Economist and minimum wages

From an article on Brazil:

How much of the credit does Lula [the current president] deserve for all this [growth]? ... He also raised the minimum wage by two-and-a-half times since 2003, taking its purchasing power to its highest level since 1979. This has not destroyed jobs: some 13m new jobs in the formal (ie, legally registered) economy have been created since 2003."

Oh dear! The implicit estimator here is the before-after estimator or, if you are a more expensive consultant, the "interrupted time series design." It requires, to produce a consistent estimate of a causal effect, that absent the change in the minimum wage, the change in the number of jobs would have been zero.

Given that Brazil increased its minimum wage in the midst of a boom, this assumption seems highly unlikely. Thus, the correct comparison would be between the number of jobs created in a boom with minimum wage increases and the number created in a boom without minimum wage increases. Both will be large positive numbers. The fact that the first is a large positive number is uninformative about the sign of the difference.

How big the difference would be depends on many factors, including how binding it was to begin with, something the Economist piece is silent about.

One expects this sort of basic error in counterfactual reasoning from the NYT or the WaPo, not the Economist.

Minimum wage humor

Hat tip: Dan Black

Minimum wages

Here is yesterday's NYT editorial on the minimum wage. Yesterday, as in 2009, not 1937.

You might think that a newspaper that poses as the newspaper "of record" would assign someone to write an editorial about the minimum wage who had (a) at some point encountered an economics class, (b) at some point had learned about the policy environment relevant to low-wage workers and (c) at some point actually read the literature around the minimum wage. I guess those folks were busy doing something else yesterday and so someone else was assigned to phone it in.

You would never know from the NYT editorial that:

1) The labor demand curve slopes down. I've posted before on the issues with the evidence on minimum wages, and reasonable people can certainly differ on the size of the short-run and long-run elasticities, but on the sign I think we are pretty clear.

2) The minimum wage is incredibly poorly targeted relative to other policy instruments designed to accomplish the same or similar ends. Put differently, the vast majority of minimum wage workers are not the primary earners in their households.

3) The EITC means that many minimum wage workers (and other low wage workers more generally) have incomes substantially above what one might think by just multiplying some number of hours by the minimum wage. More broadly, it is important to discuss the minimum wage in a broader policy context rather than in isolation.

4) The minimum wage serves to raise the relative price of non-union labor and of labor in low-wage parts of the country (i.e. the south). This fact has much to do with the patterns of political support for minimum wage increases.

5) There is reasonably good evidence that raising the minimum wage increases high school dropout, just as the simplest possible economic model would predict. You do not increase the accumulation of human capital by reducing the return to accumulating it.

6) Wages and product prices may be related through some mysterious mechanism.

So, to sum up, the NYT editorial is ignorant of the relevant literature, ignorant of the relevant policy environment and, as a result, misleading on the facts.

Remind me again why people take the NYT seriously?

Of course, the NYT piece is not quite as a off-planet as this bit from Znet where "the spirit of resistance lives." Apparently today they are resisting reading the relevant literature.

Comradely hat tip: portside.org

Soft drinks in Danish restaurants

I know some readers have been sitting on the edge of their seats for an explanation of why the staff fill soft drinks, rather than the customers, at Danish fast food restaurants (or at least in my sample of one McDonald's in Aarhus).

Some candidates that turn out to be wrong:

1) Denmark does not have a low minimum wage as part of its "flexicurity" labor market scheme.

2) Denmark did not pass a law banning restaurants from having customers fill their own soft drinks, much as some US states do actually have laws that prevent motorists from pumping their own gas, so as to "create jobs".

The explanation suggested to me by frequent-hat-tip-recipient Lars Skipper, which seems quite plausible, is instead that Denmark has a very high tax on sugar (readers will be hitting their heads and shouting "of course" at this point) and so it is too costly to let customers take as much of sugary soft drinks as they want to.

Minimum wage

Economist David Neumark has a nice piece in the WSJ today regarding the upcoming increase in the minimum wage. David (a democrat as far as I know, though it should not matter) has done a long series of valuable papers (and apparently now a book) on both the minimum wage and its awkward cousin, the so-called "living wage".

The literature on the minimum wage is far from perfect, largely because the available variation is not perfect. Using variation in the national minimum is pretty hopeless as its effects get swamped in the time series by the business cycle and many other policies. Using variation in state minimum wages is complicated by the fact that the states that raise their minimums are not a random sample of states and that the timing of state level minimum wages increases tends to coincide with booms, because the economic, and thus political costs, are lower then (though clever Michigan bucked this pattern with its recent increase). Further complicating things is that many of the likely effects of a minimum wage do not appear immediately, but rather over time as employers substitute capital or foreign labor for domestic low skill workers (as when you fill your own drink at McDonald's or Chipotle). Expectations also play a role here, so that minimum wage increases can have not only lagged effects but also anticipatory effects. It all adds up to a pretty rough road for empirical research, which is presumably part of the reason for some of the conflicting findings in the literature.

My read is that minimum wages persist because of an unhappy coincidence of public ignorance of basic economics (in this case, as in so many, a failure to see the indirect effects of a policy along with its direct effect as well as ignorace of its poor targeting), the interests of unionized workers, who want to raise the relative price of their non-unionized competition, and the interests of high wage / high price states that want to raise the relative price of labor in low wage / low price states.

This is yet one more case of evidence-based policy; in this case the policy is the opposite of what the evidence suggests it should be. It is also another opportunity for some change one might believe in. I'm not holding my breath, despite all the fine economists in the administration.

Great moments in state government

From an article in the Michigan Daily, some evidence that Jack Finn, a senior administrator at the Michigan Department of Labor and Economic Growth does not know that demand curves slope down. This may not be irrelevant to Michigan's highest-in-the-nation unemployment rate.

[As an aside: most states raise the minimum wage when times are good. Not Michigan.]

Note carefully that Jack did not say that most estimates of the short-run elasticity of youth employment with respect to the minimum wage are low, which would be defensible though perhaps not completely relevant to policy, which should also be concerned with the long run effects such as those that operate via capital-labor substitution. He is plainly and simply economically illiterate.

Odd, too, that the Michigan Daily did not bother to actually talk to an economist about this, but only to a bureaucrat and a student. Here is the relevant excerpt from the Daily:

Though less opportunity for new employment after a wage increase was a concern for some Michigan lawmakers, Jack Finn, director of the Wage & Hour division for the Michigan Department of Labor and Economic Growth, said a change in the minimum wage won't decrease the number of available jobs.

"It's almost like an urban legend that a minimum-wage increase leads to a loss of jobs," Finn said. "It's just not factual."