By Diana Furchtgott-Roth
Friday, July 17, 2015
Paul Krugman stated in The New York Times today that
“there’s just no evidence that raising the minimum wage costs jobs, at least
when the starting point is as low as it is in modern America.” To support his
position, he cites studies by University of California professor David Card and
Princeton University professor Alan Krueger.
Some commentators want a $12 minimum wage, as proposed by
President Obama, a 66 percent increase. Others, such as the Restaurant
Opportunities Centers United and New York Communities for Change, want a $15
minimum wage, a more than 100 percent increase.
If raising the minimum wage were cost-free, why stop at
$10 or $15 an hour? Why not go straight to $25 an hour, the average hourly
wage? That might be considered fair, because no one would have to earn less
than today’s average.
The answer, of course, is because some people are
displaced at any minimum wage. It is obvious to the general public that
increasing the minimum wage to $25 an hour would displace workers. It is less
obvious when amounts are smaller. But when the minimum wage is raised,
employers hire higher-skilled people, or switch to different forms of
technology such as placing orders through touch screens.
Let’s Look at Those Studies
Card and Krueger looked at the effects on fast-food
restaurants in New Jersey and Pennsylvania of raising the minimum wage in 1992.
They concluded that raising the minimum wage had no effect, or a small positive
effect, on employment.
The studies, published in 1994 and 2000, compared New
Jersey with neighboring Pennsylvania, which did not raise the minimum wage.
(Read the studies here and here.)
But just because economic studies are published in
leading academic journals does not mean that the conclusions are accurate. The
studies had a number of problems. Card and Krueger do not include information
on the portion of employment at minimum wage at any date in time. No
information was given on whether the minimum law was binding, and to what
extent, for this sample.
The studies did not include information by county, such
as income, unemployment, teen unemployment, labor force, and
labor-force-participation rates. Neither did it include changes in state taxes
and franchise fees.
The regression statistics explain little variance, and
practically none of the coefficients are significant. Card and Krueger infer
that minimum-wage policy makes no difference. A more likely interpretation is
that the equation excludes important variables.
Card and Krueger focus exclusively on fast-food
establishments, but many other minimum-wage employment opportunities in the
service industry, particularly the hospitality industry, are also likely
affected.
Better Studies Say the Minimum Wage Hurts People
Other studies have come to different conclusions. In a
National Bureau of Economic Research paper published last December, University
of California-San Diego professors Jeffrey Clemens and Michael Wither found
that increases in the minimum wage were responsible for 14 percent of the
decline in the percent of the working-age population employed between 2006 and
2012. Minimum-wage increases significantly reduced the probability of low-skill
workers reaching the middle class.
Clemens and Wither looked at the change in the minimum
wage across states that had different minimum-wage laws. Some states have raised
their minimum wage above the federal minimum wage. The authors divided states
into those in which the federal minimum wage was binding and those in which it
was not. They used panel data from the 2008 Survey of Income and Program
Participation, and assessed the extent to which increasing the minimum wage
affected the wage distribution of minimum-wage workers. Not surprisingly, they
found that some low-skill workers who earned the old minimum wage were employed
at the new minimum wage.
The professors found that a minimum wage increase
substantially reduced employment. By the second year after the $7.25 minimum
wage, the authors estimated that employment of low-skill workers had declined
by 6 percentage points, or 8 percent percent more in states with the binding
federal minimum wage than in states with a higher minimum wage. They then
examined teenagers and food service workers in more detail. For this sample,
they found that employment declined by 4 percentage points.
Increasing the minimum wage had a disproportionately more
harmful effect on states such as Texas, which has no minimum wage, than on
states such as California and New York, which have higher minimum wages. For
example, an increase in the federal minimum wage to $12 an hour, as President Obama
proposes, would not affect Seattle residents, who will face a $15 hourly
minimum wage in a few years.
In addition to reducing employment, the binding
minimum-wage increase makes it more likely that people work without pay, such
as getting internships. Recall that employers have to pay workers the minimum
wage or above, but in some circumstances they have the option of paying them
nothing as interns.
Almost No One Works for Minimum Wage Anyway
Finding the effects of raising the minimum wage is
challenging, because 97 percent of American workers now make above the minimum
wage—not because it is the law, but because employers have to pay higher
compensation packages to retain workers. That is one reason that some academic
studies do not find major negative effects of minimum-wage increases.
Those who would be harmed by increasing the minimum wage
are young people. Half of minimum-wage workers are under 25, and 24 percent are
teens. This group’s unemployment rate is already higher than the 5.3 percent
overall rate. The teen unemployment rate is 18 percent, and the
African-American teen unemployment rate is 32 percent. The youth unemployment
rate is 10 percent.
People might respond to pollsters saying that they favor
raising the minimum wage, but they are rarely willing to pay more for the
services when the prices rise. Unlike Krugman’s happy message, increasing the
minimum wage reduces both the likelihood of employment and average income. The
research should be a warning to those who seek to conjure miraculous cures to
poverty by artificially raising wages.
No comments:
Post a Comment