Forbes has an interesting article trying to sum up the
state of the economists’ empirical debate over the minimum wage
and its effect on employment.
Some excerpts to get across the flavor of the conversation:
David Neumark and co-authors have utilized a panel approach and
found that minimum wages do lead to lower employment. Arin Dube and
co-athors use an alternative approach that takes cross-state border
counties as control groups and find there is no impact. They also
find that including additional controls in the panel approach, like
census region or state trends, makes Neumarks’ results
insignificant, allegedly due to pre-existing trends. Neumark
replies that the cross border county grouping doesn’t really lead
to optimal control groups. The Dube approach, he alleges, really
throws out too much identifying information, and the resulting
large standard errors don’t give you a precisely estimated zero
impact, but a very noisy estimate….So this is where you are left off. Who has constructed the more
reliable counterfactual? Should you specify state time trends and
if so how? Does Dube throw out too much useful data? And if so, how
does Dube et al identify the impact on separations and
hires?…..Then came Meer and
West (2013). This paper extended Dube’s focus on labor
market flows and looked at net job creation using the cross-state
border counties approach. Much has been discussed about their
findings, but I think an important missing contribution of their
paper is an explanation for why there would be so much disagreement
about the impact of minimum wages if there really was a negative
impact. What they show is that if the true effect of the minimum
wage was to reduce the growth rate of employment, then looking at
the impact in levels would give you two different estimates of the
effect: no effect if you included a growth trend, and a negative
effect if you didn’t include a control trend.
The article does what it sets out to do fairly well, but it is
curious that it never discusses economic theory or why
this question is so controversial, and why studies that seem to
show no employment effect of a minimum wage might seem curious and
worthy of being looked at very carefully.
Science tends to progress not merely by observing the
world in an empirical sense, but by trying to abstract out
regularities or laws that operate in it. This is, as the language
from Forbes above makes abundantly clear, because the
world is a crazily complicated multicausal place. Understanding the
whys of what you are observing is very difficult if all you do is
observe, or observe combined with lots of complicated mathematical
attempts to figure out how to account for all the other things that
might be going on. Because, as the ongoing debate described above
shows, you can never do that in a way that will satisfy all other
reasoning and observing minds.
Upon observing an airplane fly, one doesn’t assume that
apparently the law of gravity doesn’t apply to metal plane-shaped
things. Rather, you intelligently realize instead that other forces
must be in operation on the plane. Similarly, we should not assume
that just because one doesn’t always see an observable, countable
diminution in people employed related to the minimum wage in every
specialized situation an academic looks for it, that on the margins
the law of supply and demand don’t work on labor and that raising
the minimum wage is costless in terms of jobs.
If you believe that some people’s marginal product isn’t worth
more than that minimum wage, and if you believe employers would
tend (other things being equal) to not want to lose money on hiring
people, then you should understand that the minimum wage does cost
jobs. How many, and, whether you think the benefit to the seen
still employed should as a matter of policy outweigh the harm to
the unseen unemployed, is a different question.
People involved in the actual science mostly get these
distinctions. But that these sort of studies regarding the minimum
wage sink into that general background scientistic morass of what
the “educated, I read the Sunday New York Times with
some attention” believe and “know” about the world is unfortunate,
because it privileges some very picayune and minor attempts to look
at a portion of the world above the more valuable process of
actually understanding on a deep level how the world works.
In short, it allows minor-level smarty pants to confidently
“know” that we can raise the minimum wage without causing anyone to
lose or not get a job, to let this sort of “sophisticated,
empirical” stuff obscure a well-understood fact among economists:
you can raise a legal wage above the level which many people will
be employed. Anyone contemplating policy needs to know
that.
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