Transcript The Effects of an Increase in the Minimum Wage (Benefits)

The Effects of an Increase in the
Minimum Wage (Benefits)
Stan McMillen, Ph.D.
Visiting Assistant Professor of Economics
University of Connecticut
Trinity College
Benefits for Workers, Firms, Governments and the
Economy as a Whole
• Qualitative benefits that exhaust all possibilities presented first
• Not all workers and firms receive all benefits
• Firms respond in various ways to labor cost increases
• Workers and households respond in various ways to increased wages and decreased
public and private benefits
• Governments likewise respond in different ways to increased wages for minimumwage workers
• The net benefit to the economy can be positive, neutral or negative
• These actors respond over time as the minimum wage increases
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Capital investment (automation) takes time
Prices rise slowly
Labor market adjusts slowly
Firms weigh their options & choose the ones that suit them best (iterative)
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Benefits for Workers, Firms, Governments and the
Economy as a Whole
• Benefits for Workers:
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Increased income and consumption
Increased credit-worthiness (fewer defaults/late payments)
Reduced need for high-cost loans (e.g., payday loans)
Ability to save more
Able to afford better nutrition and health
Able to afford better housing
Able to afford personal transportation
Able to afford more education/training
Able to afford more or better insurance
Able to afford more and/or higher quality child care
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Benefits for Workers, Firms, Governments and the
Economy as a Whole
• Benefits for Firms:
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Reduced turnover
Increased productivity, efficiency, morale
Improved organizational efficiency
Hire workers with greater skills
Increased sales
Reduced income (profit) taxes if profit declines (or vice versa)
Reduced property taxes based on income approach if income declines
Accelerated automation
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Benefits for Workers, Firms, Governments and the
Economy as a Whole
• Benefits for State and Local Governments:
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Fewer workers to administer public assistance
Reduced public assistance direct costs
Better public health – reduced infant mortality and increased life expectancy
Less crime
Increased sales and personal income taxes
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Benefits for Workers, Firms, Governments and the
Economy as a Whole
• Economy-wide Benefits:
• Increased automation leads to greater capital investment and higher capital
per worker and leads to higher GDP per capita
• Composition of workforce changes to higher average skill level as least skilled
workers face increased unemployment
• Governments can be smaller to the extent public assistance is reduced
• Less crime leads to lower criminal justice costs
• Reduced inequality and higher economic growth
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And now Susan will discuss the costs of a min
wage increase………
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The Effects of the Minimum
Wage: Part 2
Susan Coleman
Professor of Finance
University of Hartford
The Law of Unintended Consequences
• Although raising the minimum wage will benefit some low wage
households and likely increase their spending, there will be ancillary
negative effects on other segments of the economy including:
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Individuals and households living in poverty
Less skilled workers
Employers
Consumers
The State of Connecticut
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Effects on those living in poverty
• Raising the minimum wage is not an effective means for reducing
poverty (Neumark, 2015b).
• The minimum wage (vs. the EITC) is a blunt-edged tool in that the
majority of individuals/households who benefit are not poor.
• Neumark (2015b) estimates that if the minimum wage is raised to $15
per hour, only 12% of the benefits will go to poor families. In
contrast, 38% of benefits will go to families with incomes at least 3X
the poverty level.
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Effects on less skilled workers
• Minimum wage increases create adverse labor demand effects that
redistribute rather than increase earnings among low-skilled
individuals (Sabia & Nguyen, 2015). In other words, some low wage
earners will earn more due to the increase, but others will lose their
jobs (Neumark, Salas & Wascher, 2014)
• Similarly, Clemens & Wither (2014) found that “binding” minimum
wage increases had significant negative effects on the employment
and income growth of targeted workers.
• Higher minimum wages will cause employers seek out higher skilled
workers vs. lower skilled workers (labor-labor substitution) (Neumark,
2015a).
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Less skilled workers (cont.)
• In an extensive review of prior studies on raising the minimum wage,
Neumark & Wascher (2007) found that “almost all point to negative
employment effects, both for the United States as well as for many
other countries”.
• Further, those studies focusing on the least skilled workers “provide
relatively overwhelming evidence of stronger disemployment effects
for these groups”.
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Less skilled workers (cont.)
“…the overall body of recent evidence suggests that the
most credible conclusion is a higher minimum wage
results in some job loss for the least-skilled workerswith possibly larger adverse effects than earlier
research suggested” (Neumark, 2015a, p. 3)
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Effects on employers
• Raising the minimum wage will increase operating costs, as much as
7% for firms in some industries (restaurants) (Reich et al., 2016).
• The assumption is that firms will pass these costs on to their
customers; this assumption may not be valid in highly competitive
industries.
• If low wage workers receive increases, higher wage workers will also
demand them putting added pressure on wages and costs.
• Employers may choose to offset higher wages with shorter working
hours and fewer benefits, i.e. shift to more part-time and/or seasonal
workers.
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Employers (cont.)
• Raising the minimum wage will accelerate the current trend toward
automation which may displace some types of workers (labor-capital
substitution).
• Employers will hire higher skilled, more productive workers vs. lower
skilled workers/less productive workers (labor-labor substitution).
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Effects on consumers
• Consumers will pay higher costs as firms pass on higher minimum wage
costs.
• The majority of consumers will not benefit from wage increases to offset
these higher costs.
• In this sense, raising the minimum wage acts as a tax on those who are not
minimum wage earners including retirees, disabled individuals, and those
who cannot find jobs due to adverse labor effects.
• Higher costs may cause consumers to reduce spending or seek lower cost
venues to buy.
• Higher costs may also accelerate the current rate of out-migration as
families seek more affordable places to live.
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Effects on the State of Connecticut
• Currently Connecticut has one of the worst reputations in the country
for being business unfriendly; raising the minimum wage will solidify
that view. Employers will see this as a tax on business.
• Similarly, Connecticut has the reputation for being a high cost state,
and the rate of out-migration has accelerated in recent years. Those
most likely to leave are highly educated and skilled workers as well as
households with assets.
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Taken from MetroHartford Progress Points Report, July 2016, p.6
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Taken from MetroHartford Progress Points Report, July 2016, p. 6
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Taken from MetroHartford Progress Points Report, July 2016, p. 6
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Connecticut (cont.)
• Connecticut’s economy is underperforming that of New England and
the U.S. in measures of employment and growth rate in GDP. Recent
research shows that raising the minimum wage reduces employment
over time (Meer & West, 2015).
• Higher minimum wages do not decrease participation in or
expenditures for means-tested public assistance programs (Sabia &
Nguyen, 2015).
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Effects of the Minimum Wage on
Employment Dynamics: Meer & West, 2015
• Both authors are distinguished economists: Texas A&M and MIT.
• Central premise: Changes in the minimum wage will affect
employment over time through changes in growth vs. an immediate
drop in employment levels.
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Methodology
• Use 3 different data sets
• Point out weaknesses in the difference-in-differences approach using
jurisdiction time trends typically used for studies of this type, i.e., this
method may mask changes in the dependent variable (employment)
• Alternatively, Meer & West developed 5 models using simulated data
in a Monte Carlo framework. They ran each of these models both
with and without jurisdiction time trends to determine how much the
time trends bias estimates of employment growth (vs. employment).
• They found that the inclusion of jurisdiction time trends “starkly”
biased estimates for all models employed.
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Findings:
• Increase in the minimum wages leads to a decline in total
employment.
• More important, the higher minimum wage has a negative effect on
the growth rate of employment over time.
• Much of this impact comes 2 years after raising the minimum wage,
suggesting that short term data immediately after the increase does
not show its true impact.
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Conclusions
• Much of the previous literature on raising the minimum wage
assumes a relatively rapid adjustment in employment.
• Alternatively, Meer & West show that raising the minimum wage
leads to negative effects on job growth over a longer period of time
than has been considered in prior studies.
• These effects are most pronounced on younger workers (14-18) and
workers with lower levels of educational attainment (high school or
less).
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Near term solutions to aid low-wage families
• Increase the earned income tax credit (EITC). This approach is more
effective than raising the minimum wage because it targets low
income households (vs. low wage workers) directly.
• Develop a voluntary “regional compact” of firms committed to raising
wages for low wage employees; some firms are doing this already.
• Couple this with educational and training opportunities that will help
low wage workers increase their skills.
• Improved counseling for high school and college students on career
selection, post-secondary educational alternatives, and educational
financing.
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Longer term solutions to aid low-wage
families
• Accessible and affordable early childhood education to begin
socializing children and integrating them into the educational system
at an early age.
• Educational reform and innovation at the K-12 levels.
• Renewed focus and funding for vocational education and training at
the high school and post-secondary levels.
• Collaborative efforts on the part on businesses (small and large) and
government to improve Connecticut’s economic environment,
business climate, and worker well-being.
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What is the Effect on Employment?
• John Schmitt (2013) looks at the literature on minimum wage
changes.
• His is a study of studies of studies (meta-meta-study).
• He finds in almost 1,500 employment estimates in Doucougliagos &
Stanley (2009) of 64 studies and 201 employment estimates Wolfson
& Belman (2014 book, “What Does the Minimum Wage Do?) of 27
studies that there is no statistically or policy relevant effect of an
increase in the minimum wage (graph next)
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What is the Effect on Employment?
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What is the Effect on Employment?
• Why?
• There are economic trends occurring that overshadow min wage increases within the
region or in nearby regions (states or counties).
• So one needs to account for spatial correlation. Not doing this will attribute faster
regional growth to areas with relatively low min wages and not to other factors
driving job growth such as lower energy, housing and regulatory costs.
• There are several channels of adjustment by firms:
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Reduced hours
Reduced headcount
Accelerated automation
Increased productivity & organizational efficiency
Reductions in non-wage benefits
Reductions in training
Changes in employment composition (employers upgrade skills of their workers by hiring
higher productivity workers)
Raise prices
Wage compression (wage structure changes)
Reduced profit
Increased sales
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What Are the Dollar & Percent Costs?
• The following table shows wage cost of the last three federal min
wage increases (1990-91, 1996-97, 2007-2009).
• These increases averaged about 10% per year (column 2).
• Average increases in wage costs of affected workers ranged from 5.3%
to 9.4% (column 10) b/c some workers were already above the new
min wage.
• Total direct wage cost of these min wage increases ranged from 0.02%
to 0.13% of the total wage bill.
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What Are the Dollar & Percent Costs?
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Quantitative Example: New York State
• Modeling exercise using structural labor market model and regional
economic & fiscal impact model (IMPLAN) [following diagram].
• Changes in operating costs as a result of min wage increases
[following Table 6].
• Key parameters calibrate results in the labor market model
(robustness tests paper forthcoming) [following Table 7].
• Cumulative net employment effects in Table 8.
• These graphs are from the policy brief, “The Effects of a $15 Minimum Wage
in New York State”, by Reich, Allegretto, Jacobs and Montialoux, March 2016,
CWED at the IRLE at UC Berkeley
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Quantitative Example: New York State
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Quantitative Example: New York State
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Quantitative Example: New York State
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Quantitative Example: New York State
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Limitations of Reich, et al. Study of NYS
• Any prospective impact study involves an inherent level of uncertainty. Actual effects
may differ from their estimates if future economic conditions vary from current
forecasts.
• Reich et al. estimate the net effects on jobs in the state. The effects will vary within
industries and across geographic regions. Reich et al. discuss these differences but a
detailed analysis is beyond the scope of their study.
• Reich et al. do not take into account the effects of higher wages on worker health and on
worker training, which are likely to be positive. Also, although higher parental earnings
have well-documented effects on children’s health*, educational outcomes, and future
earnings, these long-run effects are beyond the time scope of our study.
• A separate analysis is needed to examine effects on state and local employees and
nonprofit human services sector, in which funding is dependent on public policy.
• Their results cannot be generalized to minimum wages higher than $15. Their model
predicts negative effects would occur at some higher minimum wage. However, it is
beyond their scope here to determine the level at which negative effects would become
detectable.
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*Wehby, Dave & Kaestner (June 2016), “Effects Of The Minimum Wage On Infant Health” find an increase in birth weight
driven by increased gestational length and fetal growth rate. The effect size is meaningful and plausible. They find evidence
of an increase in prenatal care use and a decline in smoking during pregnancy, which are channels through which a
minimum wage can affect infant health.
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Takeaways from the studies and literature
• The minimum wage and EITC are complements not substitutes.
• Together, these policies encourage more work from more low-wage workers
than either can separately. The EITC must work in tandem with strong wage
standards to avoid acting as a wage substitute; otherwise, the EITC would
allow certain companies to pay poverty wages, and have those low pay levels
subsidized by other employers and taxpayers, in much the way that the fast
food sector has socialized part of its payroll by having employees rely on
public assistance. A study for the National Bureau of Economic Research
found that about 27 cents of every dollar spent on the EITC is captured by
companies who are able to thereby lower the wages offered to workers.*
*Jesse Rothstein. (2009). “Is the EITC Equivalent to an NIT? Conditional Cash Transfers and Tax Incidence.”
Working Paper 14966. National Bureau of Economic Research, Cambridge, MA. Available online at
http://www.nber.org/papers/w14966.pdf
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Takeaways from the studies and literature
• The increase in the min wage does not increase overall costs very
much, it does not entail every body getting a 50% raise (ripple effect),
it does not increase prices by much and it does not increase every
worker’s wage up the line (ripple effects).
• For ripple effects that are generally quite small, see Jeannette Wicks-Lim (May
2006), “Mandated Wage Floors and the Wage Structure: New Estimates of the
Ripple Effects of Minimum Wage Laws”, PERI.
• A 10% increase in the min wage increases overall prices by 0.4% in Mark
Wilson (Sept. 2012), “The Negative Effects of Minimum Wage Laws”, Cato
Institute.
• Reference Table 6 in Reich et al. for operating cost increases.
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Takeaways from the studies and literature
• Employment effects vary by geography and industry and over
time..they can be positive, negative or insignificant.
• There are several public and private policies that can improve the
economic and social environment of low-wage workers.
• Automation and skilled labor substitution will occur no matter what
and the least skilled workers will be displaced, so the composition of
the workforce will change.
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