Good news from Arkansas! (Minimum wage increase)

[Imran Siddiqui]

Myth and Measurement: The New Economics of the Minimum Wage has been discredited. The stats collection was incredibly faulty. For one they asked employers if they intended to reduce jobs without verifying if they ever did it. It was actually found that, for example, the New Jersey raising of the minimum wage resulted in a decrease in employment when others checked up on what was 'intended' by the employers. Furthermore the original book only dealt with the fast food industry.. not the entire economy.

[Adam Smith]

Rufus:

I specifically did not cite Card and Krueger because their results have been completely repudiated in a subsequent study by Murphy and Welsch. Card and Krueger asked fast food managers what they thought would happen when the minimum wage increased. Murphy and Welsch went back to these same establishments and actually looked at the time cards. When they did the analysis with the actual data they found that employment of low-skilled labor decreased by the same amount as Brown, Kilroy, and Kohen conclude.

If only economists were that careful

edit: x-post with Imran

[Rufus T. Firefly]

Originally posted by Imran Siddiqui
Myth and Measurement: The New Economics of the Minimum Wage has been totally discredited. The stats collection was incredibly faulty. For one they asked employers if they intended to reduce jobs without verifying if they ever did it. It was actually found that, for example, the New Jersey raising of the minimum wage resulted in a decrease in employment when others checked up on what was 'intended' by the employers.

Didn't know that. My bad. Carry on, AS.

[Dinner]

Originally posted by Gibsie
Is it really that different in the US? Over here, you become a manager at McDonalds and your level of pay rises by pennies.

It's the same here. Either you're skilled and make good money or you are unskilled and work crap jobs for very little money. The lesson is stay in school and study something worth while like science, engineering, or medicine.

[Dinner]

BTW if you raise the minimium wage enough then you will see an uptick in unemployment amoung the really low paid workers. But on the other hand it costs money to buy new more efficent systems which allow employers to produce more with fewer workers so as long as the wage increases stay below that thresh hold then they're likely to just suck it up and pay the higher wage. Especially if they can pass all or part of the increase on to costumers or squeeze suppliers for it.

With record profits out there in corporate America (as we know form JohnT's endless "the good times are rolling" threads) it is hard to say corporations can't afford to pay a bit more to the janitor. It is also equally unlikely that McDonald's will find a way to outsource the fry cook so it is hard to see them firing these people. Hell, places like In'N Out Burger start their people at $13 per hour and they're burgers cost almost the same as the other fastfood places so it can be done.

[Gibsie]

They might start outsourcing workers on the drive-thru to India though

(I hope no-one from McDonalds is reading this, although most fast food workers are immigrants anyway, so I guess it wouldn't make much difference to whether I can understand them or not)

[Imran Siddiqui]

[q=Oerdin]as we know form JohnT's endless "the good times are rolling" threads[/q]

JohnT's?

[Imran Siddiqui]

Originally posted by Gibsie
They might start outsourcing workers on the drive-thru to India though

(I hope no-one from McDonalds is reading this, although most fast food workers are immigrants anyway, so I guess it wouldn't make much difference to whether I can understand them or not)

Well... recall that most McDonalds are owned by franchisees. They can't outsource, because they don't have the cash to, because they own one restaurant. So... no, don't worry about Indian drive through people... unless you live in an area with a lot of Indians .

[Ogie Oglethorpe]

Originally posted by Imran Siddiqui
Myth and Measurement: The New Economics of the Minimum Wage has been discredited. The stats collection was incredibly faulty. For one they asked employers if they intended to reduce jobs without verifying if they ever did it. It was actually found that, for example, the New Jersey raising of the minimum wage resulted in a decrease in employment when others checked up on what was 'intended' by the employers. Furthermore the original book only dealt with the fast food industry.. not the entire economy.

Beat me to it.

Faith and economics at the Star Tribune

The Minneapolis Star Tribune editorial on the proposal to raise the minimum wage from $5.15 to $7.00 is, as might be expected, pitiful: "Minimum wage/Time for an increase." It is also, however, a perfect example of what passes for argument and analysis among the Star Tribune's lefties-only editorial board.

The proposal emanates from the Democrat-controlled Minnesota Senate. The source of the proposal is a kind of warrant of its good faith in the eyes of the Star Tribune. More importantly, however, the proposal reflects "an article of faith." The relevant article of faith here is one found in the High Church of Liberalism: "that someone who works full time should achieve a certain degree of economic dignity."

On the one hand, this is a frustratingly vague article of faith: What the heck is economic dignity? What degree of economic dignity should someone who works full time have? On the other hand, we may infer that it is an article of faith with an amazingly high degree of precision: "I believe in jobs that pay $5.15 an hour in 1997 dollars, or $7.00 an hour in 2006 dollars." Is there anyone out there in Strib land who wonders whether $7.00 an hour doesn't buy enough economic dignity to warrant credal status? Why so cheap an article of faith? Why not $14.00 an hour? Or $140.00 an hour? Perhaps this is where that "article of faith" point comes in handy. Credo quia absurdum.

But this is the kind of article of faith that has evidence to support it! Raising the minimum wage by law has no adverse economic consequences. Economists, who might be thought to know something about the subject, thought so once upon a time. (Actually, they still do.) Now, however, it is only fuddy-duddy "business lobbyists" who hold such troglodytic views:

There are principled arguments against a higher minimum wage, but they no longer hold up under scrutiny. Business lobbyists say that a higher wage will stifle job creation. The idea is plausible in principle, but a landmark study by Princeton economists David Card and Alan Krueger found the effects to be negligible in practice. In fact, of the 13 states that exceeded the federal minimum wage in 2003, seven outperformed the rest of the country in job creation.

What was that Card/Krueger study? Why bother with details when you're dealing with an article of faith, and of course the Star Tribune doesn't bother. The famous Card/Krueger study involved calling fast food outlets in New Jersey after New Jersey raised its minimum wage in 1992. The study found that raising the minimum wage had no impact on jobs at the fast food outlets.

Here is a good summary of the Card/Krueger study and its flaws by Benjamin Zycher:

The most frequently cited, and seemingly most convincing, new study takes advantage of a "natural experiment" created when New Jersey raised its minimum wage from $4.25 an hour to $5.05 in April 1992. David Card and Alan Krueger of Princeton reasoned that since economic conditions ought not vary greatly between southern New Jersey and eastern Pennsylvania, which are essentially a single economy, looking at employment trends in the two states ought to reveal the effects of the minimum wage.

Card and Krueger conducted telephone surveys of about 400 fast-food restaurants in February-March 1992, and then again in November-December 1992. They asked questions about full- and part-time workers, wages, benefits, and prices. From their statistical analysis of those survey data, Card and Krueger not only "find no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state," but "find that the increase in the minimum wage increased employment." Indeed, the Card/Krueger statistical analysis suggests that the 18.8-percent increase in the New Jersey minimum wage yielded a 20.8-percent increase in employment relative to the Pennsylvania sample.

One immediate problem is that the authors looked only at major fast-food chains: Elementary economic analysis does not say that if you increase the minimum wage, employment will go down in every business--or in any particular business. The higher minimum wage might have differing impacts across firms. Indeed, it is possible that the major fast-food chains might emerge better off if the increased minimum wage raises costs at such smaller competitors as mom-and-pop fast-food stands.

Moreover, the Card/Krueger study turns out to have a major flaw: The survey data upon which it depends are lousy.

Suspicious of the Card/Krueger data and findings, the Employment Policies Institute gathered the actual payroll records from the Burger King franchises in the Card/Krueger zip codes and compared them to franchises surveyed in those zip codes. The survey data were wildly inconsistent with the payroll records. (The payroll sample also includes some restaurants that Card and Krueger missed.)

Independently, David Neumark of Michigan State and William Wascher of the Federal Reserve noticed that the variation in employment changes across the surveyed restaurants in the Card/Krueger sample seemed implausibly large--some restaurants had supposedly added huge numbers of employees while others had supposedly cut large numbers. In relatively small businesses, this sort of fluctuation seemed odd.

So Neumark and Wascher reviewed the payroll employment data gathered by EPI. When they applied the payroll data to the same econometric model used by Card and Krueger, they got completely different results. The variation in employment changes declined markedly, and analysis of the new data yields an estimated 4.8-percent decline in New Jersey employment relative to the Pennsylvania sample as a result of the higher minimum wage. Where payroll data could be compared with survey data for specific restaurants, Neumark and Wascher also found numerous errors in the Card/ Krueger data.

Looking just at Burger King restaurants, for instance, the Card/Krueger survey data show employment declines in two of three Pennsylvania zip codes, while the payroll data show employment increases in all three zip codes. Neumark and Wascher conclude that the questions used by Card and Krueger were too vague to generate precise information. For example, the survey asked how many "full-time" and "part-time" employees a restaurant had. But it didn't define either those terms (40 hours a week? 30?) or the relevant time period (within the last week? month? year?), leaving different restaurant managers to define the question differently. In short, using the actual payroll data instead of the survey "guesstimates" effectively refutes the Card/Krueger findings yielded by the New Jersey/Pennsylvania "natural experiment."

Or perhaps the Star Tribune is referring to other Card/Krueger studies, or to the book that Card and Krueger subsequently published on the subject, Myth and Measurement: The New Economics of the Minimum Wage. The Star Tribune's reference to "a landmark study" makes it difficult to determine what is being cited. In any event, see Deer, Murphy and Welch, "Sense and Nonsense on the Minimum Wage." The Star Tribune editorial today falls into the category of "nonsense on the minimum wage."

edit - xposted with a whole slew of people

[lord of the mark]

Originally posted by Adam Smith
A negative income tax would increase the incentive to work , instead of increasing unemployment. It may not be perfect, but its a lot better.

A negative income tax has to be funded, which (holding macro policy and all other spending programs constant) means an increase in taxes, and all taxes have deadweight costs. Whether those deadweight costs exceed the deadweight costs of a change in the min wage, is not, I think, knowable a priori. (though I suppose you could structure a tax to be similar to the costs imposed on employers by the Min wage, and thus show thats the worst case, and then suggest the existence of a tax with lower dead weight costs - but that would, I think, ignore the actual legal, administrative, and political constraints on tax policy)

in any case, a negative income tax is probably not politically feasible in the US at this time.

Pareto optimality is a concept of limited usefulness (at least as far as normative policy judgements) in a society where for legal, admin, and political reasons you cant simply shift income around.

[MrFun]

Originally posted by Oerdin

With record profits out there in corporate America (as we know form JohnT's endless "the good times are rolling" threads) it is hard to say corporations can't afford to pay a bit more to the janitor.

DanS's threads, you mean.

But I completely agree -- I don't understand how corporations who are swimming or even drowning in profits cannot afford to employ people at a reasonably higher minimum wage as legislated by law.

[Kidlicious]

Originally posted by Adam Smith
After reviewing more than 100 studies of the effect of the minimum wage, Brown, Gilroy, and Kohen concluded that:
This is “the evidence”. There are more recent studies which reach the same conclusion, but since I’m posting from home, this is all I have within reach right now. Can either of you produce one shred of evidence to support your statements?

1 to 3%?! What's the margin of error? I don't see how you could say one way or the other if it decreases employment or not. Both theories are perfectly acceptable, and you can't really look at the real world data and say one way or another, so why be opposed to higher wages which are obviously good, unless you're one of those who claim that higher profits are better than higher wages for the economy.

My own feeling, as someone with an economics degree and someone who will have an accounting degree in a month is that businesses don't change their production decisions so quickly just because of some immaterial cost increases. It doesn't really show up on their radar screen. If you change it a lot then obviously there's going to be some problems.

[Kidlicious]

Originally posted by Adam Smith
A negative income tax would increase the incentive to work , instead of increasing unemployment. It may not be perfect, but its a lot better.

Well I like negative income tax idea better anyway.

[Kidlicious]

Originally posted by lord of the mark
A negative income tax has to be funded, which (holding macro policy and all other spending programs constant) means an increase in taxes, and all taxes have deadweight costs.

It's an income tranfer so the overall effect is probably minimal, just as it is with increasing the minimum wage.

edit: I'm assuming that you don't believe that people will work less because to the higher taxes.

[Kidlicious]

I bet it's more likely that people recieving a tax credit for working a low wage job would work less than it is that the comparable increased taxes on those working high paying jobs would convince them to work less.