Ryan Silverman—$15 Federal Minimum Wage: Positive Intentions, Negative Results

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I am pleased to host another student guest post, this time by Ryan Silverman. This is the 10th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

A significantly higher minimum wage in America will damage small businesses, reduce the incentive to invest in human capital, and make it harder to improve living standards.

The current federal minimum wage is $7.25 per hour. However, 29 states and the District of Columbia have set minimum wages above the federal minimum wage.  Kicking off 2016, 14 states began the new year by raising their minimum wage. The nation is trending towards higher minimum wages under the rationale that all workers deserve livable wages. Many activists are fighting to raise minimum wage to $15 an hour, more than twice the current federal minimum wage.  

Minimum wage jobs typically require little to no education, such as dishwashers and cashiers. The supply of minimum wage workers tends to be highly elastic, making each worker easily replaceable. It turns out that over half of minimum wage workers are between ages 16-24, many of whom are not yet financially independent.

It is clear that minimum wage jobs are not intended for those who are in dire need of funds. Minimum wage jobs are intended to provide supplemental income in return for simple labor. Higher wages should serve as an incentive for laborers to invest in various forms of human capital to make themselves more productive in the workforce. If every American could live a comfortable life providing menial labor, and skip the rigors and cost of higher education, our productivity growth as a country would slow down, if not reverse itself.

Many small businesses have already factored the current federal minimum wage into their expenses and would be unable to operate if their labor costs doubled. Any increase in the failure of small businesses would further widen the gap between upper and middle classes. Big businesses will take over the market share of struggling small businesses, creating less competition and more monopolistic behavior. Too many people act as if the set of jobs available is fixed. In the short run the set of jobs available may indeed be close to fixed, and the minimum wage may not seem to affect jobs much at all, but in the long run, the set of jobs available far from fixed. A higher wage will drive many jobs out of existence over the course of ten to twenty years. 

Even for the poor that a minimum wage is intended to help, a substantial fraction of the benefits of a higher wage for those who manage to keep their jobs will be eaten up by the higher prices of goods produced in part by other minimum wage workers. For example, many people on limited incomes shop at Walmart. If Walmart has to pay higher wages, the customers at Walmart, who are themselves struggling, will have to pay higher prices.  

In addition to destroying jobs over the course of ten to twenty years, a higher minimum wage might tempt many people to queue up for jobs with a high minimum wage instead of getting more training. Forgoing training is not only a limitation on the life of the individual, it also deprives society of skilled work that it needs. For example, Emergency Medical Transport professionals do important work. Their services are pivotal to saving lives and require much more education and training than a typical minimum wage worker. If the minimum wage increased while the wage of Emergency Medical Transport professionals stayed the same, there would be less incentive to gain those skills. On the other hand, if Emergency Medical Transport professional wages go up, then these crucial services become more expensive. 

One must also consider the effect on the natural unemployment rate if the minimum wage increases to $15. Fewer workers will have a marginal product high enough to be employed, and more will waste time looking for jobs in scarce supply. The Congressional Budget Office predicts that if the federal minimum wage is raised to $10.10, as many as a million workers could lose their jobs. 

In the long run, I predict a further wealth disparity caused by the ability of large companies and conglomerates to better weather the minimum wage hike than smaller businesses. Small businesses have substantially less operating capital to support their largest expenses of employee wages and benefits. Small businesses will encounter the most difficulties staying afloat with higher minimum wages, particularly in difficult economic times.

Raising the minimum wage might seem to many like, at worst, a relatively harmless political gesture. But for those whose marginal product is below the minimum wage, it can be a nightmare, making it hard for them to find a job. Wouldn’t it be better to let each person choose his or her own minimum wage? But of course that is exactly what happens when there is no minimum wage at all. Next best would be to choose a minimum wage carefully for each demographic group, to make sure it wasn’t too high relative to that group’s marginal product. But a uniform minimum wage is certain to shut some groups out of the labor force–those who struggle the most at finding jobs to begin with. It may be that some of those groups are made up of people who don’t desperately need a job. But if they don’t desperately need a job, they also don’t need an increase in the minimum wage either. And if they do desperately need a job, a higher minimum wage will make it harder to find one. 

The Economist—Destination Unknown: Large Increases in the Minimum Wage Could Have Severe Long-Term Effects →

More than 31 months after “Isaac Sorkin: Don’t Be Too Reassured by Small Short-Run Effects of the Minimum Wage” appeared on this blog, the July 25, 2015 issue of The Economist has caught on to the importance of Isaac Sorkin’s research on the minimum wage. They are similarly late in noticing Jonathan Meer and Jeremy West’s research that appeared in the post “Jonathan Meer and Jeremy West: Effects of the Minimum Wage on Employment Dynamics” and still do not address the critique of that research in “Arindrajit Dube: Jonathan Meer and Jeremy West’s Negative Correlation for Minimum Wages and Employment Growth is a Statistical Artifact.”

The Economist article has a nice pair of graphs showing how much much lower US minimum wages are compared to income or median pay than in Europe (However, the US minimum wage is at a very high level relative to median pay and income in Puerto Rico, with disastrous effects.) The Economist also gives a nice report on Isaac’s latest research with Daniel Aaronson and Eric French: 

In a second paper, written with Daniel Aaronson of the Federal Reserve Bank of Chicago and Eric French of University College London, Mr Sorkin goes further, offering empirical evidence that higher minimum wages nudge firms away from people and towards machines. The authors look at the type of restaurants that close down and start up after a minimum-wage rise. An increase in the minimum wage seems to push some restaurants out of business. The eateries that replace them are more likely to be chains, which are more reliant on machines (and therefore offer fewer jobs) than the independent outlets they replace. This effect has not been picked up before because the restaurants which continue to operate do not change their employment levels, so the jobs total does not shift much in the short run.

It always seemed too good to be true when David Card and Alan Krueger claimed that an increase in the minimum wage left employment unchanged or even increased it a little in New Jersey restaurants. There is more and more reason to be skeptical of the reassurance that gave to minimum wage advocates. 

Update August 19: Isaac Sorkin points out that Jonathan Meer and Jeremy West have answered Arindrajit Dube and coauthors’ objections in a cogent supplemental appendix that can be found here.  

Smoking Out the Essence of Minimum Wage Effects

I want to try to smoke out what is problematic about the minimum wage. A minimum wage is saying a firm that wants to make a job offer and a worker who wants to accept that offer are not allowed to make a deal.

1. To clarify things, an interesting variant of a minimum wage policy that would avoid this would be to say that the minimum wage applies only to existing jobs, not to new hires. This limits the minimum wage increase to the already existing employment relationships that I think are the foundation of people’s intuition that the minimum wage is a good thing.

2. Going a little further, to avoid distortion, it might be necessary to allow a firm and a worker to agree to a contract that opts out of any possible higher minimum wage in the future. 

To make this policy more realistic, almost all distortion can probably be avoided even if there is a time limit of a year or two from the moment of hiring on how long a contract can opt out of the minimum wage.

3. Going the other direction, it is interesting to consider a minimum wage that applied only to new hires and not to existing employment relationships. I think few people would be in favor of such a minimum wage. It is interesting to consider why. 

Summing Up: Maybe there is a better way to lay things out: the objective is to separate out analytically the effect of the minimum wage on new hires from the effect of the minimum wage on existing workers.

Note: One can argue that telling someone shehe may not take a job a firm wants to give herhim will benefit other workers who do get jobs, but if that is the argument for a minimum wage, I would like to see it stated that baldly: “You must sacrifice and not take that job so that other workers can be paid more.”

Why Economic Theory Predicts a Chronic Shortage of Nurses

The word “shortage” says more than you might realize. A shortage is when there is too little of something to clear the market at the going price. Thus, a shortage is a sign that the price is too low to clear the market. Usually, this is a temporary situation: the price adjusts upward and people quit complaining about a shortage and start complaining about high prices instead.  

There are two general situations in which a price might be too low to clear the market for a long period of time. One case is when the government imposes a price ceiling. For example, rent control leads over time to a chronic shortage of apartments.

The other general situation in which a price is chronically too low to clear the market is when there is only one big buyer or only a few big buyers in the relevant market. Having only one buyer is called monopsony. Having only a few buyers is called oligopsony. 

In any local commuting area, there are typically only a few hospitals, that account for a large share of all nursing employment–particularly for the higher-skill, higher-paid nursing jobs. Because each hospital is big enough to affect the wage in the local labor market, it worries about driving up the wage of nurses by hiring too many.  That is, the cost of the last nurse a hospital hires is not just the wage of that one nurse, but also the cost of the rise in the wage to all the other nurses it employs due to that extra hiring.

In other words, the hospital might be willing to pay a little extra to get one more nurse who is a little more reluctant to come back into the labor force, say, except that paying that higher wage to the one nurse would force it to pay more to all of its other nurses. 

Why doesn’t the same logic cause a doctor shortage? It is because doctors operate in a national labor market. Doctors make enough money that it is worthwhile for them to consider moving to other cities at some distance in order to take advantage of a modest percentage difference in pay. By contrast, nurses are often secondary earners in their families and so tied to one commuting area, or even when they are free agents,they make little enough money that the cost of moving to a whole new region to make a few percent more doesn’t seem very attractive.

Someone might object to my account of where chronic nursing shortages come from by saying it is a problem of too few spots available in programs that train nurses. Too few spots in programs training nurses would indeed reduce the supply of nurses, but should lead to complaints about nurses being expensive rather than complaints about a shortage of nurses. Yet for some reason, there are a lot more complaints about nurse “shortages” than about how expensive nurses are.  

The blue line is the frequency of the phrase “nurse shortage” in ngram viewer. The red line is the frequency of the phrase “expensive nurses." 

The blue line is the frequency of the phrase “nurse shortage” in ngram viewer. The red line is the frequency of the phrase “expensive nurses." 

David Byrne: The Power of Democratizing Making Music and Art

There are pleasures in producing as well as in consuming. This is true for many things–indeed, this blog’s existence depends on it. David Byrne illustrates this fact beautifully for art and music in his book How Music Works (pages 267, 291 and 296):

The act of making music, clothes, art, or even food has a very different, and possibly more beneficial effect on us than simply consuming these things. And yet for a very long time, the attitude of the state toward teaching and funding the arts has been in direct opposition to fostering creativity among the general population. It can often seem that those in power don’t want us to enjoy making things for ourselves–they’d prefer to establish a cultural hierarchy that devalues our amateur efforts and encourages consumption rather than creation. 

In Salavador, Brazil, musician Carlinhos Brown established several music and culture centers in formerly dangerous neighborhoods. In Candeal, where Brown was born, local kids were encouraged to join drum groups, sing, and compose songs and stage performances in homemade costumes.

The kids, energized by these activities, began to turn away from dealing drugs. Being malandros was no longer their only life option–being musicians and playing together in a group looked like more fun and was more satisfying. Little by little, the crime rate dropped in those neighborhoods; the hope returned. And some great music was made, too. 

A similar thing took place in the Vigario Geral favela located near the airport in Rio. It had been the scene of a massacre in which a police helicopter opened fire and killed scores of kids during a drug raid. Life in that favela was about as dead end as you could get. A cultural center eventually opened under the direction of Jose Junior and, possibly inspired by Brown’s example, they began to encourage the local kids to stage musical events, some of which dramatized the tragedy that they were still recovering from. The group AfroReggae emerged out of this effort, and, as with the Brown projects in Salvador, life in the favela improved. The dealers left; their young recruits were all making music. That, to me, is the power of music–of making music. Music can permanently change people’s lives in ways that go far beyond being emotionally or intellectually moved by a specific composition…. Music is indeed a moral force, but mostly when it is a part of the warp and woof of an entire community. 

Roger Graef, who has written about the effectiveness of arts programs in UK prisons, believes that violence, like art, is actually a form of expression. Prisons, he says, are therefore ideal arenas for art creation and expression. Art can serve as an outlet for the violent feelings of inmates in a way that does not harm others, and that actually enhances their lives. Making art, Graef writes, “can break the cycle of violence and fear." 

He claims that the remedy for violence is an agency that will defeat feelings of impotence. Historically, religion has successfully done this, and the rise of fundamentalism might be viewed as a reaction to increasing feelings of alienation and inconsequentiality around the world. Making music might act as an antidote to those feelings too, as those cultural and music centers in the Brazilian favelas attest. In those Uk prisons, the quality of the work is beside the point, as it was in Brazil. And, unlike religions, no one has ever gone to war over music. 

However, grant-giving organizations often take the opposite view. Most arts grants focus on the work, rather than on the process that the work comes out of. The product seems to be more important than the effect its production process has. Sadly, Graef learned that it is hard for many of the inmates he worked with to continue making art outside of prison. They find the professional art world elitist and its "posh buildings” intimidating. Without a support system, and with their work being judged by criteria that are foreign to them, they lose the outlet for frustration that they had discovered.

Arindrajit Dube: Jonathan Meer and Jeremy West's Negative Correlation for Minimum Wages and Employment Growth is a Statistical Artifact →

Back in February, I did a post “Jonathan Meer and Jeremy West: Effects of the Minimum Wage on Employment Dynamics” sympathetic to Jonathan and Jeremy’s claims. Arindrajit Dube has now seriously questioned those findings, writing that the lower employment growth is in manufacturing, where the minimum wage is not very relevant, while it is hard to find employment effects in retail, accomodation and food services, where one would expect the minimum wage to matter if it matters much anywhere. 

One interesting possibility is that (a) at US levels minimum wages do not have very big economic effects, but (b) the urge to raise minimum wages is positively correlated with other policy views that are more harmful to employment growth.  

Quartz #6—>Obama Could Really Help the US Economy by Pushing for More Legal Immigration

Link to the Column on Quartz

Here is the full text of my 6th Quartz column, “Second Act: Obama could really help the US economy by pushing for more legal immigration,” now brought home to supplysideliberal.com. This column was first published on November 7, 2012. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© November 7, 2012: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

It’s time for US President Barack Obama to think big. Syria’s civil war and Iran’s nuclear capability will continue to give the president plenty of opportunities to make his mark on history in foreign affairs. But the hope of any further major achievement in domestic policy will have to overcome two hard realities: Republican control of the House of Representatives and aging Americans’ effect on the federal budget.

What the president needs is some form of political jujitsu that also solves the country’s long-term budget problems. Meanwhile, one of the biggest messages for Republicans from this election is that their electoral prospects hinge on bringing a larger fraction of Hispanics into the GOP fold. So immigration is an issue that puts them in a box: either they play ball, or they get tarred further as the anti-immigration party, which is politically deadly.

Now is the perfect time for the president to tackle immigration reform. He already has put immigration reform on the agenda, but there is a danger that he will think too small and miss the potential of the right kind of immigration reform to strengthen the economy and shore up the long-run government budget. But the key to the economic and budgetary magic of immigration reform is to dramatically increase the level of legal immigration allowed each year.

Let me be concrete by suggesting an increase of 1 million legal immigrants per year for the next 30 years. If the immigration reform is designed specifically to help the economy, here is what it can do.

First, it can work wonders for the long-run solvency of Social Security and Medicare by increasing the number of young people paying relative to older people receiving benefits.

Second, it can bring in large numbers of highly educated and highly skilled immigrants who can keep the United States at the cutting edge of technical progress.

Third, it keeps America a melting pot while giving it a competitive advantage in the global economy.

Fourth, in general, a group’s wages are raised by increasing the number of workers who are different from that group.

Thus, bringing in immigrants at the bottom and the top of the skill distribution will help the wages of those in the middle of the skill distribution—the middle class that the president promised to help. Additional immigration may cause a problem for native-born Americans who don’t complete high school, but the kind of education reform that will help solve that problem is already one of the president’s strong suits and something strongly supported by Republicans. Finally, since real-estate markets are forward-looking, a commitment to a large increase in legal immigration over the next 30 years would help the economy even in the short run by raising property values, so that fewer homeowners would be underwater, meaning they owe more than their homes are worth.

Done right, and done in a big way, the economic benefits of increased legal immigration are compelling. In the blogosphere, Adam Ozimek and Noah Smith have been some of the most forceful advocates. And on my own blog, I have stressed the moral case for increased legal immigration. (See my post “You Didn’t Build That: America Edition” and its follow-up.) And politically, increased legal immigration designed with the economics in mind is a wedge issue that separates the pro-business part of the Republican coalition from the culturally conservative part of that coalition.

An increase in legal immigration doesn’t solve the problem of illegal immigrants already in this country, but it will ultimately make that issue so much easier to deal with that the issue of illegal immigrants could be safely deferred, if political necessity demands (as it might, given the strong positions to which many Republicans have committed themselves against illegal immigration).

For the sake of our nation, second-term presidents—who no longer face a reelection battle—should be thinking about their place in history. Most Americans today have a positive view of the legal immigration we have had in the past since it’s how most of us got here. On the domestic front, the president has very little room to maneuver. Changing our 21st century approach to immigration is one arena where a bold move can put President Obama forever in the top tier of American presidents who have laid the foundation of American greatness.

Holman Jenkins on the Role of Organized Labor in Blocking Policy Initiatives in the Democratic Party

Mancur Olson, an economist who studied The Rise and Decline of Nations

Mancur Olson, an economist who studied The Rise and Decline of Nations

Last Saturday, Holman Jenkins had a very interesting op/ed in the Wall Street Journal: “Hey Mitt, Voters Aren’t the Obstacle.” What is the obstacle in Holman’s view? The political influence of organized labor.  The theory Holman bases his analysis on is from the brilliant economist Mancur Olson, who focused on the forces that change institutions over time. Holman:

Mancur Olson, the late and admired social thinker, described the lobbying incentives created by policies that concentrate benefits on the few and disperse the costs to the many. Recipients of federal entitlements aren’t highly motivated to oppose the kind of long-term reforms actually required by our fiscal dilemma. Organized labor is.

I encountered Mancur Olson through his book The Rise and Decline of Nations. Here is wikipedia’s summary of The Rise and Decline of Nations in its article on Mancur Olson:  

In 1982, [Mancur Olson] expanded the scope of his earlier work in an attempt to explain The Rise and Decline of Nations. The idea is that small distributional coalitions tend to form over time in countries. Groups like cotton-farmers, steel-producers, and labor unions will have the incentives to form lobby groups and influence policies in their favor. These policies will tend to be protectionist and anti-technology, and will therefore hurt economic growth; but since the benefits of these policies are selective incentives concentrated amongst the few coalitions members, while the costs are diffused throughout the whole population, the “Logic” dictates that there will be little public resistance to them. Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline. 

The most interesting thing in Holman’s piece is his list of bipartisan and Democratic initiatives that were thwarted by union lobbying. I have added bullets and combined three different quotation blocks here, but the words are Holman’s:

  • When a flurry of bipartisan health-insurance proposals failed in the Nixon and Ford administrations, including a stillborn Kennedy-Nixon compromise and 1974’s promising Long-Ribicoff bill, all were defeated because labor rejected anything that wasn’t single-payer. (Ted Kennedy later called it his greatest legislative regret.)
  • When liberals like Rep. Jerrold Nadler proposed investing the 1990s Social Security surpluses in the stock market so the money wouldn’t be squandered on unrelated federal spending, labor killed the idea.
  • When Dick Gephardt, Tom Daschle and Rick Santorum voiced support for Social Security supplemental accounts, and when President Clinton said a bipartisan reform would be his No. 1 priority in 1999, labor snuffed the burgeoning consensus.
  • When Democrats gathered to nominate Al Gore in 2000, public-employee unions contributed a record number of delegates—at least 20% of the total. One of labor’s biggest aims, according to a lobbyist for the union-backed Fund for Assuring an Independent Retirement, was throwing cold water on any Democratic enthusiasm for Social Security and Medicare reform.
  • Think uninsured voters had any hand in designing ObamaCare? ObamaCare was largely designed by organized labor. Labor beat back attempts to curb the regressive tax subsidy for employer-provided insurance. Labor plumped for the incentives that will soon cause many employers to shift their health-care costs to taxpayers.
  • [Michelle Rhee, a Democrat] was the break-the-crockery D.C. schools chancellor, whose mission came to an end when Mayor Adrian Fenty was booted by a local electorate straight out of the latest Romney gaffe. To put it bluntly, voters in D.C. sided with the teachers union that Ms. Rhee was fighting over the students she was trying to help.

Holman summarizes as follows:

We don’t dismiss the power of AARP, but organized labor dominates the Democratic Party on Capitol Hill. Organized labor has been the force, decade after decade, carefully tending the creation of the many liabilities and excesses that now threaten the Republic.

Let me say this on my own behalf. No one should blithely assume that unions will support liberal policies, if by liberal policies one means policies to help the poor and the suffering. Most unions are middle-class organizations that in their political activities are ready and willing to sacrifice the interests of the poor to benefit their members and their leaders. (Here I am distinguishing the political activities of unions from the wage-and-benefit-raising and worker-voice activities of unions that I discuss in my post “Adam Ozimek on Worker Voice.”)