If you prefer analysis of the minimum wage that doesn't try to address identification problems to analysis that does, this is the post for you...

Here (HT - Tyler Cowen).

Here's the featured graphic:



So my title is admittedly snarkier than a lot of the other minimum wage posts, but it's because I'm truly dumbfounded as to how this has taken off. I gather the author is a finance guy and that may explain some things. Not that I'm an expert on that, but it seems to me if you're in finance, identifying trends in data and forecasting from them can serve you well as long as nothing major changes structurally. That's the sort of situation where Friedman's brand of positivism that is so embattled actually makes sense.

But you just can't do that to understand the underlying causal mechanisms.

I've got a more detailed comment in Cowen's post to this effect, but if you eyeball his red lines (and as far as I know eyeballing is our only option at this point - I don't see the data anywhere), five of the seven red lines coincide with a recession. Teen employment goes down during a recession?!? Incredible! The two that don't occur in a recession both have increasing red lines, and the one red line that's increasing and during a recession is during a relatively mild recession in the otherwise high-growth 1960s.

So even looking casually at this we have a big, big problem.

Why is this so popular???

Arin Dube on poverty and the minimum wage

This is related to the Sabia and Burkhauser post I had up yesterday. Dube has a new post up summarizing his contributions, which Tyler Cowen did not seem to be as impressed with as Sabia and Burkhauser (well... he thought the econometrics were fine but the results didn't conform to what Cowen considered common sense [if you found that odd you're not alone]).

A lot of the post is summarizing the differences between the two papers, including two big ones: Sabia and Burkhauser assume that workers under the old minimum wage will not get a raise, and they assume that those earning above the new minimum wage will not see a raise.

Obviously both are problematic and they make a big difference. When you deal with that, some measurement error issues in survey data (always be careful about survey data at the tails of the distribution especially - very high or very low income), and the quasi-experimental approach of Dube (rather than the simulation approach of Sabia and Burkhauser), their estimates for the impact on poverty are higher (18.9 percent of beneficiaries are poor rather than 11.3). Obviously this doesn't change the underlying conclusion that this is not a policy just targeted at the poor. As I tried to summarize in the last post, it's not clear why anyone would think it was in the first place. Just do a few calculations with a hypothetical wage earner and you'll see that most (just over 80% in Dube's case and just under 90% in Sabia and Burkhauser's case) shouldn't be living in poor families. This was the key insight of the post, in my opinion (bolding is mine):

"So to take stock, if you consider the Sabia and Burkhauser simulation results  as “facts” you also are claiming that no worker reporting a wage below the old minimum will get a raise, and no one above the new minimum will get a raise. These are not very good assumptions, and they certainly are not facts. 

Of course, you don’t have to make these assumptions. You could allow for spillovers. You could allow for wages to rise below the minimum. You could allow for measurement error in reported wages and other sources of income. But then you are not in a world where tabulating survey data gives you simple facts that are beyond reproach. You need to make additional assumptions to make causal claims. And we have not even begun to talk about behavioral effects—be they on labor demand side, or on labor supply side such worker search effort, etc. (And by the way those do not all go in the same direction.)  So you could add a lot more assumptions and continue with the simulation route, or you could use quasi-experimental approach used in almost all of applied micro-economics to empirically estimate the effect of minimum wages on poverty and other outcomes.  Of course, you would want to subject your identifying assumptions to specification checks and falsification tests to ensure you have reliable control groups; and you would account for possibly confounding policies such as state EITCs. And when you do all of that, and some more, you would probably end up with a paper like this one. 

So where does this leave us?   As I said in my paper, policies like cash transfers, food stamps, and EITC are better targeted to help the poor, although even there minimum wage are better thought of as complements and not substitutes. More generally, however, motivations behind minimum wage policies go beyond reducing poverty. The popular support for minimum wages is in part fueled by a desire to raise earnings of low and moderate income families more broadly, and by fairness concerns that seek to limit the extent of wage inequality, or employers’ exercise of market power.  And the evidence suggests is that attaining such goals through increasing minimum wages is also consistent with a modest reduction in poverty, and moderate increases in family incomes at the bottom."  

The minimum wage is not well-targeted on poor families but it does seem to be targeted on low-income families

...which isn't to say it only affects low-income families of course. Lots of teenagers not from low-income families get their first work experience in a minimum wage job too.

But back to the question of poverty - this is somewhat of a cheat post because I am just reproducing a comment on David Henderson's recent post on the subject (see links to his NCPA paper for more details and his post for more links).

*****

I have been writing a lot about the state time trends that Bob Murphy has been musing on lately, but I feel like I need to get to Meer and West and the flows, as well as Sabia-Burkhauser.

As a general reaction to the poverty reduction question, it sounds reasonable to me but I'm not sure poverty is the right lens to look through. I think a few basic calculations show in the first place that it's going to be more relevant for a broader category of low income families than poor families per se.

$7.25 x 35 hours x 50 weeks for someone that actually takes some time off but maybe doesn't have paid vacation and has a generous amount of hours on the cusp of full and part time (OR two part time jobs) gives you $12,687. That already exceeds the poverty line for a single person, and is just a few thousand short of a family of two. If you add minimum wage workers to the family, family income grows faster than the poverty line.

So this is not a poor person's policy from the beginning and certainly not if we're talking about the people making as high as $9.50. You don't even need to go to the data you just need to do a few thought experiments.

Whether it's well-targeted or not is a different question. A lot of these families are still low-income. We seriously consider expanding SCHIP to them, for example, even if not all benefits. I'm not sure how marginal these households are but as we've seen, one minimum wage earner in a household can account for a difference of up to 100% of the FPL, so losing that second or third person could make the family at 300% suddenly at 200%, or the family that's at 200% suddenly 100%. So it's not like these families are in a position where they're marginal workers - their income really matters even if they're not below the poverty line.

So all the commentary so far - from you [David Henderson], Cowen, etc - seems fine as far as it goes but I think it's still clearly a policy targeted at lower income families.

I promise the next post is going to be about the minimum wage (in all likelihood) or something else substantive about economics

Fool me once...

So I got fooled once by David Henderson's post where I thought he was going to say that everybody agrees that the question is about the role of labor supply incentives in the ultimate impact of UI on unemployment.

Shame on him, so the saying goes... but I'm not sure that's entirely fair - so let's say maybe shame on me for expecting that.

Now I see a post from Russ Roberts titled simply "Paul Krugman is not a hypocrite".

FANTASTIC!, I honestly thought.

We are making progress!

We are not making outrageous personal attacks and we're going to talk about economics, even if we disagree very strongly about the scientific reasonableness of a claim!

Well this is fool me twice, so it's definitely "shame on me" at this point.

If we are going to make personal commentaries rather than talk about economics in the economic blogosphere, you should tell me how ridiculously cute my almost-four-month-old daughter is.

Krugman on UI... and another great big sigh of disappointment for the economics blogosphere

Krugman derangement system can be pretty impressive sometimes, but the recent spat has to win some sort of prize. I've commented in a few places on it, but I thought this blog might need a little break from the more serious minimum wage wage posting I've been doing.

Russ Roberts recently accused Krugman of lacking intellectual credibility because he mentions a micro labor supply effect of unemployment insurance in his textbook but in a recent blog post he criticizes Robert Barro for inferring that because of these micro incentives, the idea that UI can reduce unemployment is (to quote Krugman's paraphrase) "self-evidently absurd".

Of course it's not "self-evidently absurd" at all. You can have negative incentive effects and a reduction in unemployment quite plausibly if the unemployment rate is high because of demand problems. There is no contradiction whatsoever. And Russ Roberts, with a PhD from the University of Chicago, should be able to understand this point.

Then David Henderson jumped in and I thought things would get a little more sane when I read: "The issue--and everyone on both sides agrees that this is the issue--"... and I was SURE the next line would say "is whether or not you can acknowledge negative incentive effects and still argue that UI reduces unemployment".

Because THAT is what the issue is, and David is usually mild-mannered and to the point and I honestly expected that's what I would read next. But no, it continues: "is whether Krugman is being hypocritical in his discussion of unemployment insurance."

A good alternative to this is Chris Dillow's post. He starts by referencing Bob and Russ, but he doesn't say anything like "The issue--and everyone on both sides agrees that this is the issue--is whether Bob and Russ are being jackasses to Krugman"

Because there's a point where the Krugman derangement syndrome gets old and we need to focus on the economics if we really want to be an economics blogosphere.

For what it's worth Barro clearly understands there's nothing even passingly hypocritical in Krugman's case. Barro writes:

"Yet Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving "aggregate demand." Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed. Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment. As per Mr. Vilsack, the administration believes that the cumulative effect is a multiplier around two."

Of course, he goes on to dispute the argument, and that's fine. As I said above - THAT should be the real question here: who is right about the effect of UI. But despite disagreeing, Barro knows full well that nobody says that the incentive effects aren't there, they say that they are overwhelmed by other effects when the economy is demand-constrained.

Krugman is obviously not a hypocrite. That is NOT the question at hand. Krugman does not lack intellectual credibility. Krugman is not the embodiment of Orwellianism (a comment on Russ's blog). Let's get back to economics, people.

Brief, and entirely unsatisfying post on Ozimek and the minimum wage

Commenters "Lord" and Bob Murphy both suggest I look at Ozimek's post on DLR here. It's very good, although I don't know how much it resolves. It goes over a lot of the time-trend issues we've been over here. Wolfer's identification of bias, for example, is similar to what identified as the case that Bob was talking about, which could be a possibility (although one I doubt).

The flows may help to solve these sorts of questions - there are papers on that from Dube and from Meer and West. I'd have to read them. But I can't see how that definitively resolves anything. There can be no rate-of-change change without a change in the flows so the same ambiguities in the changes or lack of changes in the levels is going to be there in the flows too. The difficult task isn't identifying a trend change (which requires a flow change and results in a level change), the difficulty is identifying the right counterfactual trend.

It ultimately boils down to whether we think the time-trends are appropriate or not and if there's an obvious econometric test for it I'm not sure what it is. Time-tends may be wrong, but Occam's razor seems to suggest we should include them (as in DLR). Spatially heterogeneous time trends seem more reasonable than just the right circumstances that would actually introduce bias by including time trends.

Neumark and Wascher suggest we might want non-linear time trends instead of linear ones. One reasonable way to test this is to do an out of sample specification test using the comparison cases. So use a couple specifications of the time trend for periods -12, -11, -10,..., -2, -1, 0, and then figure out which specification best predicts the trend in 1, 2, 3, 4,...,10, 11, 12. Since these cases don't have any dynamic effects of the minimum wage, it should give you a better sense of the non-linearity of time trends. Now, you have to argue that that specification of the time-trend (linear, non-linear, etc.) is also true in the treatment case. But since we're not using the same slopes or parameters itself that seems defensible.

Really I'd need to read Meer and West and the responses but I feel like many of the same points are made here that I made the other day, namely: (1.) time trends should help to reduce bias in most cases, but (2.) you can imagine specific scenarios where the opposite would be the case.

Entirely unsatisfying, eh?

I still think DLR offers the most sensible default - just at first appearances. That doesn't mean there isn't something else going on, but I think it needs to be demonstrated.

Ryan Long on the econometrics of the minimum wage: a big picture explanation

I've been a little concerned that my last couple posts have been confusing for some people based on some comments from Ryan Long about all the variables DLR are putting in, so I want to zoom out to the big picture a little. First Ryan expressed concern that we're adding too many variables in a fixed effects model and that that is losing us significance*. Recently he expressed concern that we were just adding variables to reduce bias on the idea that adding more variables reduces bias.

This one concerns me a lot more and now I'm worried more people have missed the whole point of these posts. We are not just chucking things in the model and waiting to lose the significance. We have a treatment effect we're trying to estimate but we have non-experimental data so we need to figure out a way to mimic an experiment and get at least a good sense of what the treatment effect is. DLR have chosen to do that with what is at its core a DID set-up.

But once you do that, the comparison group you have can still run into certain problems that can bias the result. We've worked a lot with these models, though, so we know ways around those problems and usually that involves adding other variables. We're not just adding them for the hell of it - we're adding them because when you add a variable it changes which bit of variance in the data you are using to estimate the effect.

That bolded sentence is the key here.

And that's been the point of my last several posts. Bob Murphy raised concerns (not Ryan's concerns - I think Bob understands the big picture about non-experimental estimation I'm laying out here) about certain variables that were added. My view is that all of these were essential to get unbiased results and represent an improvement on earlier estimates.

So that has been the point. I've been trying to explain why changing the model in X way gets you a better estimate than refraining from changing it in X way. It's not just a matter of adding any ol' variable.

* Don't worry - it's not the case - there's a tremendous amount of degrees of freedom so there is no concern about that. In fact DLR's models should have (I'd have to double-check) many orders of magnitude more degrees of freedom than Neumark and Wascher's, which was a state study. Moreover, only the significance of the minimum wage variable in the employment model dropped, not in the others. If it were a df problem they'd all be mush - there'd be no reason for one model to be unaffected and one to lose significance if that were the problem. Finally, Ryan can easily look at the standard errors - they haven't exploded or anything like that. It's just a regular old insignificant effect - no funny business. That would not have gotten past the editors and the referees of RESTAT.

More thoughtful than you might think at first on the minimum wage...

I saw this on facebook the other day.

It sounds like your usual Bill Maher complaint that some of you may be quick to dismiss, and ultimately I don't know if I entirely agree with it either. But there's more to it than first meets the eye, and it hinges on questions of wage bargaining, monopsony, etc. in a lot of ways.

So what is the economic science behind intuition like this? What's your take on it?