Here’s a second letter that I sent today to the New York Times:
Gary Chaison misses the real, if unintended, lesson of the Russell Sage Foundation study that finds that low-skilled workers routinely keep working for employers who violate statutory employment regulations such as the minimum-wage (Letters, September 8). This real lesson is that economists’ conventional wisdom about the negative consequences of the minimum-wage likely is true after all.
Fifteen years ago, David Card and Alan Krueger made headlines by purporting to show that a higher minimum-wage, contrary to economists’ conventional wisdom, doesn’t reduce employment of low-skilled workers. The RSF study casts significant doubt on Card-Krueger. First, because the minimum-wage itself is circumvented in practice, its negative effect on employment is muted, perhaps to the point of becoming statistically imperceptible. Second, employers’ and employees’ success at evading other employment regulations – such as mandatory overtime pay – counteracts the minimum-wage’s effect of pricing many low-skilled workers out of the job market.
Sincerely,
Donald J. Boudreaux
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Perfect.
As I recall C&K were fairly cocky about their results too (hinting that the law of demand maybe didn’t apply); as most will recall there was finally a comment on C&K that appeared in the AER by Neumark and Wachter. Among other things, it seems that among other things, C&K’s data collection was by the inexact method, to say the least. The delay by the AER in publishing a critique of C&K, certainly served C&K well, but it is a black eye on the profession. So, it is great that Don is bringing it up again and with new evidence supporting the good old fashioned demand and supply analysis that C&K cavalierly berated with temporary cover from the AER editors.
Now, I would be skeptical that the minimum wage is “statistically imperceptible.” There’s a big difference immigrants who work for next to nothing and saying that a majority of low-wage American workers are paid under the table.
I have to chuckle at the minimum wage is “too high” at $7.25 an hour. I s’pose in earlier times the minimum wage had no effect because the U.S. was “on a roll” – incomes were rising fast and living standards were improving so the minimum wage had no effect. But now the U.S. train has stopped and is going backwards – wages have to go down and so does the standard of living and now the minimum wage is beginning to bite.
“The minimum wage get circumvented and therefore it is wrong?” So? Every so often someone someone in the West has been found owning a slave or two. The laws (/constitutions) against slavery are being circumventing every now and then.
All of this discussion with no mention of the shadow economy?
You all sound like a group of government employees
I am not convinced by the reasoning of this post. The Card-Krueger study was done on California and New Jersey minimum wage job market, and showed that a relatively modest increase in the mimimum wage did not decrease emlpoyment, at least not right away, but that it did increase wages.
I don’t see the connection with The Russel Sage Foundation study, which was done in New York, Chicago, and California some number of years later. It is no surprise that employers will attempt to and succed in paying some workers less, as that study finds. That, however, does not impeach the results or conclusions of the Card-Krueger study.
Your reasoning seems to be that because it can be observed that some employers are violating minimum wage laws and some workers are accepting this violation, these violations must be large enough to explain why an increase in the minimum wage is actually illusory because not enough people follow it anyway. Perhaps true, but certainly a leap from the more reasonable conclusion of: People will try to pay as little as possible and some will even break the law to do it; a higher wage mandated by law results in a higher real wage, at least in the short term.
Surely most would agree that generally, a price floor for labor will generally decrease demand and increase supply. The specific magnitude of that effect, however, when considering the givens of the U.S. labor market and work force, implications of minimum wage increases redistributing the allotment of profit between the different actors within a firm, the liklihood of workable substitutes, whether there is compliance with the new law, etc., is worth exploring.
In conclusion, but studies are good and interesting, but are not likely to be nearly as related as the post suggests, and it cannot be said that the findings of the Russel Sage Foundation study plays a significant role in explaining the result in the Card-Kreuger study.
I, for one, am happy that when I wasn’t old enough to work legally, a local bike shop owner broke the rules and gave me a job assembling bikes in the back room of his shop. I was willing, it taught me some life lessons, my parents got me out of the house for productive pursuits and the bike shop owner almost got what we paid for.
I’m also happy to have had several other off-the-books jobs including yard work, painting, snow removal and throwing papers.