Minimum wages are increasing. Jobs can disappear.
These increases may be justified at a time when high inflation is eroding the wages of American workers. Yet the new enthusiasm for the minimum wage is likely to do great harm to many of the workers it is supposed to help.
Proponents “didn’t measure the long term,” Erik Hurst of the University of Chicago told me. “So they think they have a free solution.”
Recent research by Hurst and three colleagues concludes that President Biden’s proposal to raise the federal minimum to $15 would end up hurting the livelihoods of about 15% of workers earning less than that, primarily those who find themselves at the bottom of the pay scale. Even if they benefited from the short-term wage increase, many would end up losing their jobs.
This is bad news for supporters of a higher minimum wage, who have come to believe that the argument over the pros and cons of the policy – whether it destroys jobs or not – has been finally settled. in their favor.
Three decades ago, economists David Card of the University of California at Berkeley and Alan Krueger of Princeton University investigated fast-food restaurants on both sides of the New Jersey border, which increased its minimum wage, and Pennsylvania, which did not. To the surprise of many, they found no evidence that raising the floor wage costs jobs.
This puzzling discovery seemed to contradict a fundamental principle of economics – that in a competitive market, increasing the price of a good, service or input into the production process will reduce the demand for it. thing. But economists have noted that it makes a lot of sense if the labor market is not competitive.
Like a monopoly that has the power to raise prices without losing market share to cheaper rivals, employers facing little competition for workers can pay them less than their contribution to the bottom line without worrying that a rival does not rush to hire them.
Economists have found evidence of so-called monopsonistic behavior among employers in certain industries and markets. This reinforced the proposition that forcing employers to raise wages will not automatically lead them to abandon workers altogether, as they are paying them less than they are worth to the company. They can pay them more while making a profit. Raising the minimum wage in this type of market could even create new jobs. More people would be attracted by the higher salary. As long as the new salary does not exceed the value of their contribution to the business, the employer will still make a profit on each additional worker.
There have been skirmishes around the limits of the proposition that minimum wage can do no harm. Later research in the style of Card and Krueger has sometimes found minimum wage increases reducing employment. Others found no effect. The magnitude of the impact has generally been small.
Some economists oppose the new theoretical framework. “I think the monopsony train is coming out of the station way too fast,” David Neumark, an economist at the University of California, Irvine, who is skeptical of the value of the minimum wage, told me. He notes that firms in large markets where most people live and where most workers work are not likely to wield significant monopsony power. There are too many competitors also hiring.
But perhaps more importantly, the wave of support for the minimum wage as the tool of choice to improve the lot of the working poor does not take into account time: all empirical studies observe changes in employment over a few years at most. Companies generally don’t reorganize their workforces or retool their production lines as quickly.
Whether or not they have monopsony power over their workers, firms will do their best to cut costs, replacing expensive inputs with less expensive ones.
Workers can be replaced by robots or by other workers who, either because they have more education or more experience, are more profitable for the company. Just give them time.
This proposition is based on empirical research just as solid as that of Card and Krueger. (Indeed, Card co-authored some of them.) Low-wage workers who are suddenly made expensive by a rising minimum wage will be largely replaced in the end.
Hurst, Patrick Kehoe, and Elena Pastorino of Stanford University, and Thomas Winberry of the University of Pennsylvania developed a labor market model that fits both evidence that raising the minimum wage has little or no impact on short-term jobs, as well as long-term worker substitution results.
They conclude that increasing the minimum wage in real terms to $15 per hour – compared to the average wage distribution from 2017 to 2019 – would affect a large part of the workforce: 40% of workers without no university education and 10% of workers with university education. does less than that. The group includes workers earning $14.50 and workers earning half that amount.
The main conclusion of Hurst and his co-authors is that all of these workers would benefit in the early years as their wages increase. But in the long run – which in some cases could mean as little as four years – the least productive workers at the bottom would be laid off, to be replaced by more productive ones.
Whether raising the minimum wage is ultimately good or bad for workers must then be calculated over their entire time in the labor force. This will result in positive gains for many, but it will ultimately hurt those at the bottom of the ladder – including just about everyone earning less than $9.
Moreover, the higher minimum would hurt the prospects of future low-wage workers who are not yet in the labor market. They would not benefit from any short-term wage increase. But they would likely be overlooked by employers looking for workers with a latent value to the firm in the order of $15.
The precise effects are difficult to estimate. They rely on estimates from empirical research papers on the elasticity of substitution between different types of workers, as well as between workers and machines, and these are difficult to measure. The extent of corporate monopsony power is another parameter that would also affect the calibration.
Still, the general thrust of the conclusion is strong: the minimum wage is not a free tool to fix the low-wage economy. It may not be obvious at first, but wait.
More writers at Bloomberg Opinion:
• Unemployment going in the wrong direction for the Fed: Jonathan Levin
• ‘Jobful Vibecession’ will keep workers on the payroll: Conor Sen
• US should bribe landlords to accept higher density: Eduardo Porter
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration. He is the author of “American Poison: How Racial Hostility Destroyed Our Promise” and “The Price of Everything: Finding Method in the Madness of What Things Cost”.
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