Friday Reads: Life’s Labor Lost

lll Good Morning!

I think I’ve mentioned that I’m not a labor economist.  I’m a financial economist.  However, it’s hard to get through any econ program with out learning something about the labor markets given that it’s one of the most basic of all markets.   I wanted to talk about the increased minimum wage proposal in the President’s SOTU address.

You’ll probably hear quite a bit about how minimum wages create unemployment.  This is true under specific conditions.  The minimum wage must be below the going wage or what we call the equilibrium or clearing wage so that it is ‘binding’  or actually creating an excess supply of job seekers for that wage and less jobs than would be available at the clearing wage. You can look at the graph of the US below and see that in many states, the proposed Obama increase to the minimum wage is lower than the going wage in many states.  The poorest states–mostly in the south and middle of the country–are the ones with the lower wages.

However, the basic 101 econ labor market conditions, assumptions and model are very simplistic.  All of these things impact the outcome and can determine if the minimum wage increase creates any excess workers.    Labor economists that look at the real world have found some additional things about minimum wages that suggest that minimum wage can benefit the economy at large and unemployment at large.  They can also help create efficiencies in unexpected places, which is always good for markets.

I’m going to try to give you some background from the popular press, scholarly articles, and a conservative magazine where economists explain why increasing the minimum wage can be good for the economy.  Actually, there’s so much good rationale that even Walmart lobbies congress for increases. That probably will surprise you, but it’s pretty simple.  Minimum wage workers are Walmart shoppers.  Giving them more income turns them into customers. They don’t have any leftover money so they basically spend all they get.  This is good for Walmart.  This isn’t true for richer folks.  They tend to sit on their money and it goes to places that can take time to work through our economy if it actually goes to our economy and not some place else entirely.

So, let me first start with a New Yorker article called “The Case for a Higher Minimum Wage”.  This is, of course, not the scholarly arguments. However, there’s some good background information in the article to get us situated with the stylized facts. Unlike House Republicans and Joe Scarborough,  people that actually want to know abut things rather than opine through their bungholes love them some stylized facts.

While the labor economists and econometricians are still arguing about which of their many studies can be relied upon, there are quite a few things about minimum wages, and their impact on the economy, that we know for sure. Taken together, these things amply justify raising the minimum wage, as President Obama called for in his State of the Union address.

The first statement we can make without fear of contradiction is that, at $7.25 an hour, the current minimum wage is pretty low. In nominal dollars, it’s gone up quite a bit over the past twenty-five years. In 1978, it was $2.65; in 1991, it was $4.25. But these figures don’t take into account rising prices, which eat away at purchasing power. After adjusting for inflation, the minimum wage is about $3.30 less than it was in 1968. Back then—forty-five years ago—the minimum wage was $10.56 an hour, according to a very useful chart from CNNMoney.

We also know that the U.S. minimum wage is low compared to its counterparts in other advanced countries. In France and Ireland, for example, the minimum remuneration level is more than eleven dollars an hour. Even in Great Britain, which is usually regarded as a country with a flexible, U.S.-style labor market, it is close to ten dollars an hour. Another informative chart, this one from Business Insider, shows that the U.S. minimum wage is comparable to ones in places like Greece, Spain, and Slovenia—countries where G.D.P. per capita and labor productivity are markedly lower than here in the United States. We have an advanced economy but a middle-level minimum wage.

A second important and (largely) undisputed finding is that there is no obvious link between the minimum wage and the love's labour's sketch copyunemployment rate. During the nineteen sixties, when the minimum wage was raised sharply, unemployment rates were sharply lower than they were in the nineteen eighties, when the real value of the minimum wage fell dramatically. If you look across the states, some of which set a minimum wage above the federal minimum, you can’t see any sign of higher rates leading to higher unemployment. In Nevada, where the national minimum of $7.25 an hour applies, the jobless rate is 10.2 per cent. In Vermont, where the minimum wage is $8.60 an hour, the unemployment rate is 5.1 per cent. What these figures tell us is that other factors, such as the overall state of the economy and how local industries are doing, matter a lot more for employment than the level of the minimum wage does.

There are, in fact, many things that impact how the level of the minimum wage will impact an economy. Some economists have found that a “properly functioning minimum wage” can actually improve labor flows in a market.  Lee & Saez (2010) show under which conditions this can happen. This link goes to a theoretical paper so if calculus is not you’re thing, you may want to take my word for it. I’m going to show you the technical result as well as the authors’ story that is much more intuitive so you get an idea of how economists look at these things. This is from the paper’s introduction and conclusion which are the parts without the calculus!!

We show that a binding minimum wage is desirable as long as the government values redistribution from high-to low-wage workers, the demand elasticity of low-skilled labor is finite, the supply elasticity of low-skilled labor is positive, and most importantly, that the unemployment induced by the minimum wage is efficient, i.e. unemployment hits workers with the lowest surplus first. The intuition is extremely simple: starting from the competitive equilibrium, a small binding minimum wage has a first order effect on distribution but only a second order effect on efficiency as only marginal workers initially lose their job.

This is from the employer’s view point.  It basically says they let go of their worst employees first so they really don’t lose much.  Also, it implies it’s probably not a large number that are released.  The problem is that this doesn’t really look at the increased number of people that might enter the work force to get at the higher wage.  This is part of the excess worker phenomenon as  people that wouldn’t be in the market for the lower wage will enter the market if the wage is higher.  Therefore, more people will be looking for jobs than there will be jobs available.  However, this isn’t as big of a problem as job losers for society as a general rule.  It just makes the numbers appear worse.

The second part of the paper considers the more realistic case where the government also uses taxes and transfers for redistribution. In our model, we abstract from the hours of work decision and focus only on the job choice and work participation decisions. Such a model can capture both participation decisions (the extensive margin) as well as decisions whereby individuals can choose higher paying occupations by exerting more effort (the intensive margin). In that context, the government observes only earnings, but not the utility work costs incurred by individuals.1

In such a model, we show that a minimum wage is desirable if unemployment induced by the minimum wage is efficient and the government values redistribution toward low-skilled workers. The intuition for this result is the following. A binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence e ffects. Theoretically, the minimum wage under efficient rationing sorts individuals into employment and unemployment based on their unobservable cost of work. Thus, the minimum wage partially reveals costs of work in a way that the tax system cannot.

This is an interesting result since it basically says that it’s a more efficient way of giving poorer folks incomes by keeping the most efficient ones in the labor force instead of being unemployed and relying on government programs.  Their model argues that a minimum wage efficiently rations ‘out of work’ benefits.  So, in this case, yes it creates some unemployment, but generally this means the workers who are the most ‘deserving’ of the job stay in the job and those that aren’t can fall into the safety net and be retrained or schooled to improve their prospects.

One of the primary results of a paper by Dube et al (2o12) is estimating the decrease of what we call “churning” or what you probably know as job-hopping. This behavior costs employers a lot of money since the initial employment and training periods can be expensive for even the lowest wager earners.  Reducing churning means less of these expenses overall and basically coverage of the increased wage. So, in this case, the minimum wage makes the employer think about the total wage bill and not just the portion related to hourly work.

state-minimum-wages

Here’s one of the more interesting set of arguments from the conservative point of view.  This is the idea that by providing a good working wage at the bottom wage earners, you stop the problem of a potential ‘college graduate’ bubble.  Since the majority of jobs in this country still don’t require a college degree, people will be more likely to work jobs and not over-educate themselves. The author also argues that the kinds of jobs that tend to be minimum wage jobs are not out-sourceable so improving the lot of these folks improves a lot more than just the people in the jobs.  Minimum wage jobs tend to be service jobs and the benefits of the incomes and the jobs themselves will stay in the country regardless of the higher wage. We again see the argument that most economists make about ‘trickle-up’ economics.  Giving more income to the lowest wage earners actually creates a stimulus because they spend their money and there are a lot of them.

Although the direct financial benefits to working-class Americans and our economy as a whole are the primary justifications for the proposal, there are a number of subsidiary benefits as well, ranging across both economic and non-economic areas.

First, the net dollar transfers through the labor market in this proposal would generally be from higher to lower income strata, and lower-income individuals tend to pay a much larger fraction of their income in payroll and sales taxes. Thus, a large boost in working-class wages would obviously have a very positive impact on the financial health of Social Security, Medicare and other government programs funded directly from the paycheck. Meanwhile, increased sales tax collections would improve the dismal fiscal picture for state and local governments, and the public school systems they finance.

A final argument for using a minimum wage is that even though it tends to be less efficient and more costly than just supplementing the incomes of low income earners, it tends to be politically easier to get an increase through congress than a subsidy.

Does raising it improve the plight of the worst off, at a reasonable price?

A lot depends on your definitions, but economist Adam Ozimek makes a smart point. According to a 2007 study by the CBO, an increase in the minimum wage to $7.25, like that eventually passed that year, would increase wages by $11 billion, of which $1.6 billion went to poor families.

By contrast, increasing the Earned Income Tax Credit for large families (as happened in the stimulus bill) and for single people would cost $2.4 billion, of which $1.4 billion would go to poor families. The EITC option costs one fifth as much to society but does about as much good for poor families. That suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.

Oddly enough, the conservatives are less interested in the net savings, than the process of doing this, so they prefer minimum wage increases to the EITC option.  This means Boehner should be happier than he is with this proposal.

Furthermore, as large portions of the working-poor became much less poor, the payout of the existing Federal Earned Income Tax Credit (EITC) would be sharply reduced. Although popular among politicians, the EITC is a classic example of economic special interests privatizing profits while socializing costs: employers receive the full benefits of their low-wage workforce while a substantial fraction of the wage expense is pushed onto the taxpayers. Private companies should fund their own payrolls rather than rely upon substantial government subsidies, which produce major distortions in market signals.

So, I hopefully didn’t overwhelm you with too much stuff over coffee, but I would like to remind you that this is basically the mornings read post. So, since I’ve run out of space, it’s now your turn to share the other things. Oh, and it’s okay to ask questions or tell me that something confuses you.  I’m assuming you’re not a labor economist either.  Again, there’s a lot of controversy and a lot of different circumstances and assumptions around all these models.  But, it should let you know that increasing the minimum wage can be good policy for a variety of reasons even though it might impact the number of people looking for or working at those jobs.

What’s on your reading and blogging list today?

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61 Comments on “Friday Reads: Life’s Labor Lost”

  1. bostonboomer says:

    Meteorite explosion over Russia, in pictures.

    • bostonboomer says:

      Amazing video of meteorite–500 people injured.

      • bostonboomer says:

        The academy says the meteor weighed 10 tons and entered the earth’s atmosphere at a speed of at least 33,000mph (54,000kph) and shattered between 18 and 32 miles above ground (30 to 50km).

        The Itar-Tass news agency reports that some fragments fell into a reservoir outside the town of Cherbakul, quoting the regional governor’s office. The agency also cited military spokesman Yarslav Roshupkin as saying that a 20ft (6m) wide crater was found in the same area.

        Donald Yeomans of the US Near Earth Object Programme in California said:

        If the reports of ground damage can be verified, it might suggest an object whose original size was several metres in extent before entering the atmosphere, fragmenting and exploding due to the unequal pressure on the leading side vs. the trailing side (it pancaked and exploded). It is far too early to provide estimates of the energy released or provide a reliable estimate of the original size.

        The European Space Agency has ruled out a link to the asteroid passing by earth tonight.

      • RalphB says:

        Josh had some youtube videos of this thing over at TPM last night. Dodged a bullet when it exploded before striking.

        • dakinikat says:

          I watched a lot of the videos. Huge blast sound and it shattered windows. I’d still be drinking vodka if I were in one of those buildings. Scary thing,

      • Fannie says:

        Wow, that wasn’t a small deal coming at them.

    • RalphB says:

      The Atlantic: Wow, the Russian Meteor Was the Biggest in a Century

      The meteor we all saw streaking across YouTube from Russian dashboard cameras was the largest in a century, a scientist who studied the event told Nature’s Geoff Brumfiel.

      That would make it the biggest rock to hit the Earth since 1908′s Tunguska wiped out a big old patch of Siberia. …

      • bostonboomer says:

        I’m not surprised. The video actually looked a lot like the descriptions of Tunguska. The one exploded before striking too. Of course in those days there weren’t any

        Photo of crater at weather.com–and other photos

  2. bostonboomer says:

    Very interesting post, Dak. Sorry for the OT stuff–I’m just fascinated by meteors and meteorites.

    Conservatives are so weird. They don’t mind at all handing over trillions of dollars to rich people and banks, but when it comes to supplementing the incomes of poor working people with the earned income credit or by some other means, they get all morally outraged. They also don’t mind being handed money by lobbyists so they’ll support certain legislation–which to me is basically a bribe.

    Thanks for explaining this. Now I’ll be prepared when I hear the fact-free, science-free arguments by wingnuts who would rather have people starve in the streets than let them earn a living wage.

    • dakinikat says:

      I expected it to be one of those posts where no one knows what to say … i guess the bottom line is that unemployment comes when businesses don’t have customers which means people that buy stuff don’t have incomes/decent jobs …

      The calculus may be rocket science but the intuition isn’t at all ..

      So government policy needs to focus on getting people back to work at decent jobs even if it has to provide them doing things government does like building good roads, bridges, and power grids and sources.

      I’m sorry the Republicans are so greedy they never seem to understand that, but there it is …

      • Dak, it is so funny you should say this:

        Minimum wage workers are Walmart shoppers. Giving them more income turns them into customers. They don’t have any leftover money so they basically spend all they get. This is good for Walmart.

        My husband was just saying to me this week, “…for walmart employees, valentines day is the 15th.”

        In other words, walmart employees need to wait until the day after the “holiday” to get the items on sale. It is that way for most holidays, like Easter and Halloween and any other gift or card giving day.

        Pathetic isn’t it?

  3. RalphB says:

    For comparison, in Australia the minimum wage is US $16.50/hour plus full benefits for every employee, full or part time. They have done quite well through everything so far, so it seems it doesn’t hurt employers there.

  4. RalphB says:

    Congressman’s Wayward Tweets Reveal Daughter, Not Lover

    Reporters went looking for sleaze and found something kinda nice instead. Refreshing for a change.

    • bostonboomer says:

      I liked that. I’d kind of like to know more about the backstory, but I can understand why he wants to keep it private.

  5. RalphB says:

    Weigel: The Many Chuck Hagel Vote Positions of John McCain

    Democrats are bristling over what Sen. John McCain told Fox News yesterday, most of which he also thought important enough to say on the floor of the Senate.

    To be honest with you, Neil [Cavuto], it goes back to there’s a lot of ill will towards Sen. Hagel because when he was a Republican (sic), he attacked President Bush mercilessly and say he was the worst president since Herbert Hoover and said the surge was the worst blunder since the Vietnam War, which was nonsense. He was anti-his own party and people. People don’t forget that. You can disagree but if you’re disagreeable, people don’t forget that.

    My “sic” is there because Hagel is still a Republican, but the whole graf is kind of a “sic.” McCain, who has an outsized role in the media, was all over the damn place during the Hagel drama.

    Washington expected McCain’s vote to be pivotal, but the Hagel fight was the moment that Sen. Ted Cruz took over as the leader of the intellectual opposition.

    So Ted Cruz is now the intellectual leader of the Republicans? Somehow I don’t doubt it because there’s a joke here that Cornyn is following him so closely that Cruz is the only Senator with 2 votes.

    • bostonboomer says:

      Like Paul Ryan is the intellectual leader of the House Republicans? Just just plain embarrassing.

      BTW, the entire attack on Iraq was the worst blunder since the Vietnam war, not just the surge.

      • RalphB says:

        Actually Hagel explained that when he said the worst blunder since Vietnam, he meant the whole Iraq war not just the surge :-)

    • dakinikat says:

      McCain has seriously lost it. The bitterness bile has finally replaced all the gray matter.

      • bostonboomer says:

        I think that thing in his cheek is eating his brain.

      • Beata says:

        LOL, BB!!!

      • bostonboomer says:

        That thing in his cheek has driven me crazy for years!

      • ANonOMouse says:

        I’m no expert, but I think McCain might have some sort of dementia. He’s hostile and combative, he changes his position on issues over and over again and at the drop of a hat. He seems to be running scared. Someone on Hardball said this afternoon that the real test for McCain’s will be when his amigo, Lady Lindsey, gets challenged by the TP in 2014.

  6. bostonboomer says:

    Charlie Pierce takes down Bill Hemmer for making fun of a 102-year-old woman who had to wait all day to vote–and Jake Tapper for defending Fox.

    • bostonboomer says:

      Earlier he skewered one of my least favorite Villagers, Chris Cillizza.

      • dakinikat says:

        Cillizza is a lazy thinker and he’s full of himself any more.

        Btw, get on twitter … two of the villagers are having a cat fight … it’s funny… Nate Silver and Ken Vogel. They’re calling each other names even.

      • bostonboomer says:

        Ken Vogel must be in a really bad mood. I just posted a link to his battle with Nate Silver down below.

        • dakinikat says:

          oh, good, some one wrote about it … I mentioned it above. I was having a good laugh about that earlier this morning.

          Ken just doesn’t like the fact every one thinks he writes for “Tiger Beat on the Ptomac” but they just call it Politico

      • bostonboomer says:

        Weird. I misread your comment. I thought you had written that Vogel was fighting with Andrew Sullivan, so I thought it was a different Twitter battle. I must need a nap.

      • bostonboomer says:

        Really? Well that’s a relief. I thought I was hallucinating!

  7. RalphB says:

    Asteroid DA14 flyby at 1:25 PM Central

  8. dakinikat says:

    http://www.thefiscaltimes.com/Columns/2013/02/15/The-Minimum-Wage-A-No-Lose-Issue-for-Democrats.aspx#page1

    Liberals argue that academic research shows that modest increases in the minimum wage have a minimal impact on jobs, while doing a lot to raise the incomes of the working poor.

    At a time of high unemployment, it may appear that conservatives have the stronger argument. However, their problem, politically, is that the loss of jobs due to a higher minimum wage comes almost exclusively from the loss of jobs that otherwise would be created. That is, from the loss of jobs that do not now exist, but would come into existence at a lower minimum wage.

    It is almost unheard of for employers to fire workers rather than pay them a higher minimum wage. They may not fill vacancies, they may adjust hours, they may move toward automation, they may scale back benefits and many other things. But firing workers is not one of them.

  9. bostonboomer says:

    Atlantic Wire reports on hilarious Twitter battle between Nate Silver and Politico morons.

  10. dakinikat says:

    http://www.addictinginfo.org/2013/02/14/pope-allegedly-sought-immunity-for-abuse-crimes-just-before-resigning/

    It seems that with his resignation announced, the Pope, whose given name is Joseph Ratzinger, has a meeting with the Italian President, Giorgio Napolitano on February 23 to beg for immunity against prosecution for allegations of child sex crimes. Apparently, this hastily arranged meeting, and likely the resignation as well, are the result of a supposed note received by the Vatican from an undisclosed European government that stated that there are plans to issue a warrant for the Pope’s arrest. This letter was allegedly received on February 4, and Ratzinger resigned a week later. Now, there’s no way people can ignore how fishy this is. The first Pope to resign in 600 years does so after panicking about an impending arrest and in the midst of a hastily arranged meeting begging for protection from the Italian government? How they will keep people from connecting the two is beyond me. Chances are, the world will be popping popcorn and steadily watching.

    Well, for once, the guy might not get off easy. The International Tribunal into Crimes of Church and state calls upon the Italian President to deny help to Ratzinger, and to “not collude in criminality. Let’s just hope that Napolitano does not cave. However, there may be another avenue to make sure the Pope is brought to justice if the Italian President does cave.

    for some reason this all reminds me of Reagan, his altzheimer’s and the Iran Contra scandal that should’ve led to his impeachment

    http://itccs.org/

  11. roofingbird says:

    If the minimum wage increases kept up with growth and inflation, the whole country would be better off. Good post Dak!

  12. bostonboomer says:

    The speech Reeva never gave

    It was a speech to high schoolers about how she had overcome growing up poor and had escaped an abusive relationship. But Oscar Pistorius shot her four times through the locked bathroom door before she could give the talk. He claimed he thought she was a burglar! Liar!

  13. dakinikat says:

    Joe Scarbourough misinterprets people so he can try to claim he’s right

    http://www.politico.com/story/2013/02/paul-krugman-economics-deny-deny-deny-87722.html

    • dakinikat says:

      I couldn’t help myself.

      Okay, I am an economist and you’re wrong on this one Joe. First, social security has nothing to do with the debt or the deficit so quit whipping that dead horse. Second, it’s not medicare that’s the problem. It’s the rising cost of health care and the inability of the market to function given all the third party payers and market frictions. Third, the Fed committed to keeping interest rates low so the cost of borrowing is not going to be an issue in the near term. The deficit itself is coming down and would come down quicker if the fiscal policy in this country was properly aimed at creating jobs and growth. Discretionary spending is way down already. The automatic spending will come down, again, as the economy improves. With your rationale, we should’ve just let the NAZIs run all over Europe rather than run up the debt/deficit. The WW2 debt and deficits certainly did not hold back the growth we experienced in the 1950s and 1960s. Stop misinterpreting economists to heal your wounded ego. It’s getting pathetic.

      • bostonboomer says:

        Good for you!!

      • RalphB says:

        Almost every other comment to that story also ate Joe’s lunch. He’s losing his own readers.

      • bostonboomer says:

        Scarborough:

        After watching his debt-denying performance on “Morning Joe,” one wonders whether Paul Krugman will be as haughty and dismissive of his fellow Princeton economics professor as he is of all who disagree with his marginalized position. One hopes he instead does something that Mr. Krugman hates to do: just admit that he was wrong.

        I won’t hold my breath.

        Scarborough calls Krugman “outside the mainstream.” I really don’t think the Nobel committee is in the habit of voting for bizarre crackpot theorists. They’re not mavericks, IMO. I guess I could be wrong….

      • Fannie says:

        ditto – it is pathetic

  14. bostonboomer says:

    Excellent rant on the sequester and Obama’s responsibility for it.

  15. bostonboomer says:

    Dak– This is related to your post: Wal-Mart Executives Sweat Slow February Start in E-Mails

    http://www.bloomberg.com/news/2013-02-15/wal-mart-executives-sweat-slow-february-start-in-e-mails.html

    • dakinikat says:

      Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.

      “In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.”

      Exactly. The economy is dependent on the vast majority of people in the country having good take home pay. The richest of the rich have been getting richer and it’s not trickled down on anything. Economists were warning that that payroll-tax increase was going to slow things down again because it hit the spenders and not the real takers.

  16. RalphB says:

    Huckleberry Closetcase keeps finding more nominees to block. He’s so desperate I’m starting to think someone is about to out him or something.

    Sen. Lindsey Graham (R-S.C.) on Wednesday added Army Gen. Lloyd Austin to the list of White House national security nominees the Senate Republican has stonewalled in recent weeks.

    Graham said he will block a vote by the Senate Armed Services Committee on Austin’s nomination to become the new Central Command chief, until the four-star general provides the panel his insights into the White House’s postwar plan for Afghanistan.

    http://thehill.com/blogs/defcon-hill/policy-and-strategy/283219-graham-postpones-confirmation-vote-on-centcom-nominee-

    • bostonboomer says:

      Well, at least he’s not demanding more explanations of what happened in Benghazi from this one.

  17. RalphB says:

    Economist’s View: Holtz-Eakin Tries to Scare You. Don’t Let Him

    The difference between evidence and pure bs is cool.

  18. bostonboomer says:

    Joe Scarborough Makes Up Economist Alan Blinder’s Defense Of Joe Scarborough

    http://mediamatters.org/blog/2013/02/15/joe-scarborough-makes-up-economist-alan-blinder/192699

    • dakinikat says:

      Joe Scarborough just continues to make an ass of himself. What’s that old saying about not digging yourself into a deeper hole? Mika should grab the shovel before he finds himself in the Himalayas.