The current debate over the minimum wage and potential rises in it has everyone being incredibly selective in the evidence that they'll believe over the effects of it. There's everything from the reasonable and careful papers that point out that we've not seen mass unemployment as a result of previous modest increases so modest increases seem to be just fine. At the other end of the scale there have been people insisting that paying workers more actually increases the profits of a company as those workers spend more with the company that employs them: an assertion of such idiocy that it's difficult to see why anyone at all would believe it. Yet some people do, even some supposedly rational people who write reports on the effect of minimum wage rises.
But that we don't get immediate mass unemployment from modest minimum wage increases (which is not the basic prediction anyway, that is that we will get some job losses as a result) has led people to leap into thinking that doubling the minimum wage will have none of those bad or unwanted unemployment effects.
At which point three papers which the Economist has pointed to showing that the unemployment effects are more subtle than the debate seems to be allowing:
FED up with pay increasing only at a snail’s pace, politicians are resorting to the law instead, by increasing the minimum wages that businesses must pay. But this is taking them into uncharted territory. Britain’s recent minimum-wage increase will take it from the average among OECD countries to the upper ranks. Germany’s new minimum wage, introduced in January, stands at 62% of average earnings in east German states. If a $15-an-hour federal minimum wage were implemented in America, as campaigners want, it would apply to two-fifths of workers.
The three papers they look at:
We document three new findings about the industry-level response to minimum wage
of industry dynamics based on putty-clay technology and show that it is consistent with
hikes. First, restaurant exit and entry both rise following a hike. Second, the rise in
entry is concentrated in chains, which we show to be more capital-intensive. Third,
there is no change in employment among continuing restaurants. We develop a model
these findings. In the model, continuing restaurants cannot change employment, and thus
industry-level adjustment occurs through exit of labor-intensive restaurants and entry of
capital-intensive ones. We show these three findings are inconsistent with other models
of industry dynamics.
This speaks to the Card and Krueger finding of course. For they only studied the capital intensive chain restaurants. The more labour intensive Mom and Pops were ignored. But this paper is saying that we would expect more of the Mom and Pops to close, to be replaced by the chains, thus lowering overall employment, even while increasing employment in the capital intensive chains. This is a criticism of the C&K paper that I've been making for some years now.
An empirical consensus suggests that there are small employment effects of minimum
wage increases. This paper argues that these are short-run elasticities. Long-run elasticities,
which may differ from short-run elasticities, are policy relevant. This paper develops
a dynamic industry equilibrium model of labor demand. The model makes two points.
First, long-run regressions have been misinterpreted because even if the short- and longrun
employment elasticities differ, standard methods would not detect a difference using
US variation. Second, the model offers a reconciliation of the small estimated short-run
employment effects with the commonly found pass-through of minimum wage increases
to product prices.
We know very well that short and long run elasticities differ. So it's no surprise that they differ from labour demand as well as the areas where we usually take account of the difference (smoking taxes, gasoline consumption and so on, very low short term elasticities, quite high long term ones). Just because we don't see waves of bankruptcies in the weeks and months of the imposition of a higher minimum wage doesn't mean that we're not going to see capital substituting for labour over time: and thus fewer jobs.
The voluminous literature on minimum wages offers little consensus on the extent
to which a wage floor impacts employment. We argue that the minimum wage will
impact employment over time, through changes in growth rather than an immediate
drop in relative employment levels. We conduct simulations showing that commonly used
specifications in this literature, especially those that include state-specific time
trends, will not accurately capture these effects. Using three separate state panels of
administrative employment data, we find that the minimum wage reduces job growth
over a period of several years. These effects are most pronounced for younger workers
and in industries with a higher proportion of low-wage workers.
And finally we've got to consider Bastiat. Let us look at what is unseen. What growth in employment isn't going to happen as a result of people not opening new businesses in the face of those increased labour costs? The prediction here is that a 10% raise in the minimum wage stops job growth (note, not quite the same thing as kills current jobs) by 0.3% a year. Not huge, but cumulatively it can become so.
The bottom line here is that Krugman was entirely wrong to state that there's no evidence that the minimum wage rise will cause unemployment. The evidence that it will is often rather subtle though.
We're really back to this statement of reality. Modest minimum wage rises have modest effects, often too small to be directly observed in the numbers. Large rises, and the general assumption is that to anything over 50% of median wage is large, will have larger effects. The effects will take time to come through as the market, and thus technology itself, reacts to the changes in relative prices. But the best guess we've got from all of this evidence is that a large rise in the minimum wage will decrease employment over time. Which really isn't a surprise: people do tend to buy less of something when it becomes more expensive.
It's still entirely possible to claim that the rise to $15 is justified on other grounds, not that I'll agree with you. But the idea that there just aren't going to be job losses is not bourne out by the current state of economic research.
