Beat the Press

Dean Baker's commentary on economic reporting

6/23/2006

Reporting Nonsense on the Minimum Wage

Suppose that the senators who support a quick withdrawal from Iraq got in the habit of saying that the United States should get out of Iraq because losing 100 U.S. soldiers a day is an unacceptable price for the occupation. Would the media simple report this claim without comment? Or, would they point out that these senators apparently don’t realize that the fatality rate is approximately 2 per day?

My guess is that every story that noted the claim that 100 soldiers a day are being killed would correct this assertion based on an authoritative source on the causality count. The media would probably also run numerous stories that reported on the fact that the proponents of a hasty withdrawal have no idea what they are talking about. This would be good journalism.

The question is why it is not applied to the debate over the minimum wage. Reporters routinely quote claims from politicians opposed to raising the minimum to the effect that it would lead to a large loss of jobs and will slow economic growth. Well, we have evidence on this one. Economists have done numerous studies of the impact of modest increases of the minimum wage, like the one currently being debated. Berkeley economist David Card and Princeton economist Alan Krueger have done some of the most famous studies, but many other economists have approached the topic from different angles (including my colleague at CEPR John Schmitt [sorry, not available on-line]), and nearly all of them have found that the minimum wage has little or no effect on employment.

If talking to experts in the economics profession is too difficult for the country’s top reporters, perhaps some simple arithmetic would be sufficient. The minimum wage bill currently being pushed by Senator Kennedy would raise the minimum wage to $7.25 by 2009. By comparison, the minimum wage was almost $8.00 an hour (in 2006 dollars) in the late sixties. This means that if Kennedy’s bill were approved, the real value of the minimum wage in 2009 would still be more than 10 percent lower than it was in the late sixties, even though productivity will have increased by more than 120 percent over this period.

For those not old enough to remember, the late sixties was one of the most prosperous economic periods in U.S. history. The economy grew rapidly, wages grew rapidly, and the unemployment rate eventually fell to 3.0 percent. Clearly, the minimum wage could not have done too much damage.

The idea that the minimum wage hike being debated would have a substantial impact on employment and growth is absurd on its face. The media has the obligation to point this out – if they don’t, maybe opponents of the Iraq war should start saying that the fatality rate of 100 a day is unacceptable.

11 Comments:

  • At 8:18 AM, Blogger Tim Worstall said…

    The argument against rises in the minimum wage isn’t that it results in "a large loss of jobs". It is true (and Card and Krueger have been debunked often enough for us to know that it certainly doesn’t lead to an increase in them either) that the effect on total employment is small. It is also true that that effect is negative, that some workers do lose their jobs but in the overall noise of the labour market this effect is difficult to see.

    What isn’t at issue is that hours on offer to said minimum wage labour fall.

    What also isn’t at issue is that minimum wage rises are an incredibly inefficient method of increasing the incomes of the working poor. Those actually relying upon said minimum wage (a very small portion of those getting it) for their livlihood also get EITC, Medicaid and so on. When you factor in the withdrawal of such benefits, whatever taxes they might pay on the extra earned income, even a large rise in the minimum wage does virtually nothing for the post tax post benefit incomes.

    So why do it? Why not do it the more efficient way and increase the EITC?

    Why deliberately go out and use the most expensive method of changing the working poor’s incomes and then manage to change them only slightly, with known ill effects?

    When someone proposes such silliness you know there must be politics involved.

     
  • At 8:46 AM, Anonymous tom said…

    Dean, I think you are the one full of horse manure. How can anyone have respect for an economist who ignors basic theory in order to pander to the political left? Beat the "Economist"!


    http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm

     
  • At 1:32 PM, Anonymous S Brennan said…

    Tim,

    Back your statement below up with facts.

    "Those actually relying upon said minimum wage (a very small portion of those getting it) for their livlihood also get EITC, Medicaid and so on."

    I called a SINGLE person I know who is working for Minimum wage [some us live in the real world]. They indicated that while they were considered "lucky Duckies" by the Wall Street Journal, they did not recieve Medicaid.

    Tom,

    Great argument, probably the best you ever have made. Frame it. It's your best work. I mean it, it's the best you could do. You should be proud of yourself for having reached preschool levels.

    No wonder Republicans hire their cronie pals/pols...they couldn't get work in the "free market". 911, Iraq, Katrina & budget deficits ...well, that's what happens when the preschool crowd get a hold of the reigns.

     
  • At 6:17 PM, Blogger PGL said…

    Did you see Mankiw's blog "Sperling on the Minimum Wage"? After you read Mankiw's claim that the Card & Krueger analysis has been refuted - see Brad DeLong's reply to Mankiw.

     
  • At 6:22 PM, Blogger PGL said…

    Tom finds a 1995 survey from the part of the JEC that serves the GOP side. If you read enough of these rightwing JEC reports, you might think the hacks over at the National Review are economists by comparison. OK, they have a lot of studies from before 1995 but when you go to DeLong's webcite, notice he links to a 2000 paper from Card & Krueger.

    Incidentally - if Tom wants to get hammered, have him go over to Max Sawicky's place and talk about theory sine evidence.

     
  • At 9:25 PM, Blogger Dean Baker said…

    I will try to avoid getting into a general debate on the merits of raising the minimal wage. (I think it's a good idea). I was actually commenting on the narrow point of whether it is credible to claim that a modest increase in the minimum wage will lead to any substantial rise in unemployment.

    On this point, I would say the research is pretty well-settled. Card and Kreuger have done some very good work on this topic (which has not been debunked), but so have many other economists.

    My favorite study showing no job loss from raising the minimum wage was actually done by two economists who set out to refute Card and Krueger (CK), David Neumark and William Wascher (NM). CK looked at the change in employment in fast food restaurants in adjacent counties in New Jersey and Pennsylvania in the months before and after New Jersey raised its minimal wage. The argument was that if the minimum wage led to unemployment, then employment in fast food restaurants should grow less rapidly in New Jersey than in Pennsylvania. In fact, CK found the opposite, although the effect was not statistically significant.

    NW critized the quality of the data (it was gathered by college students calling restaurants and asking for the number of the people on the payroll). They attempted to replicate the study with employment data provided directly by restuarant owners through the Employment Policies Institute, an organization funded in large part by the restaurant industry. In this study, NW found that the minimum wage hike in New Jersey did in fact lead to slower employment growth.

    NW then decided to strengthen their results by collecting data from more restaurants to construct a larger sample. To shorten the story, the analysis of this larger sample turned out to support CK, it found no job loss from the hike in the minimum wage. (My colleague John Schmitt did a short paper on this back when we were both at the Economic Policy Institute.)

    It turns out that the data given to NW by the Employment Policy Institute had been cooked to show job loss. As we said back then, "fast food data proves hard to swallow."

     
  • At 10:35 PM, Blogger Steve Sailer said…

    Doesn't the economic impact of the minimum wage depend on the market rate? For example, Jack-in-the-Box in ultra-expensive LA is offering $9 hour right now for fast food work, so raising the federal minumum to $7.25 would have little effect here.

    But if the federal rate was raised to $20 per hour, and was enforced, then employment would drop sharply.

     
  • At 1:14 AM, Anonymous S Brennan said…

    If what Steve Sailer said was true then swanky restaurants would be out business...but their not...go figure...maybe underpaying your staff isn't the only way to be successful?

     
  • At 12:16 PM, Anonymous Denis Drew said…

    To Steve Sailer,

    Here's a funny one: If the minimum wage were raised to $100/hr, it would cause so much inflation (and therefore devaluation of the dollar) that it is within the realm of the possible that not one job would be lost. ($100/hr would have to be edged in over many years of course -- or nobody would know what to charge for anything the day after it was reached in one jump)

    Here's a weird one: Since the minimum wage was close to $9.50/hr in 1968 and average income has risen 100% since then, to keep up with both inflation and per capita income growth, the minimum would have to be raised to $19.50/hour, today. (I go by BLS inflation instead of the Census, so my minimum wage high point is higher and growth rate lower than Dean Baker's -- the Census combination would yield about $17.50/hr.)

    I have no idea how much inflation $19.50/hr would cause. However, it is a simple calculation that $12.50/hr would add 4% to the cost of GDP output.

    Makes you wonder -- on an abstract level -- just what is possible.

     
  • At 7:02 AM, Anonymous Christine Covert said…

    By the way, Steve, with regard to restaurants and serving staff, in my albeit historical experience, usually pay is AT minimum wage or a below, regardless the swank level of the restaurant. The tips are expected to make up the difference. Please choose your examples more carefully.

     
  • At 3:16 PM, Anonymous Paul Tracy said…

    Regarding the fact checking of assertions, the media engage in "selective empiricism."

     

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