Sunday, April 5, 2015

That Pesky Minimum Wage Increase Issue

Progressives are convinced that raising the minimum wage is a net benefit to society. Conservatives are sure that it is not.

Conservatives need to get a clue, tone down the rhetoric a bit, and at least be more open-minded. Yes, the theory is on your side. But the data … well … not so much.

This is really a question about the elasticity of employment with respect to minimum wage changes. That’s a measurable thing.

And it’s been measured a lot.

So much so that anyone can pick and choose the value of that estimate that they prefer: if you want a certain number … it’s out there.

Now, there’s this statistical technique called meta-analysis. In short, it means that you put together everyone else’s results, and then treat those as a new data set … so that you can talk about the distribution and accuracy of the results.

One way to look at the is with something called a funnel graph. This shows the point estimate of the effect on the horizontal axis, and the accuracy of the effect on the vertical axis (higher is sharper). Here’s it is for over a thousand minimum wage studies:


(If you really need to know what the red line means, you can go read this post from Menzie Chen at Econbrowser, but I’m not worried about it if you’re not).

This does show a predominantly negative effect: the peak of the distribution is just left of zero. So the conservatives are right. The thing is, the progressives are right too: the effect is in the “so what, who cares” range.

Let’s assume that the elasticity is –0.1 for the sake of an example. This means that a 30% increase in the minimum wage (which is about what’s on the table nationally) will lead to a 3% reduction in minimum wage hours. That’s not much.

To put that in perspective, consider a place with 20 minimum wage workers. Doubling their wage would lead to a 10% drop in employment, so 2 of those workers would get fired. That’s a tragedy for those individuals, no doubt. But think about it: what would minimum wage workers say to a lottery in which they had a 90% chance of doubling their income, versus a 10% chance of losing their job. I think they’d take that gamble.

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