Clemens and Wither Summarize Their Empirical Findings on the Minimum Wage

by Don Boudreaux on January 15, 2015

in Myths and Fallacies, Science, Seen and Unseen, Work

Yesterday at Vox, University of California at San Diego economists Jeffrey Clemens and Michael Wither summarized their recent empirical findings of the long-term employment effects of minimum-wage legislation.  (HT James Pethokoukis) A slice:

Over the late 2000s the average effective minimum wage rate rose by nearly 30% across the United States.  Our best estimate is that these minimum wage increases reduced the employment of working-age adults by 0.7 percentage points.  This accounts for 14% of the employment rate’s total decline over this time period and amounts to 1.4 million workers.  A disproportionate 45% of the affected workers were young adults (aged 15 to 24).

We next estimate the minimum wage increases’ effects on low-skilled workers’ incomes and income trajectories.  We find that binding minimum wage increases reduced low-skilled individuals’ average monthly incomes.  Targeted workers’ average incomes fell by an average of $100 over the first year and by an additional $50 over the following two years.  While surprising at first glance, we show that the short-run estimate follows directly from our estimated effects on employment and the likelihood of working without pay.  The medium-run estimate reflects additional contributions from lost wage growth associated with lost experience and training.

These findings comport with well-establised and widely accepted (at least among economists) principles of economics.  No head-scratching tales of empirical reality – such as the tale told by minimum-wage proponents that monopsony power is rampant among the thousands of different employers of low-skilled workers – must be told to fit these findings into economists’ larger understanding of the way the world works.  Clemens’s and Wither’s findings make sense, especially in light of the fact that countless other empirical investigations of the consequences of minimum-wage legislation find results consistent with those found here by Clemens and Wither.

For empirical studies of the effects of minimum-wage legislation to justify a conclusion that such legislation actually does generally help the very workers that such legislation is ostensibly meant to help, the empirical record in support of this proposition would have to be overwhelming (which it isn’t remotely close to being).  The reason is that acceptance of such a conclusion would either require a foundational revamping of economics – one in which the law of demand is shown, as a matter of theory, to not apply to low-skilled workers, or require convincing empirical evidence that

(1) employers of low-skilled workers really do generally possess monopsony power, and

(2) that the super-competitive earnings by employers made possible by this monopsony power are not competed away on the output side of the market, and

(3) that the nature of the jobs performed by minimum-wage workers do not change significantly for the worse in response to minimum-wage legislation (for example, that employers of such workers do not respond to minimum-wage legislation by providing for their minimum-wage workers fewer on-the-job amenities), and

(4) that the existing conditions of employment under which current empirical investigations are carried out – conditions such as the kinds of firms that exist, their capital/labor ratios, the prevalent details of employment contracts – are themselves not labor-cost-minimizing adjustments to the existence of minimum-wage legislation.  If minimum-wage legislation has been around for a long time, it would already have weeded out of the economy business practices and firms that are especially effective at employing disproportionately large numbers of low-skilled workers at wages below the government-stipulated minimum.  Therefore, empirical studies done of changes today in the minimum wage will by their very nature be unable to capture the full effects of the minimum wage.

(1), (2), and (3) together mean that employers of low-skilled workers would have to be convincingly shown to be both monopsonists and monopolists yet have no ways of responding to a higher minimum wage other than by increasing the hours of unchanged low-skilled work-effort that they employ.  Any one of these propositions is highly implausible; the simultaneous combination of all three is simply unbelievable – which is why empirical studies that find that minimum-wage legislation generates happy outcomes for low-skilled workers are suspect to so many economists, and especially to those who consider seriously the full consequences of such legislation.  The reality of (4) only adds further reason to doubt empirical demonstrations that low-skilled workers are generally helped by a government policy that strips them of one of the most attractive bargaining chips they possess – namely, the ability, unimpeded by a government-mandated minimum, to offer to work at hourly wages below those that are paid to other workers or that are effectively paid for labor-substituting machinery.

And none of the above considerations touches upon yet another likely consequence of minimum-wage legislation, one made, for example, by Bob Murphy: the substitution of ‘better’ low-skilled workers for ‘worse’ low-skilled workers – for example, the substitution of experienced workers (coming out of retirement to work at low-skilled jobs at a higher minimum wage) for inexperienced teenagers.

Considering all of the above, any alleged scientific or empirical demonstration that minimum-wage legislation helps the least-advantaged of the low-skilled workers should not be taken seriously as a basis for public policy.  Such demonstrations are, at this stage at least, policy desires costumed in serious scientific analysis and not remotely persuasive science.

Keep in mind that if minimum-wage proponents are wrong in their analyses, then the bulk of the ill-consequences of minimum-wage legislation falls on people who can least afford to be burdened by misguided government policies.


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