the stimulus than the Romer-Bernstein report warned it would be without the stimulus: The Keynesians have incredibly spun the episode as confirmation that deficits create jobs.

Indeed, look at how Noah Smith himself is contributing to the layperson’s confusion. Here’s Smith later in his article: “In the end, as in medicine, a randomly controlled trial is the best way to know whether a treatment works. The early evidence said that minimum wages are a medicine without too many harmful side effects, so now we’re proceeding with a new round of trials.”

No no no, that’s very misleading (no doubt unintentionally so). The early evidence said that minimum wage laws reduce employment growth–just as the textbooks and intro classes taught students for decades.

Then, there was a wave of studies in the 1990s that challenged this orthodoxy, including the famous Card-Krueger paper in 1994. Furthermore, these new studies also found that regions with higher minimum wages tended to have lower employment growth. But if you included a bunch of other factors, then the effects of the minimum wage variable lost independent explanatory power. It seemed like maybe it was just a coincidence that states that had slower employment growth (for various reasons) also tended to have legislatures that passed more aggressive minimum wage hikes.

Also, all (to my knowledge) of the empirical studies finding that minimum wage hikes have no ill effect on employment growth are talking about a modest hike, not the ridiculous hikes that are being now implemented. (For more on the scholarly debate, see my EconLib article.)

Finally, let me clear up one loose end: Caplan said that minimum wage supporters “can and should precommit” to the excuse that a minimum wage hike could hurt employment growth in individual cities, but that that hardly affects the case for a whole state let alone the entire country. Although Caplan is right that they should get this argument out on the table before the evidence comes in, of course the loudest champions of minimum wage hikes aren’t going to do that. They have been assuring working Americans that the claims of layoffs are simply lies of Big Business and their paid propagandists. You can’t show nuance in a situation like this, or concede that your opponents might be right at a city level. Once you start admitting unintended consequences–once it’s no longer a case of Good Workers vs. Evil Bosses–the political battle is over.

  • Aaron Robert

    uhg.

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Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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