More on the Minimum Wage

3/16/2013 10:46:00 AM
Traveling today, so just a quick re-post about the minimum wage . If you read my previous post on the minimum wage (and bit of theoretical speculation here), you know that my support for it is pretty tepid.

Here are the point's I thought were interesting from Arin Dube's tesimony via Mark Thoma:
"A falling minimum wage has contributed to rising inequality, explaining around half of the rise in inequality in the bottom half of the pay distribution, and more so for women."
That's a pretty impressive statistic. I wonder, however, what empirical strategy was used to reach this conclusion. I will also add that the big caveat is where it says "inequality in the bottom half of the pay distribution"--if you've followed the econosphere discussion on inequality at all, you know that almost all of the increase in inequality has been in the top half of the pay distribution. Hence, this is misleading because it actually means that the declining real minimum wage is not a significant source of overall inequality increases.

"For the range of minimum wage in creases we have seen in the U.S. over the past two decades, recent evidence based on credible methodologies do not find job losses of any sizable magnitude."
As In my previous posts, I think its pretty important to understand why the Econ 101 result doesn't hold before we jump on board. As I noted here, lack of an employment effect does not necessarily mean that minimum wages don't harm minimum wage workers.

"economic models with search frictions, lower quits and layoffs, along with increased search activity by the unemployed, can explain why employment response is small...Lower turnover can also increase productivity. Outside of the simple Econ 101 type environment, increasing workers’ pay can improve the functioning of the low wage labor market."
This looks to me like a dash of search theory and efficiency wage theory, a much needed reprieve from the conventional refrain about monopsony power. My two thoughts are: 1) this increases my support for the minimum wage, and 2) why the heck didn't I think of this?

"the overall price level is unlikely to change noticeably"
This is old news to anyone studying the issue, but certainly worth consideration. One question, though, is whether the inflation effect would increase as the minimum wage increases relative to average wages.

"The best evidence suggests that minimum wage increases lead to moderate reductions in the poverty rate, especially together with the Earned Income Tax Credit."
The point about poverty is well taken. But I think the econosphere needs to drop the line about the EITC--it is an extremely poorly designed income subsidy with cumbersome rules and loopholes, that mostly just incentives people to have children. It is not complementary to the minimum wage in some key respects (for example, it increases labor supply, while the minimum wage may suppress labor demand).

Lord 3/16/2013 06:34:00 PM
Not only through lower turnover. It also motivates increased investment in technology, and that may be the largest effect of all.
Matthew Martin 3/17/2013 05:45:00 PM
Good point. I still have some reservations though. Showing that a policy increases incomes isn't quite the same as showing that it is welfare-improving if, for example, it causes an inefficiently high level of investment. But probably it is welfare-improving in the sense of redistributing from the higher to lower income people.