Saturday, January 04, 2014

A Tale of Dueling Studies and Confirmation Bias- Minimum Wage Edition

Increasing the minimum wage is an issue with popular support. 13 states raised minimum wages effective January 1, others are putting it on their legislative dockets. The evidence of effects of minimum wage increases is mixed, and proponents and opponents tend to like data that support their previously-held beliefs. Think tanks publish studies with policy proposals-- do X and we estimate Y will happen, with Y being positive or negative largely based on their prior biases.

The Economics Policy Institute, for example, published a paper supporting a minimum wage increase from $7.25 to $10.10. One effect, they argue, is a job-creating multiplier effect. If workers are paid more, they'll spend more, and employers will hire more to meet that demand. (They borrow Moody's economist Mark Zandi's multiplier for tax cuts to estimate a $1 increase in salary means $1.20 increase in output/income. A tax cut granted by an entity with the power to borrow or print the money is not the same as a statutory wage increase, but that aside...) They include this adjustment:
"The calculation of the stimulative impact of the minimum wage, however, must also account for the offsetting shift from employers. We assume employers pass on some of the minimum-wage increase (somewhere between 20 percent and 50 percent) to consumers through increased prices."

In other words, the ONLY offset is the price increase. There are no reductions in jobs or hours and no reduction in the wages of other employees as a result of the increased cost of labor to business from a 39% increase in their minimum wage workers. The other 50-80% of the increase in wage goes directly to the pockets of affected workers who keep their jobs and hours and are better off. More workers get hired everywhere as a result of economic growth. Sound too good to be true? What would be the downside of increasing the minimum wage

The problem is that contradicts other studies. The big debate has been about employment effects of minimum wage. Evidence on this is hotly contested but EPI goes with a very well-known 1994 paper looking at the difference in employment between New Jersey and Pennsylvania after New Jersey increased its minimum wage by 18.8%, which found no discernible adverse effects on employment.

The problem is that the Center for Economic Progress, another think tank with similar leanings as EPI, recently published a survey of the literature on minimum wage to determine why there might be no discernible difference in unemployment. "Mixed evidence" is a phrase that occurs many times in the paper, but the studies they evidence the least-disputable are that:
1. There is some reduction in hours, though those might not be "large."
2. Prices rise moderately.
3. Firms require "improvements in efficiency" - demanding better attendance and productivity from workers in response to their increased cost.
4. Wages of non-minimum-wage workers are cut ("compressed") to offset the cost.
5. Labor force participation of teens increases.
6. Profitability of firms in Britain were reduced.

#1 and #4 are not accounted for the EPI paper, it would significantly reduce their multiplier. And you have to keep in mind that they assume all states everywhere would see no reduction in employment from a larger minimum wage increase than what was seen in 1992. No move to capital (machines) to replace the higher-cost worker, no reduction in workforce. Ask yourself: If you're an employer in a county with a 15% unemployment rate, what would you do? Would you be more discriminate in who you hire since you have an above-average pool available to you? Might you let one of your more unproductive employees go as others enter the labor force? How much would you tolerate your profits to be reduced by before you made changes?

EPI makes a moral argument in their paper that those most vunerable in society would be those most helped by a minimum wage increase. However, studies have found that not to be the case. A study done on the same New Jersey minimum wage hike found that those helped by the wage hike were "young, single, and part of middle and upper-income families." David Neumark recently wrote that his student found that a modest minimum wage increase would disproportionately benefit "families with incomes more than three times the poverty line." (Neumark and others argue expanding the EITC is a much more efficient policy to help the working poor.)

Most economists and statisticians would dismiss EPI's study as biased and flawed, as well as recognize that CEPR's survey includes some suspect word choices and highlights. But policymakers, journalists, and the general public may not be that savvy. Hence, a politician might stand up today and say "If we do X, a great Y will happen. It's been researched."

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