Here.
Such headlines are always interesting discussion starters because they give the lie to things you might have heard about how anyone that understands basic economics thinks X. Even if you ultimately decide they are misunderstanding something, the reasons a Nobel laureate will take a different stance than you might are always going to be thoughtful.
If by "U.S. minimum wage" we mean federal minimum wage, I find it almost impossible these days to get enthusiastic about an increase. It doesn't keep me up at night worrying about it, but I really can't be super supportive of it. The empirical evidence clearly says that there are no real employment effects (or small positive effects if you find the methods of a certain set of studies persuasive, or small negative effects if you find the methods of another set persuasive). We are all entitled to prefer one method to another if we have our reasons, but the big picture is it's not a big effect.
You could argue that a nil effect argues in favor of increasing the minimum wage. I don't think that's entirely clear cut. There are other margin adjustments as well as long-term adjustments that we may be worried about. But even putting that aside, this is still going to be an average effect. Surely we think that a federal minimum wage imposed on a country of three hundred million people is going to be more binding in some areas than others. If you had a big positive effect maybe the average effect thing wouldn't bother you so much. But a nil effect means that the distribution of local effects is going to be both positive and negative.
And why wouldn't it be? You're saying that the price of low wage labor in Los Angeles, California should cost the same as in Oxford, Mississippi.
The nil effect in the empirical literature tells me there's something to the monopsony arguments. The data just don't make sense otherwise, and the theory is reasonable enough so I have no reason not to believe that. So if states want to raise their minimum wage, that's fine by me. There might be some free lunches to serve up, and it's their prerogative to go after them.
But I don't see why I should feel the same way about the federal minimum wage.
Tuesday, January 14, 2014
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"The nil effect in the empirical literature tells me there's something to the monopsony arguments. The data just don't make sense otherwise"
ReplyDeleteThere are plenty of other possible reasons:
* Employers are reducing perks instead of pay.
* Employers are making job conditions worse instead of cutting workers, making people do more or do less sociable hours.
* Employers who know about the minimum wage change ahead of time are using natural wastage (people leaving) instead of lay-offs directly afterwards. To avoid lay-offs hurting staff morale.
* Employers who don't know about the minimum wage change ahead of time are using natural wastage after the change.
* Employees who are let go are leaving the labour force instead of signing on as unemployed.
In other labor markets you can conceive of non-salary compensation that could make up for it, but in this market I find the idea that they are reducing other forms of compensation implausible. There's just not much in the way of compensation besides the paycheck for minimum wage workers. Certainly no amenities at the place of employment are going to come close - the most important ones are probably mandated by law themselves.
DeleteThe second bullet is the most likely, but I don't know. Without evidence I feel like it doesn't make sense to jettison monopsony, which is perfectly reasonable. The only reason to jettison that in the absence of evidence on these other margins is if you REALLY don't want the monopsony story to be true, and that's not a good way to proceed IMO.
The last three points confuse me. The third one is fine as far as it goes and should be easy to test for. You can't get at that in the C&K study but others look at several periods before and after implementation and my understanding is they don't find evidence of this.
The fourth bullet would definitely be picked up in most modern studies. It's not like people stop looking at the employment effects a quarter out.
The fifth bullet is irrelevant. As far as I know these studies track employment levels, not unemployment levels. That's as it should be. The split between unemployment and NILF is a whole different issue.
"... but in this market I find the idea that they are reducing other forms of compensation implausible."
DeleteOther benefits aren't necessarily in the noise, take a look at McDonald's staff benefits, for example.
"The second bullet is the most likely, but I don't know. Without evidence I feel like it doesn't make sense to jettison monopsony, which is perfectly reasonable."
You seem to think it's reasonable, I don't agree. Where I work there are very many companies who employ at the minimum wage or close to it. I don't see how there can be a monopsony. I remember a while ago that you talked about the argument that it's time consuming and costly to change jobs. I agree with that, but I can't see how it provides a monopsony over any significant time scale (if it did then business owners have a free lunch, how would that happen?).
Anyway, my point was that there are other possible causes than the monopsony argument, that's why I listed some of them. As you say modern studies take into account the things I mention at the end. However, the case for the minimum wage is been made mostly by meta-studies that aggregate earlier studies, but those earlier studies don't take into account all of the factors I mention and some have other flaws I haven't mentioned.
"The nil effect in the empirical literature tells me there's something to the monopsony arguments. The data just don't make sense otherwise"
ReplyDeleteI'm not so sure about that.
NSW point out that (at least Dube et al) show a nil effect due to a nil effect on wages, when there is significant wage growth following a minimum wage increase, there is also significantly negative employment effect. If wages are static, even under conditions of ideal, perfectly-competitive labor markets we *should* see a nil effect on employment.
WTH? I had just assumed Krugman was one of the 7, but he's not.
ReplyDeleteI think the fact that the endorsement did not call anyone a cockroach cost them Krugman's signature.
DeleteHow could an empirical study possible account for the myriad ways in which employers might cut back on non-wage costs? I'm not saying they do/don't or will/won't, it just seems a stretch to decide that it is "implausible".
ReplyDeleteOn a separate point Daniel, I'd like to get your thoughts on the reduction ad absurdum argument against minimum wage legislation. Obviously the minimum wage question is extremely complex but do you think there's value in explaining to say, an undergraduate, that a mandated minimum wage of $100 per hour would have negative employment effects? Not using the reduction as an argument against whatever the latest proposed increase is here, just wondering if you as a teacher think it has pedagogical usefulness. Do you think it illustrates a general economic principle?
In my experience it meets with hostility from people who think (maybe because of C&K study) that a small increase would be fine, even though they totally agree that a $100 minimum wage would be disastrous.
I feel like something needs to be clarified here. I agree there are lots of margins on which firms make adjustments. That's not implausible at all. What I find less plausible is that non-wage compensation can account for the nil employment effect. There just doesn't seem to be enough non-wage compensation in these sorts of jobs to accomplish that. The most reasonable alternative margin to adjust on is the productivity margin.
DeleteI suppose in the way you've framed it I think there's value to it. Even if you want to employ a monopsony argument (which I think is entirely appropriate for undergraduates), there is going to be a point where it cuts into employment. If you want to say that with a reductio, that sounds fine to me. I don't think much of reductios on this generally because the only point they could possibly make is so elementary it doesn't need making to anyone. It follows, then, that if you're teaching elementary economics maybe it makes more sense.
Unfortunately, when you see people use reductios they're using them badly even by the standards that I've laid out here.
I think it meets with hostility because it gives the impression that the people that state the reductio think their opponents are dunces.
Can you give a link to a paper that makes the monopsony argument? It's been awhile since I looked at it. I did look up the Burdette & Mortensen matching model recently which I gather is what this argument is based on. However, in that model (or ye basic search model, like say in Romer's Adv Macro) minimum wage still decreases employment. In B&M a minimum wage *can* increase social welfare but that's different (the increase in utility of those who retain higher paying jobs is greater than those who experience longer unemployment spells). You can use the B&M monopsony model to argue for minimum wage, but you can't use it to explain why the empirical work does not detect employment effects.
ReplyDeletePersonally I'm pretty sure something else is going on (probably the data just isn't good enough, not enough variation, close to equilibrium min wages, adjustments in hours rather than persons etc)
This is one version of the B&M
ReplyDeletehttp://econ.tau.ac.il/papers/macro/postmatch.pdf