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In what has become a running joke amongst those skeptical of the claim that minimum wage increases have no effect on unemployment, a recent report by the Employment Policies Institute showed that 174 of the 184 co-sponsors of a bill to raise the federal minimum wage to $15 an hour hired unpaid interns.
My personal favorite example of this type of this is when the Freedom Socialist Party, which was pushing for an even more ridiculous $20 minimum wage, posted ads for new employees offering $13 an hour.
The party’s national secretary doused himself in irony to defend his organization by saying “We’re practicing what we’re preaching in terms of continuing to fight for the minimum wage… But we can’t pay a lot more than $13.”
Hmmm, perhaps some of the unemployment a higher minimum wage would bring might actually be beneficial. Maybe we’ve gotten this whole debate wrong…
At the federal level Nancy Pelosi promised to pass a $15 an hour minimum wage if the Democrats take control of the House in 2018. Increasing the federal minimum wage across the nation is far more vulgar than increasing a state or city minimum wage. Having spent some time in New York recently, I can definitely understand the desire to increase wages. When a 350 sq. ft. studio that lacks enough space for anything more than a mini fridge rents for $2500 a month, taxes are through the roof and a pack of cigarettes costs $13, it can be hard to get by. Artificially raising the minimum wage isn’t going to fix that, but the desire to is understandable.
New York State may have the seventh highest median per capita income in the country, but the cost of living vary wildly by city and state throughout the United States. The Mises Institute’s Ryan McMaken showed that once you have accounted for the different costs of living in different states, “New York ($26,152) is now the state with the lowest median income due to its very high cost of living.”
And they want to put a one-sized-fits-all $15 minimum wage across the whole country? From Podunk, Kansas to Midtown Manhattan, the geniuses in Washington will decide the minimum someone can agree to work for someone else. Whatever would we do without such wise bureaucrats to guide us?
In Podunk, Kansas, a $15 minimum wage would be catastrophic. But even in large, wealthy cities, the minimum wage offers no panacea. The most notable example of this is Seattle, which put in motion a gradual increase to a $15 an hour minimum wage back in 2015.
Now a $15 minimum wage in a city like Seattle was unlikely to ever be disastrous. The city is so expensive that wages are generally much higher than they are in other parts of the country. In 2015, the median household income in Seattle was $80,349 while it was only $56,516 in the United States on the whole. In other words, Seattle’s median income was 42 percent higher than the American average.
That being said, increasing the costs of labor is still going to decrease its demand. Early on, economist Mark Perry noted, with the imperfect data he had available, that the unemployment rate seemed to increase after the passage of the bill. Anecdotal evidence, such as McDonalds and others rapidly switching to automated self-order kiosks, also trickled out. But with more time having passed, we have a better vantage point to evaluate the law.
Now we have a study from the University of Washington that demonstrates that the new minimum wage law “…reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent.” Not a disaster for a wealthy city like Seattle, but it’s not good. And it’s more proof of what you should expect from basic economic theory.
This story gets much more interesting though, as another study from the University of California Berkeley showed no effect. What gives? The title of Daniel Person’s article on the subject gives away the punchline, “The City Knew the Bad Minimum Wage Report Was Coming Out, So It Called Up Berkeley.” Here’s how Person describes what happened,
While the Berkeley report… was cheered in many corners of the web, one blogger at Forbes called foul. Michael Saltsman is an avowed critic of higher minimum wages… [and he] raises a good question, pointing to a paragraph on the title page of the study that says the Berkeley report was “prepared at the request of the Mayor of Seattle.” This was odd, Saltsman noted, given that the city was already funding a series of six studies from the University of Washington on the impacts of the wage law. Why look outside the city for research when taxpayers are already funding local number crunching?
He had a theory: Those UW studies just weren’t positive enough. Saltsman pointed out that Reich is a go-to academic for proponents of a $15-an-hour minimum wage across the country.
After contacting the mayor’s office and looking into the matter further, Person believes the timeline is as follows,
The UW shares with City Hall an early draft of its study showing the minimum wage law is hurting the workers it was meant to help; the mayor’s office shares the study with researchers known to be sympathetic toward minimum wage laws, asking for feedback; those researchers release a report that’s high on Seattle’s minimum wage law just a week before the negative report comes out.
As Person puts it, Seattle “weaponized data” to vindicate its minimum wage increase.
The criticism that because Seattle’s overall economy is booming that that somehow detracts from the minimum wage hindering it in any way is also false. As Jonathan Meer observes,
This is exactly backward: If Seattle is growing faster than expected, then the counterfactual comparison group is not keeping up as well at it should be, understating the extent of the job losses. It also seems strange to claim that low-wage work will do worse in good economic times, when the recent evidence of the Great Recession shows the opposite. More to the point, recent research shows that the negative impacts of the minimum wage are higher during economic downturns, not boom times.
Finally, it would be worth addressing the often-heard point that recent studies have disproven the idea that minimum wages increase unemployment. Or in other words, that apparently the cost of labor behaves completely differently from other goods. In a review of over 100 studies, economists David Neumark and William Wascher found that,
…there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.
Yes, minimum wages still do increase unemployment.
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