Unsurprising evidence that hiking the minimum wage hurts low wage workers

On July 1, the minimum wage spiked in several cities and states across the country. Portland, Oregon’s minimum wage will rise by $1.50 to $11.25 an hour. Los Angeles will also hike its minimum wage by $1.50 to $12 an hour. Recent research shows that these hikes will make low wage workers poorer.

A study supported and funded in part by the Seattle city government, was released this week, along with an NBER paper evaluating Seattle’s minimum wage increase to $13 an hour. The papers find that the increase to $13 an hour had significant negative impacts on employment and led to lower incomes for minimum wage workers.

The study is the first study of a very high minimum wage for a city. During the study period, Seattle’s minimum wage increased from what had been the nation’s highest state minimum wage to an even higher level. It is also unique in its use of administrative data that has much more detail than is usually available to economics researchers.

Conclusions from the research focusing on Seattle’s increase to $13 an hour are clear: The policy harms those it was designed to help.

  • A loss of more than 5,000 jobs and a 9 percent reduction in hours worked by those who retained their jobs.
  • Low-wage workers lost an average of $125 per month. The minimum wage has always been a terrible way to reduce poverty. In 2015 and 2016, I presented analysis to the Oregon Legislature indicating that incomes would decline with a steep increase in the minimum wage. The Seattle study provides evidence backing up that forecast.
  • Minimum wage supporters point to research from the 1990s that made headlines with its claims that minimum wage increases had no impact on restaurant employment. The authors of the Seattle study were able to replicate the results of these papers by using their own data and imposing the same limitations that the earlier researchers had faced. The Seattle study shows that those earlier papers’ findings were likely driven by their approach and data limitations. This is a big deal, and a novel research approach that gives strength to the Seattle study’s results.

Some inside baseball.

The Seattle Minimum Wage Study was supported and funded in part by the Seattle city government. It’s rare that policy makers go through any effort to measure the effectiveness of their policies, so Seattle should get some points for transparency.

Or not so transparent: The mayor of Seattle commissioned another study, by an advocacy group at Berkeley whose previous work on the minimum wage is uniformly in favor of hiking the minimum wage (they testified before the Oregon Legislature to cheerlead the state’s minimum wage increase). It should come as no surprise that the Berkeley group released its report several days before the city’s “official” study came out.

You might think to yourself, “OK, that’s Seattle. Seattle is different.”

But, maybe Seattle is not that different. In fact, maybe the negative impacts of high minimum wages are universal, as seen in another study that came out this week, this time from Denmark.

In Denmark the minimum wage jumps up by 40 percent when a worker turns 18. The Danish researchers found that this steep increase was associated with employment dropping by one-third, as seen in the chart below from the paper.

3564_KREINER-Fig1

Let’s look at what’s going to happen in Oregon. The state’s employment department estimates that about 301,000 jobs will be affected by the rate increase. With employment of almost 1.8 million, that means one in six workers will be affected by the steep hikes going into effect on July 1. That’s a big piece of the work force. By way of comparison, in the past when the minimum wage would increase by five or ten cents a year, only about six percent of the workforce was affected.

This is going to disproportionately affect youth employment. As noted in my testimony to the legislature, unemployment for Oregonians age 16 to 19 is 8.5 percentage points higher than the national average. This was not always the case. In the early 1990s, Oregon’s youth had roughly the same rate of unemployment as the U.S. as a whole. Then, as Oregon’s minimum wage rose relative to the federal minimum wage, Oregon’s youth unemployment worsened. Just this week, Multnomah County made a desperate plea for businesses to hire more youth as summer interns.

It has been suggested Oregon youth have traded education for work experience—in essence, they have opted to stay in high school or enroll in higher education instead of entering the workforce. The figure below shows, however, that youth unemployment has increased for both those enrolled in school and those who are not enrolled in school. The figure debunks the notion that education and employment are substitutes. In fact, the large number of students seeking work demonstrates many youth want employment while they further their education.

OregonYouthUnemployment

None of these results should be surprising. Minimum wage research is more than a hundred years old. Aside from the “mans bites dog” research from the 1990s, economists were broadly in agreement that higher minimum wages would be associated with reduced employment, especially among youth. The research published this week is groundbreaking in its data and methodology. At the same time, the results are unsurprising to anyone with any understanding of economics or experience running a business.

This post was originally published at Truth on the Market.

The Squawk Box effect on CEO pay

From the Wall Street Journal:

How big is the CNBC effect? “CEOs who appear in CNBC interviews will earn $210,239 more” on average in the following year, the professors say, compared with similar CEOs who didn’t go on.

CEOs of small companies see a bigger bump. The effect for CEOs in the smallest firms was $130,925 greater than for CEOs in the largest companies, even though big business CEOs usually get paid more.

Cable TV is better than print. A CEO who got more print coverage than average in a year got a tiny boost in pay the next year.

Refugees pay more in taxes than they collect in benefits

Research from the National Bureau of Economic Research:

Using the NBER TAXSIM program, we estimate that refugees pay $21,000 more in taxes than they receive in benefits over their first 20 years in the U.S.

Other findings:

  • Refugees that enter the U.S. before age 14 graduate high school and enter college at the same rate as natives.
  • Among refugees that entered the U.S. at ages 18-45, after 6 years in the country, these refugees work at higher rates than natives but they never attain the earning levels of U.S.-born respondents.

Ban the box backfires

“Ban the Box” laws prevent employers from conducting criminal background checks until well into the job application process. (“Ban the Box” comes from the check box on many job applications asking, “Have you every been convicted of a crime?”)

Proponents of “Ban the Box” claim that by ignoring an applicant’s criminal record until late in the application process, ex-cons would have better employment opportunities.

A secondary goal is to reduce racial disparities in employment.

New research suggests that “Ban the Box” has backfired.

We find that [Ban the Box] policies decrease the probability of being employed by 3.4 percentage points (5.1%) for young, low-skilled black men, and by 2.3 percentage points (2.9%) for young, low-skilled Hispanic men. These findings support the hypothesis that when an applicant’s criminal history is unavailable, employers statistically discriminate against demographic groups that are likely to have a criminal record.

Source: NBER

Should I stay or should I go? Labor market mobility and Millennial stress

 

Economists say too few people are moving away:

Labor market mobility in the United States has declined. Interstate migration is down (graph from Molloy, Smith, Trezzi and Wozniak) and so is in-state-migration, especially for the less well educated. Where once people responded to shocks by moving to opportunity now they are likely to stay put and retire early or take-up disability insurance.

Pop psychologists say too many people are moving away:

But the real change comes in the freedom of movement that has made it easy for people to leave families far behind. Studies have shown that having limited family in close proximity can lead to anxiety and depression. … One recent survey found that about half of millennials live away from their hometown. That’s a significant number.

Newsflash: Trump is wrong about undocumented workers

Donald Trump launched his Presidential campaign in June 2015 with the insult heard ’round the world:

When Mexico sends its people, they’re not sending their best. They’re not sending you. They’re not sending you. They’re sending people that have lots of problems, and they’re bringing those problems with us. They’re bringing drugs. They’re bringing crime. They’re rapists. And some, I assume, are good people.

Trump missed the biggest stereotype of all—undocumented workers work and they work a lot.

Research published by the National Bureau of Economic Research finds that undocumented workers tend to work more hours in a year than native born workers. On top of that, undocumented workers work longer hours at every wage level, according the to studies author, George Borjas:

This finding is consistent with a frequent conjecture that is made about undocumented immigration— that “undocumented immigrant men come to the United States to work.” It is clear that the data strongly support this conjecture. Undocumented immigrant men … work regardless of the surrounding economic conditions.

Just look at this graph adapted from the study (I overlayed two graphs, added some color, flipped the axes). It shows native born men (the red) can’t be bothered to work at low wages. At $5 an hour, the average native born man would work less than 20 hours a week. In contrast undocumented men work an average of 30 hours a week at $5 an hour.

To get native born men up to 30 hours a week, the wage needs to be more than $8.00 an hour. Yet, at $8.00 a hour, undocumented men work and average of 30 hours a week.

Looks like Trump is wrong on this one. Research shows that undocumented men come to the U.S. to work.

Labor-Supply-of-Undocumented-Immigrants-Borjas-2016
The scatter diagrams show the relation between the average annual hours worked (including non-workers) and the hourly wage of a particular age-education-year group, using the 1994-2014 CPS-ASEC files.

 

Labor force participation and a working age population that won’t work

FRED is the go-to place for a bunch of economic data. A service of the Federal Reserve Bank of St. Louis, the site is easy to use and has a huge amount of data.

FRED also runs a blog that uses its data to answer—or at least address—some of the big data-driven questions of the day.

FRED’s blog is now looking at labor force participation. But, first let’s see why labor force participation is important.

Let’s begin with with unemployment. Unemployment is a simple concept: The number of people who don’t have a job, divided by the number of people in the labor force. The labor force includes those who are working and those who want to work. If you’re looking for a job, then you’re in the labor force. If you aren’t working and aren’t looking for work, then you’re not in the labor force.

  • If you’re retired, you’re not in the labor force because you left the labor force at retirement.
  • Many students are not in the labor force because their studies leave them no time to work.
  • If you look through the want ads searching for a job, you are in the labor force.
  • Once you stop looking through the want ads, you are not in the labor force.

Labor force participation is a big deal. It’s a measure of employment opportunities. If opportunities abound, the labor force grows as people look for income earning opportunities. As people give up on working, labor force participation drops.

FRED notes that while the rate decreased quickly during the previous recession and its recovery, the overall decline in labor force participation began several years before. FRED argues that maybe demographics is the cause. In particular, in the graph below, the proportion of the U.S. population 25 to 54 years of age follows a pattern similar to that of the labor force participation rate over the past 10 years. The 25-54 age group has the highest labor force participation rate. So, the argument goes, if the share of this age group is declining, the total labor force participation rate is likely to decline as well.

Bottom line: One reason why labor force participation has dropped is that a big chunk of the working age population (age 25-54) has shrunk.

OK, but that does not explain the drop in labor force participation among those who are working age, as shown in the figure below. The participation rate has dropped steadily since 2000. If the U.S. had the same labor force participation rate among 25-54 year olds that it had at the beginning of 2000, there would be 3.4 million more people in the labor force.

Bottom line: Aging boomers may explain some of the drop in labor force participation, but the bigger problem is a working age population dropping out of the labor force.

Podcast – Millennials, affordable housing, and taxing star scientists

 

What are Millennials and what do they want?

Econ Minute answers that with a clip from Matt Edlen‘s presentation at the Portland State Center for Real Estate Annual Conference. Get inside the minds of the mysterious Millennials and learn how they and their parents will change the world.

Next, we spend a few minutes on affordable housing and look at how it’s a problem worsened by policy.

We end with a look at income taxes and the role they play in attracting scientists to a state … or driving them out.

Taxes matter: The migration of star scientists

Drop in on an Econ 101 class and at some point in the term, you’re bound to hear the economics professor say, “If you want less of something, tax it.”

That’s one reason for “sin” taxes. The hope is that high enough tax on liquor, tobacco, or—more recently—marijuana, will reduce consumption of these sinful products.

Taking it a step further, one way to have fewer rich people would be tax higher incomes at a higher rate.

But there is a rip roaring debate in economics and policy circles about whether this basic rule of economics actually applies to income taxes.

On the one hand, there is a large body of evidence that differences income taxes are associated with the migration of individuals—especially high income individuals—from high tax areas to lower tax areas:

  • Research using data from the Panel Study of Income Dynamics, find that both higher tax rates and increased tax rate progressivity decrease the probability that a head of household will move to a better job during the coming year, slowing the potential for household income growth.
  • The existence of a state income tax influences migration patterns and that higher state income tax levels have resulted in reduced per capita income growth over time.
  • Income taxes have an effect on migration for most races and age groups, and that individuals move from states with high income taxes to states with low income taxes.
  • The Public Policy Institute of California (PDF) finds that Californians of all incomes leave California for states without income taxes. Among highest income households, 36 percent more leave than arrive in California.
  • Approximately 1.5 million New Yorkers left the state between 2000 and 2008 due to “high costs and taxes,” and that those that left were selectively higher income households.
  • Studies from other countries with variable, internal regional tax rates support the hypothesis that US state-to-state migration would also be affected by tax policy. For example, research finds that newly-educated individuals, in particular, migrate in response to tax differences. A one percentage point increase in the tax rate change effects a 2.8 percentage point increase in the net out migration rate.

On the other hand, Warren Buffett once claimed that he’s never worked with anyone who mentioned taxes as a reason to forgo an investment opportunity that he offered.

A working paper recently distributed by the National Bureau of Economic Research seems to support the traditional view.

The authors look at what they call “star scientists,” whom they define as scientists with a large number patents—in the top 5 percent of those with patents. Based on the patent applications, they identify the scientists’ state of residence in each year over a number of years. With that information, the researchers can see whether a scientist has moved, which state they moved from, and which state they moved to. Then they link that information with data on each states top tax rates for individuals and business and and statistically analyze if taxes played a role in the move from state to state.

The results are interesting and indicate that tax rates are factor in attracting and keeping top scientific talent:

  • Star scientists’ moves from state to state are sensitive to changes in the top marginal tax rate on individuals.
  • Corporate income taxes affect state-to-state moves among private sector “star scientists” with no statistically significant effect for moves by academic and government researchers.

Count this as another piece of evidence that, “If you want less of something, tax it.” And it even applies to top scientists.

Referral-based hiring: Better workers, better pay

Firms often use referrals from existing employees to hire new workers. About 50 percent of US jobs
are found through informal referral networks and about 70 percent of firms have programs encouraging referral-based hiring. One can argue that the social networking site LinkedIn is mostly a referral-based job board with more than 250 million users.

Although referral-based hiring has boomed in recent years, there is little quantitative evidence that reliance on referrals is any better or worse than traditional methods of hiring.

Research published in the Quarterly Journal of Economics finds some measurable benefits to referral-based hiring (paywall-protected published article; free pre-publication working paper):

  • Referred applicants are more likely to be hired and more likely to accept offers, even though referrals and nonreferrals have similar skill characteristics.
  • Referred workers tend to have similar productivity compared to nonreferred workers on most measures, but referred workers have lower accident rates in trucking and produce more patents in high-tech.
  • Referred workers are substantially less likely to quit and earn slightly higher wages than nonreferred workers.
  • In call centers and trucking, the two industries for worker-level profits can be calculated, referred workers yield substantially higher profits per worker than nonreferred workers. These profit differences are driven by lower turnover and lower recruiting costs for referrals.

If businesses want better employees and workers want better jobs, it may be time to ditch the job board (even if it’s the best job board out there), and hit up the modern version of the Rolodex.

 

Podcast – Gridlock, Painkiller Abuse, Jobs, and Free Speech

This week’s podcast looks at how gridlock could be good for state budgets and economic growth.

Then we’ll check out new research suggesting that Medicare’s expansion in to prescription drug benefits has caused a boom in painkiller abuse.

On the job front, we’ll examine new evidence that referral based hiring is better for business and better for workers than the traditional methods of sifting through stacks of resumes and applications.

We’ll wrap thing up with commentary on two very different views of how free speech works in a world of free markets.

The minimum wage debate in 20 short minutes

Legislatures in many states are considering bills that would raise the minimum wage as high as $15 an hour.

Proponents have argued that raising the minimum wage would reduce poverty and pull workers off of public assistance.

Opponents point out that a steep increase would reduce employment opportunities and that much of the wage increase would get eaten up by taxes and higher prices. Plus there’s the basic principle that if someone wants to offer their labor services for $5 an hour, why should the government say they can’t do that.

The 20 minute (or so) video above hits most of the pros and cons, just click “Play” to watch the show.

Click here to listen to the show as a podcast (right-click to download)

No good deed goes unpunished: A look at the $15 an hour minimum wage

There’s an old expression, “No good deed goes unpunished.” Raising the minimum wage may sound like a good deed. But, it delivers a lot of punishment. And, it punishes those that it seeks to help.

For example, for the past few years, youth unemployment in Oregon has been about five percentage points worse than the U.S. as whole. The labor force participation of Oregon’s youth has been declining faster than the rest of the U.S.

In other words, young people looking for work cannot find work. And—even worse—it’s so hard for the young to find a job that they’ve given up looking.

However, as unemployment has grown and labor force participation has shrunk, Oregon has seen a steady rise in the state’s minimum wage to among the highest in the country.

This is not some crazy coincidence, or an episode of Portlandia where young people come here to retire. It’s because it is too expensive to employ young people or unskilled people. It’s because of Oregon’s sky high minimum wage.

It’s not only about the young. It’s about the unskilled, the elderly, the disabled, the person trying to get his or her life back on track.

Most economic evidence indicates that increasing minimum wages are associated with reduced employment. Indeed, a recent comprehensive review of the research by the U.S. Congressional Budget Office finds that the negative impacts are felt through wide portions of the economy with youth employment disproportionately damaged. CBO’s analysis is based on an increase in the federal minimum wage. State-level impacts are likely to be larger as many employers operate in a national labor market and can shift staffing across state lines.

We can see that observation play out in a few figures. The figure below shows that, since 1990, wage and salary income in Oregon has declined relative to the rest of the U.S. In 1990, the average Oregon worker made about $550 less per year than the rest of the U.S. The most recent data shows that the average Oregonian earns about $3,400 less than workers in the rest of the U.S. However, over that time period, Oregon’s minimum wage has grown to be among the highest in the country. In fact, the figure at the top of this post shows that as Oregon’s minimum wage has grown, so has its relative decline in wage and salary income.

Oregon-wage-salary-income-vs-US

The minimum wage bills under consideration in this legislative session would likely reduce total wage income in the state. The steep minimum wage increases being proposed would take income from one group of Oregon workers in order to benefit another group of Oregon workers, without increasing—and likely decreasing—total Oregon wage income. While some employees would see a modest increase in their annual salaries, tens of thousands of Oregonians would be unable to find employment and would have no wage income.

In fact, it is very likely that the gains to those who will see a boost in their wages would be more than offset by the losses to those who cannot find work at those wages. In other words, Oregon workers—as a whole—would be worse off.

In July 2014, the Legislative Revenue Office concluded that raising the minimum wage by just $2 an hour would have a long-run negative impact on employment and incomes.

The recent article published by the Journal of Political Economy titled, “How Effective Is the Minimum Wage at Supporting the Poor?” concludes that:

[t]he costs imposed by the minimum wage are paid in a way that is more regressive than a sales tax.

What the research finds that that the biggest chunk of a minimum wage increase gets eaten up in payroll and income taxes. Then, the rest of the increase gets eaten up by paying higher prices because minimum wage increases get passed on to consumers in the form of higher prices.

In other words, after the government gets its cut, minimum wage earners end up paying for their own minimum wage increases. It’s a bit like shifting money from one pocket to another, while dropping a few coins along to way that get picked up by the tax collector.

Watch the testimony before the Oregon Legislature: