Thursday, January 16, 2014

Economists for a higher minimum wage

This post is about why I will not be adding my name to the current petition of economists in favor of increasing the US minimum wage, which you can view (and add your name to, if you are a Ph.D. economist) here.

The current list features some heavy hitters (e.g. Larry Summers and Larry Katz), some usual suspects (e.g. Robert Reich) and some (to me anyway) surprises (e.g. Melissa Kearney and Angus Deaton).

Here is the petition's survey of the state of play of the empirical research:
In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.
Oddly, for a petition from (mostly) academic economists, no citations to the literature are provided to support these claims.

Even more oddly, the research summary fails to distinguish between employment effects in the short-run, which can be estimated using compelling partial equilibrium identification strategies, and employment effects in the long-run, which generally cannot. Unfortunately, the compelling evidence we have about low short-run employment effects is largely irrelevant to policy, which should concern itself with long-run effects. My favorite minimum wage paper shows that small short-run effects are quite consistent with large long-run effects.

In addition to concerns that the short-run effects may differ substantially from the longer run effects due to delayed capital-labor substitution and other factors, I have three other concerns about the minimum wage:

1. It is poorly targeted relative to alternative policies such as the Earned Income Tax Credit (EITC). And, yes, I am familiar with the argument that the minimum wage and the EITC are complements; what is thin on the ground, so far as I am aware, is evidence of the empirical importance of this argument.

2. As pointed out recently by Greg Mankiw, it distributes the costs of the increased minimum wage in a less attractive way than alternative policies such as the EITC, which implicitly come out of general tax revenue.

3. Most importantly, raising the minimum wage fails to address the underlying issue, which is that many workers do not bring very much in the way of skills to the labor market. Rather than having a discussion about raising the minimum wage, we should be having a discussion about how to decrease the number of minimum wage workers by increasing skills at the low-skill end of the labor market. This would, of course, mean challenging important interest groups. It is also a bigger challenge more broadly because it is less obvious how to do it. But that is the discussion we should be having because that is the one that will really help the poor in the long run, in contrast to a policy that feels good in the short run but only speeds the pace of capital-labor substitution in the long run.

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