Thursday, February 21, 2013

Strong US support for increasing unemployment

A USA Today poll reports that 71% of Americans back the president’s plan to raise the minimum wage: 87% of Democrats, 68% of independents and even a 50-47% plurality of Republicans. Only the tea party supporters oppose the move (64-32%)

The only problem with the plan is that — based on more than 100 academic studies — it will raise unemployment, particularly among the least employable workers (e.g., minority teens).

A 2006 NBER study by David Neumark of UCI (go Anteaters!) and William Wascher of the Federal Reserve — later published in Foundations and Trends in Microeconomics — reviewed nearly two decades of research on the impact of increasing minimum wages. Here’s the abstract:

A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.

Two other important conclusions emerge from our review. First, we see very few - if any - studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.
While individual studies have reached varying conclusions, such comprehensive literature reviews are the way that science reaches a consensus on an unsettled question of causality (whether innovation policy or global warming). The administration wants to be guided by science when it supports its policies, but ignores inconvenient truths.

When our educational system turns out high school graduates that are illiterate or innumerate, they pay the price. When it turns out economic illiterates — leading to bad policies — others pay the price for those policies.


Kenneth M. Kambara said...

More nuanced view in The Economist: Minimum human wages

Joel West said...

The economist seems to rely on case studies as rebutting the employment effects, even though such case studies are completely unreliable for this purpose.

Even the capitalists of the WSJ point out that if you want to impact poverty, raise the earned income tax credit. Then you're not raising the wages of the majority of minimum wage workers who aren't poor (e.g., suburban teenagers).

Kenneth M. Kambara said...

I dunno. I'm in favor of more "thin slices" than the econometric parameter dance, which even Neumark's work mentioned in The Economist highlights how the issue is nuanced.

I'd be concerned that the neoclassical economics approach of looking at (say) log (wages) & employment is way too noisy. I must admit I'm often skeptical of policy that interferes with pricing mechanisms, but I'm more wary of studies that don't look at a wider array of dependent measures. I do believe there's work in the economic sociology literature that does this that uses DVs like Gini. That can get pretty noisy too (but I would surmise there would be cleaner parameter estimates), but why not triangulate methods and approaches rather than stick to one paradigm.

Kenneth M. Kambara said...

There's also a political calculus that economists are notoriously horrible at dealing with. Obama's SoTU made no promise of reducing unemployment. It's not his objective function and I think given Dem demographics and his policy agenda, I think he thinks he has things covered. I'm not usually one for parsing words, but I think it is important to go back to his stance on this policy. It's not "off code" for what's he's been advocating.