Do minimum wage increases reduce employment for low-skilled workers?
Core argument: Neumark's literature review finds 79% of studies report reduced employment from minimum wage increases, with 46% showing statistically significant negative effects, while 21% found small positive impacts and 4% were statistically significant.
Neumark's literature review highlights that 79% of studies report reduced employment due to minimum wage increases, with 46% showing statistically significant negative effects. Only 21% found small positive impacts, and a mere 4% were statistically significant. The average employment elasticity is approximately -0.15, indicating a 10% minimum wage hike reduces low-skilled employment by 1.5%. A $15 minimum wage, a 107% increase from the current $7.25, could lead to a 16% drop in low-skilled jobs. Recent research continues to show job loss, especially among workers with a high school education or less, where elasticity is -0.24, meaning a 10% wage rise cuts employment by 2.4%. In low-wage sectors like retail, job loss may be obscured by shifts from lower- to higher-skilled workers.
Ed Comment:“..I don't find his argument that fiscal stimulus won't heat up the economy persuasive. Surely, if domestic households are saving more than they are investing, the economy will temporarily grow if the government borrows and spends the excess savings. That is, it will avoid the Keynesian pardon of thrift. That's different than borrowing and spending offshore savings, which, in effect "hires" offshore workers as flows must balance--no increase in offshore borrowing without an offsetting. Increase in the trade deficit. US consumption (or investment) goes up, but domestic work doesn't go up. Cowen doesn't recognize he needs to differentiate between the two. The problem, as I stated in my last email, is that the reallocation of resources stimulus spurs is temporary and occurs at a time when the economy is searching for a new permanent reallocation of resources to replace the mistaken allocation that led to the downturn. As I said in the last email, when saving exceed investment, i.e. the economy goes into recession, it occurs for real reasons. Equity may be underwriting risk but then discover hidden risks it didn't realize it was taking. It will rein in risk-taking to compensate. And search for a more optimal reallocation of resources. The discovery of new risk is usually caused by shocks that destroys equity that underwrite risks. With less equity to bear risk, the economy can/will take less risk. Similarly, like the rodent, the economy can and does temporarily overreact. Usually, all 3 occur at the same time.Risk is like the wave is particle-wave duality. Economists largely and mistakenly only account for particles.A static view of the economy, like Keynes' overlooks this. It assumes we are always returning to "normal." It's sees 3 above but overlooks 1--the chief cause of recession. By overlooking risk Cowen (and Mason) also miss the issue of risk I raised in my last email. When the government borrows, it doesn't lend, it gives. That turns debt into equity from the perspective of the recipient. The recipients of equity behaves different. They take the risk of consuming a vacation to the Caribbean, a risk they probably wouldn't take if they had borrowed the money personally. Cowen doesn't see this difference. As I said in my last email if people were rational, Riccardian equivalence would not turn debt into equity. But household don't make the full adjustment so risk-taking goes up and so too does economic activity, (although and multiplier effects are lost to any offshore borrowing and offsetting offshore hiring as the flows must balance--no offshore borrowing without offsetting trade deficits). And as I said in my last email, the economy can run hotter if it takes more risk until those risks materialize. Cowen, Cochrane, and Mason don't see this. Mason mistakenly and stupidly thinks you can take more risk without suffering offsetting consequences. He embodies that very naivety/stupidity that leads to a lack of (full) Ricciardian equivalent. That's not to say the economy is taking the optimal level of risk. My first book argues it systematically underinvests. But it's highly unlikely the government can find the optimal allocation without random mutation and survival of the fittest. Which is not to say the government has no role. But rather, are we better off with it having a bigger role than the enormous 36% of GDP it already consumes? I find it hard to believe but for wishful thinking, i.e. what it ought to be able to do theoretically if it were perfect rather than what it fails to do as the ugly suboptimal beast that it is…”
Tyler Cowen makes the point that one way to think about JW Mason's the "new macro" is it’s an effort to create supply side incentives/dynamics from the demand side, "...So smart supply-side remedies can increase both employment and pay in a sustainable fashion. But that has been known to economists since the days of Adam Smith. The new macroeconomics(J. W. Mason argument),as it is being formulated, is looking for a way to bring about the same effect through the demand side....The upshot is thatthe most plausible demand-side mechanism for “running an economy hot” is the Keynesian story about money illusion — the idea that people tend to see their wealth and pay in nominal terms, not real terms. And that scenario will not be good for most of the workers who already have jobs, as in many cases their real wages will fall. Of course that is most workers, because even in bad times the unemployed are a clear minority. Nonetheless, expect talk of “running the economy hot” to continue. It sounds good, and it conveys the notion that the economy is making up for years of neglect following the subpar recovery from the 2008 financial crisis. It allows politicians and officials to show determination and convey a sense that they are brave fighters for the working class. Unfortunately, this kind of talk is the rhetorical equivalent of vaporware, promising something that will never ship. Simply wishing for better outcomes, and describing them with catchy language, does not suffice to bring them about….”