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Raise the Minimum Wage?
Posted by: Dale Franks on Monday, June 19, 2006

Ezra Klein, bless him, seems to have decided that raising the minimum wage would not have adverse effect on the employment rate for lower-skilled workers.
The lowest unemployment rate in the country is Hawaii's 2.8 percent, which somehow survives with their $6.75 minimum wage. Second lowest? Florida, with a luxurious $6.40 per hour. Vermont, resting comfortably at number 5, has a minimum wage of $7.40! And the very highest unemployment in the nation? Mississippi, with no minimum wage laws at all.
This assertion has gotten Cato's Will Wilkinson's panties in a wad.
Ezra Klein says of the law of demand that “It’s a good guideline, but it’s got no end of exceptions.” The minimum wage, of course, is one those exceptions.

They’re both right in general, if not about the minimum wage in particular. There are more economics classes, and they do teach exceptions. However, let’s not imagine that there is some advanced economic class in which you learn that the law of demand is false.
Wilkinson then goes on to note that:
If you want to say that a wage floor is not going to throw some low-wage workers out of their jobs (or prevent them from getting jobs), you’ve got to say, in a principled way, why not. The burden is on those who predict an exception to an immensely reliable regularity.
That's a fairly high bar to clear, and, according to Megan McArdle, it's far from clear that Mr. Klein has cleared that bar.
[T]he correlation doesn't even look to me like it's there. Try as I might, I don't understand how Mr Klein got that conclusion from these data; it seems to me that the states with minimum wages above the federal minimum are vastly more likely to have unemployment above the federal average. The correlation is not perfect, of course; this is the real world we're talking about. But of the nineteen states with a minimum wage above the Federal average, twelve are in the bottom half of the unemployment distribution, which is to say they have higher unemployment rates...Whereas there are only 7 in the happy end of the unemployment scale...

Of those, only three are in the ten best employment states, versus 5 in the worst employment states; and all three of the best employment places are states that are heavily dependant on the tourism industry. I just don't see how this is a justification for high minimum wages.
The miniumum wage is a tricky subject. Trying to find out the effects of increasing the mimimum wage across time requires a fair bit of rigor in establishing what the results of such a rise might be.

First, there's a methodological problem. One of the common methods for determining the effects of minimum wage increases is to survey firms in year 1 of the study, then come back in Year 2 to survey the firms again. Commonly, what happens is that, if you can't contact the firms again in Year 2, you drop them from the study, and of the remaining firms, you compare the number of people they employed in year 1, with the number employed in Year 2.

Sounds good right? Except there's a big problem with this methodology. For instance, let's say you wanted to learn what the casualty rates for soldiers in World War II was. So, you survey 1,000 soldiers in 1941. In 1946, you survey those same 1,000 soldiers, and if any don't respond, to the 1946 survey, you throw them out of the survey sample. So, in 1946, you write that, out of a sample of 750 soldiers in 1941, all 750 soldiers were alive in 1945, thus "proving" that no US soldiers died in WWII. Obviously, that's a faulty result.

But it's very similar to the results of the Card & Krueger study that the Left is always so keen to quote.

Let's say your survey shows that there are 100 firms, each of which employs 10 people at minimum wage in Year 1. In Year 2, you find 80 firms employing 11 people each. So, you throw out the 20 non-responding firms, and you report a 10% increase in employment! Woo Hoo!

Except, of course, that in the real world, employment has declined from 1,000 workers to 880 workers.

The other problem is much more difficult than just looking at raw employment numbers. It's important to track the substitution effect.

As the cost of employment rises, you have to look at who employers are hiring. Let's say that, in Year 1, prior to a rise in the minimum wage, you are employing 1,000 black males who are the primary wage earners for their families. Then, in Year 2, after the rise, you are still employing 1,000 workers, but they are all middle-class, white college students.

Even though the rate of unemployment for minuimum wage earners hasn't changed, the demographics of who is employed at the new rate has changed signifigantly. The primary beneficiary of the rate change has been people who, arguably, are the least needy, while those who have been most adversely affected by the change are those for whom the change was designed to help. In this case, obviously, the real-world results are at direct variance with the intended effects. Employers have, in this case, substituted workers with fewer skills, but greater need, for workers with higher skills, but less need.

Additionally, we haven't even touched on the changes that might have occurred in the employment market as a whole. What if Year 1 occurs in a recession, and Year 2 occurs at the height of an economic expansion. The unemployment rate might drop irrespective of changes in the minimum wage, for no other reason than that the labor market in general has become tighter.

And, of course, productivity is an important consideration, too. If an employee must be paid $7.00 per hour, but they can only produce $6.40 per hour of product, then it will never be economic to hire them.

In short, broad unemployment measures are not particularly indicative that raises in the minimum wage are useful in accomplishing their stated effects, i.e, providing a decent wage to lower-skilled workers. You must drill down deeper than that to guage the effects of increases in the minimum wage.
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Previous Comments to this Post 

Outstanding bit about substitution effect. And Wilkinson was being polite. Klein is making the economic equivalent of a flat earth argument. What’s so ironic is this argument’s quaintness. Klein is simply doing what Hayek describes economists as having wasted their time pursuing for centuries: attempting to determine pretium mathmaticum, a mathmatical price.

Written By: Peter Jackson
Well, here is a partial explanation. Hawaii and Vermont are both FAR AWAY from Mexico, while Mississippi is not. When the minimum wage goes up, you just displace poor white and black workers with brown ones who aren’t on the books.
Written By: kyle N
As I recall some Human Rights study from Berkley just recently discovered,quel suprise! that illegals are being paid less than the minimum wage around New Orleans these days.

Kyle’s observation about proximity to Mexico and the minimum wage is spot on.
Written By: looker
URL: http://
The law of demand works for illegals too. There might be isolated incidents where young Mexicans are fooled or are victims of miscommunication, but as far as I know, you couldn’t find a minimum wage job in New Orleans to save your life. At the beginning of March for example the starting wage at Home Depot was $18/hour, and they were experiencing around 80-90% turnover every ten days or so.

There are a lot of left-wing volunteer groups in New Orleans right now and though they help a lot of folks they also have their agendas. Just do a Google News search for "New Orleans" and you’ll find a bunch of stuff from Acorn and others.

Mississippi has been under-developed and under-educated since... forever. It’s in places like these where the supply of low-skilled/unskilled labor has always far outstripped the supply of low-skilled employment that hikes to the minimum wage cause the most unemployment. Vermont and Hawaii are rich states and very expensive places to live (compared to the rest of the country) where I imagine the minimum wage would probably have to go well over ten dollars an hour before they saw any effect on employment.

Here’s some data from 1990 showing that in 1990 Vermont actually had a higher percentage of Mexicans than Mississippi, though barely.
Written By: Peter Jackson
Klein’s streak of unconvincing liberal apologetics tromps on.
Written By: Unknown
URL: http://
At the beginning of March for example the starting wage at Home Depot was $18/hour, and they were experiencing around 80-90% turnover every ten days or so.
Where did you get this statistic? It seems high for a floor person or cashier.
Written By: VRB
URL: http://
I got it from the manager of a Home Depot in Metairie.
Written By: Peter Jackson

I can certainly believe your statistics. If anyone doesn’t, please drive down here and take a gander. Mexican workers are all over New Orleans and they didn’t drive, hitchhike, or whatever to work for under $3 an hour. We can’t find enough people to do all the work we need done. How in the world could you hire people to work at minimum wage when any able bodied worker can pick up a shovel and get $10! I have had friends here in Baton Rouge offered over 20 an hour to go work there. Sounds only ok except that is $20/hr 24 hours a day! They are paying for you to go and live there, not just work. Anyway, Peters right and the guys from Berkeley are full of crap.
Written By: Lance
URL: http://
I am definitly living in the wrong place.
VRB in Philly
Written By: VRB
URL: http://
No, my comment about illegals is true for some areas, they hold the wages down.
But not New Orleans. That is a special case. If i was still a young man I would have gone there and lived with my sister and done a lot of work for high pay.
But I am no longer young, and no longer willing to break my back.
Written By: kyle N
I believe that minimum wage should be increased. We all can agree that it is pretty dificult, if not impossible, to live on minimum wage.
Granted, people that get paid minimum wage are not the most qualified but they do perform an essential job in industries and a consumer oriented society.
Of course there are concerns that oppose this idea. If inflation is one of them, then the working hours could be increased to at least 40 a week, since most minimum wage workers work from 30 to 35. In addition, if these workers earn more pay, they will utilize more services, maintaining low unemployment rates and they will indirectly generate jobs.

Click here to sign a petition to increase minimum wage.
Written By: xeronimo
URL: http://
I believe that minimum wage should be increased.

So why don’t we just make it $100 an hour and be done with it?
Written By: McQ
$100. Can’t have that! The well off would benifit too.
Written By: VRB
URL: http://
I believe that minimum wage should be increased. We all can agree that it is pretty dificult, if not impossible, to live on minimum wage.
It’s even harder to live on no wages, because companies don’t want $10 /hr liabilities.
Written By: Jordan
URL: http://
Here’s a study that finds that raising the minimum wage does have an adverse impact on employment using the natural experiment of OR and WA raising their minimum wages:

It has a good write up of previous work done in the area of wage/employment relationsihps as well.
Written By: Shek
URL: http://
An expansion of the Earned Income Tax Credit would be a much more effective and equitable way of helping the working poor than raising the minimum wage.
Written By: David F. Prenatt, Jr.
I think they should raise minimum wage because it it impossible for a single parent to make it. I feel that there would be alot of people getting off of welfare if they were making more money.That would save the goverment TONS!
Written By: Cyn
URL: http://
Ok guys/girls, lets look at it from a microeconomic level and ofcoz ceteris-peribus, if wages go up, then consumers as a whole will have larger levels of expendible income which would definately lead to a higher level of consumption and thus economic activity. On the flipside there are business institutions which would require more capital due to the higher wages and thus ask more money from the market of expendible income.

Naturally following the timeline it would require that wages be increased first before the benefits are felt by the economy at large.

What do you guys think of my arguement?
Written By: Ryan
Ok guys/girls, lets look at it from a microeconomic level and ofcoz ceteris-peribus, if wages go up, then consumers as a whole will have larger levels of expendible income which would definately lead to a higher level of consumption and thus economic activity.
Wages are a cost of doing business so they’re rolled into the price of consumables, meaning any increase in buying power is basically overcome by increased prices.

It isn’t about how much you make. It is about how much you can buy with what you make. Minimum wage is a feel good issue with no real lasting effect for those to whom it is supposed to help.
Written By: McQ

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