Praise be, we now have the economic research to prove that higher minimum wages have no ill effects, so let’s push onward to $15 an hour for all, right? I predict that’s what will be said about new research, even though that’s not what the research actually says.
The new paper is published in the top economic journal of them all, and certainly the author, Arindrajit Dube, is an excellent researcher. It’s thus fair enough that we take seriously the result, but we need to be very sure of what we’re claiming is the result.
There are few ill effects of minimum wages around the levels that the U.S. has currently or has had in the past few decades. The basic insight learned is that ill effects will come when a minimum wage “bites”: when it actually affects the wages being paid to any significant number of people or affects those paid to any particular group significantly. Given that, as the paper points out, only some 2% of workers actually get the federal minimum wage, the effects just aren’t going to be large. We can see some effects among those already disadvantaged in the labor market (for example, teenagers, African-American, or those without a high school diploma). But even there the effects are mild, simply because that minimum wage is low.
None of this changes the standard intuition that when there’s a heavy such bite then there will be ill effects. What it does do is then lead us to trying to calculate what is a wage that does have that snarl, that bite? What is a minimum wage that is “too high” in the sense of having an excess of those ill effects upon employment? This is where I predict — no, not fear, not posit, nor surmise, but predict — this paper will be misused.
Our thinking is that the effects come from the relationship between the minimum and median wages. If we insist that wages cannot be lower than more than we already pay half the people, then we really are going to have problems. A minimum wage of 100% of the median wage isn’t going to work, that is. That ratio is called the Kaitz Index. This paper shows us that there are few to no such bad things happening up to 0.59 on that Kaitz measure. We can have the minimum wage at 59% of the median wage and know that we’ll have the good effects and only trivial amounts, at worst, of the bad.
You can see what’s going to happen next, can’t you? The Economic Policy Institute tells us that the median wage is about $22 this year, and 59% of that is $13. A bit of rounding and some aspiration, and why not go for a $15 minimum wage?
Except there are two median wages. Part-time and seasonal wages tend to be lower than full-year and full-time ones. The Economic Policy Institute is using that higher full-time one. The one for all jobs is quite a bit lower, $18.58 per hour. Take 59% of that and you get a rather lower level of $10.95 an hour. That’s around and about what McDonald’s, Walmart, and similar establishments pay as entry-level wages, which does seem about right, doesn’t it?
So, the new research paper, from esteemed researchers, published in the world’s top English language economics journal, tells us that minimum wages up to a certain level cause few to no problems. They’ve shown this for up to 59% of median wages. But which median do they mean? Dube himself told me they mean that lower one — specifically, the “median wage of all workers, not just for full time.”
But we all know how this is going to be used, don’t we? As proof that $15 an hour won’t cause any problems — which isn’t what the paper shows at all. Rather, it says that a $10.95 an hour minimum wage shouldn’t cause any problems of note.
The new paper is good empirical work. The fault is in what people will argue it says, not what it does.
Think it through without the jargon for a moment. A minimum wage around what most large employers already pay isn’t going to have much effect on anything, is it? A minimum wage 37% higher than most major employers pay for entry-level jobs is going to have rather more bite to it, isn’t it? The unemployment effects of our minimum wage do depend upon that very bite.
That bite is, in itself, the trying to push wages above the rates that are already being paid. So, the finding that a minimum about what is already paid isn’t a problem really doesn’t tell us, doesn’t tell us at all, that pushing wages up by 40% won’t be a problem. But that is the argument that I predict large numbers of people will start using.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
