Casey states
Another federal minimum-wage increase would not, as some proponents promise, create jobs, but would reduce employment.
. . . raising the minimum wage reduced employment by 800,000, cutting it back to its early 2009 level is likely to increase employment by 800,000. That would add a bit to government revenue as some of those people moved from unemployment benefits to tax-paying workers.
I understand that there are sophisticated studies showing a limited impact of the minimum wage on employment. My judgment is impacted by those studies. Nonetheless, they are climbing a steep hill against intuition and a supply and demand paradigm that has proved incredibly powerful in the past.
It may not be the case that the minimum wage cut employment by 800K but I have a hard time swallowing that it does not impede recovery and exacerbate long term unemployment.
I can’t imagine that there are no workers at all in America whom it is profitable to hire at $4.75 an hour but unprofitable to hire at $7.25.
Mildly wonkishly, there are some secondary effects that could come from bolstering consumer spending. Our presumption here is that businesses are hoarding cash and that a higher minimum wage would drain that cash into the hands of people who would spend it.
I am skeptical about this. The business sitting on lots of cash are large corporation, especially in Tech and Finance. These are not minimum wage employers. One the other hand small businesses are still struggling with financing.
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Wednesday ~ July 6th, 2011 at 12:01 pm
foosion
You’ve decided to go with intuition over evidence? That’s a fair summary of what’s wrong with economics today.
Wednesday ~ July 6th, 2011 at 12:54 pm
rjs
we need rising raises across the board to get out of a balance sheet recession… lower wages just digs a deeper hole..
Wednesday ~ July 6th, 2011 at 1:33 pm
Lord
Facts, who needs facts when we have biases? I find Why only one in four teens is employed by Invictus at Ritholtz much more informative and persuasive.
Wednesday ~ July 6th, 2011 at 2:19 pm
marmico
Mulligan “forgot” about the decennial census hiring going supernova. GIGO.
Wednesday ~ July 6th, 2011 at 8:17 pm
Khal Mojo
Considering productivity has been increasing so much this last ten years, especially in the last three, it’s cheaper to hire a worker even at a higher rate. With more productive labor, whether through technology or other means,, more can be produced. That means minimum wage means less and less, probably zilch.
Thursday ~ July 7th, 2011 at 6:08 am
Passing By
Professir Smith -
Theory says a minimum-wage increase will create employment losses. Empirical studies say maybe so, but they’re small. Is that a conflict?
Well, if we parameterize the theory with plausible values, it predicts an effect about the size that the empirical studies report.
For example, minimum-wage workers are heavily concentrated in retail. Hourly employee wages are less than 20% of the total cost base in fast-food outlets, and an even smaller percentage in many other minimum-wage retail businesses, like gas stations. So if there’s a 40% minimum-wage increase, passed through entirely to consumers, it’s less than an 8% price increase. The industry’s price elasticity is somewhere around one (1), so that price increase would reduce retail volume by less than 8% … presumably leading to job losses among the minimum-wage employees of less than 8%. (Considerably less, actually, since all the numbers above err on the high side.)
Theory and empirics seem to agree. What am I missing?
Thursday ~ July 7th, 2011 at 6:58 am
Passing By
One other thought …
The obvious beneficiaries of raising the minimum wage are the minimum-wage workers who get an earnings increase. But the millions of people who earn modestly more than the minimum also benefit, since the higher minimum helps raise their wages by removing the possibility of replacing them with lower-wage people.
One suspects that this knock-on benefit is the real reason that minimum-wage laws enjoy widespread political support.
Thursday ~ July 7th, 2011 at 7:13 am
Th
There would be a much better argument for cutting the minimum wage if corporate profits weren’t so strong right now.
Yes, theory says that increasing the cost of labor decreases demand for labor. There is also a theory that people having more money increases demand for goods and services which increases demand for labor. This is not a single variable experiment and studies merely show the two factors are at odds and tend to cancel each other. There is probably a really nice equilibrium point someone could model if there weren’t so many fingers on the scales.
Friday ~ July 8th, 2011 at 8:02 am
Art Mann
Sweden’s economy is bustling along just fine. So, what is their minimum wage?
$18.00 per hour.
Thursday ~ July 21st, 2011 at 10:35 am
Fred Geisler
Sweden’s economic position at the moment isn’t only connected to their minimum wage.
When the recession hit, the Swedes had a budget surplus, predesignated to be tapped in case of recession. When the recession hit Sweden, the funds were tapped for economic stimulus, which worked as expected and put their economy back on track.
In 2000, the US was on track to have a budget surplus around 2007-2008. Looking at the unfamilar problems of managing a surplus, Alan Greenspan asked Congress to ensure those problems didn’t need to be dealt with. Congress granted his request.
Friday ~ July 8th, 2011 at 3:00 pm
The Minimum Wage, Ctd « Modeled Behavior
[...] 2011 in Bias and Rationality, Economics | by Karl Smith Kevin Drum doesn’t like my take on the minimum wage This kind of stuff bothers me on a bunch of different levels. Let’s count the [...]
Tuesday ~ November 8th, 2011 at 1:58 am
Links for 2011-07-06 « Random Ramblings of Rude Reality
[...] In Which I Agree With Casey Mulligan on Modeled Behavior [...]