Tuesday, February 23, 2010

More on the Minimum Wage

Talk about minds thinking alike:

"As was the case in Ontario, recent evidence from the US illustrates the pointlessness of using the minimum wage as a way to reduce poverty (h/t Craig Newmark):

'Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor? Using data drawn from the March Current Population Survey, we find that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates. When we then simulate the effects of a proposed federal minimum wage increase from $7.25 to $9.50 per hour, we find that such an increase will be even more poorly targeted to the working poor than was the last federal increase from $5.15 to $7.25 per hour. Assuming no negative employment effects, only 11.3% of workers who will gain live in poor households, compared to 15.8% from the last increase. When we allow for negative employment effects, we find that the working poor face a disproportionate share of the job losses. Our results suggest that raising the federal minimum wage continues to be an inadequate way to help the working poor.'"

Read the comments on possible qualifiers to the general finding.

There's plenty of other empirical studies showing that the imposition of a minimum wage negatively impacts low-wage employment, which generally means two constituencies - the poor generally, and young men with inadequate labour skills. Here's a sampling (I think I've linked to some of these studies before):

  1. "Minimum Wages and Youth Employment in France and the United States", John M. Abowd, Francis Kramarz, Thomas Lemieux, David N. Margolis, NBER Working Paper 6111, 1997
  2. "Employment Effects of the Federal Minimum Wage", John F. Boschen, Herschel I. Grossman, NBER Working Paper 812, 1981
  3. "Raising Incomes by Mandating Higher Wages", David Neumark, NBER Reporter: Fall 2002

A quote from the last paper above which I find rather telling, especially in light of my last post (bold emphasis mine):

"Of course a finding that living wage laws reduce poverty does not necessarily imply that these laws increase economic welfare overall (or vice versa). Living wage laws, like all tax and transfer schemes, generally entail some inefficiencies that may reduce welfare relative to the most efficient such scheme. Finally, there is another reason to adopt a cautious view regarding living wages. As already noted, the effects of living wages appear only for broader living wage laws covering employers receiving business or financial assistance. The narrower contractor-only laws have no detectable effects. This raises a puzzle. Why, despite the anti-poverty rhetoric of living wage campaigns, do they often result in passage of narrow contractor-only laws that may cover a very small share of the workforce?

One hypothesis I explore is that municipal unions work to pass living wage laws as a form of rent-seeking. (25) Specifically, by forcing up the wage for contractor labor, living wage laws reduce (or eliminate) the incentive of cities to contract out work done by their members, and in so doing increase the bargaining power and raise the wages of municipal union workers. There is ample indirect evidence consistent with this, as municipal unions are strong supporters of living wage campaigns. As further evidence, I explored the impact of living wage laws on the wages of lower-wage unionized municipal workers (excluding teachers, police, and firefighters, who do not face competition from contractor labor). The results indicate that these workers' wages are indeed boosted by living wages. In contrast, living wages do not increase the wages other groups of workers whose wages-according to the rent-seeking hypothesis-should not be affected (such as other city workers, or teachers, police, and firefighters). Thus, even if living wage laws have some beneficial effects on the poor, this last evidence suggests that they may well be driven by motivations other than most effectively reducing urban poverty. While this does not imply that living wages cannot be an effective anti-poverty policy, it certainly suggests that they deserve closer scrutiny before strong conclusions are drawn regarding their effectiveness."

Ever wonder why its mainly unions that generally call for minimum wage laws? You have been warned.

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