At Bloomberg Noah Smith is skeptical about the findings in the CBO report on the effects of a $15/hour minimum wage. Here’s the kernel of his article:
When employers have excessive power, minimum wages cause much fewer job losses, and modest pay increases can actually raise total employment by drawing marginal workers into the labor force. An interesting new paper by economists José Azar, Emiliano Huet-Vaughn, Ioana Marinescu, Bledi Taska, and Till Von Wachter found exactly this sort of effect. The authors concluded that when there are fewer general merchandise stores (think: Wal-Mart) in a particular area, minimum wages tend to cause less unemployment among store workers. In areas with only a very few stores, higher minimum wages actually raise the number of store employees — just as monopsony theory would predict.
This single study isn’t definitive, and needs to be replicated with alternative methodologies. But it suggests that minimum wages could work very differently from how the CBO predicts. The CBO’s analysis relies on the idea that the job loss from minimum wage is proportional to the amount that it would raise earnings in a given area — in places like rural Kansas, where wages are low, this implies that the impact of a federal $15 minimum wage could be ruinous. But since small towns are precisely the kinds of places that are likely to have only a few employers, the negative impact of a higher federal minimum wage might be more muted than the CBO expects.
This seems like a good place to remind people of how the Congressional Budget Office operates. Typically, they receive a request from Congress for an analysis, stating the parameters and constraints of the analysis. We don’t know what the CBO was asked to do but, based on what they did, we can guess. They were asked to provide an analysis of three different minimum wage levels to determine the employment effects of the different scenarios and was probably asked not to consider run-on effects.
I should also point out that retail (“think: Wal-Mart”) is not the right comparison. The hospitality industry, mostly fast food and casual dining, is the right one since that is where most minimum wage employees are employed. Those are not in a monopsony position. They’re in competition with most homes and many grocery stores. As I have pointed out before these establishments operate on very narrow margins. Just a few points of additional costs can make the difference between profit and loss.
I do agree that more study is needed. Marry in haste, repent at leisure. Additional, broader studies should be done, focusing on regional and sector impact.
And let’s not lose sight of the underlying problem. The minimum wage is intended as an entry-level wage, mostly paid to people just entering the labor market to enable them to gain experience and go on to a better-paying job. The problems are that we’re not creating enough better-paying jobs, the number of entry-level workers is increasing faster than expected, and adults are trying to support families on what should be a wage for single young people.
Well, there’s one way to find out.
That’s a principle that could be applied to any number of things including determining whether the cars will stop for you when you step into a busy street. It applies to the present diplomatic efforts (such as they are) with Iran, North Korea, and China and domestic measures such as Medicare For All.
A basic problem is that once having started it’s pretty darned hard to pull back.
All true – I want more small-scale experiments at the local and state level. The most progressive state in the union is arguably California, so why not start there. And it’s also a political test – if you can’t get $15/hour passed in California, there’s no way it will pass nationally.
That experiment has already been done. California’s state unemployment rate is $12/hour. California’s unemployment rate is 4.3%, nearly 20% above the national unemployment rate of 3.6%. It’s been flat for some time. Since California’s minimum wage has been ratcheted up over the last 12 years that can probably be related to changes in the unemployment rate.
California has the most illegal immigrants in the nation, at about 2.2 million, so I am not sure how you are going to conduct your experiment or what you think the experiment was testing for (this assumes you are serious when you have claimed that illegal immigrants affect our jobs and wages). Also, we know that several states were more severely affected by the housing crisis, in particular CA, FL, AZ, and Nevada. You have lots of variables changing.
Steve