The Wall Street Journal opined on this development. Let’s review another example. But there will definitely be fewer establishments with fewer workers.

Which is what we’re now seeing in Seattle.

Posted in Bernie Sanders, Big business, Big Government, Cronyism, Minimum Wage, tagged Bernie Sanders, Big business, Big Government, Cronyism, Minimum Wage on October 3, 2018| 1 Comment »

I want higher wages. It’s too soon to say for sure, but perhaps we’re seeing evidence that last year’s tax reform is paying dividends. Of course, it’s also possible that we’re in a bubble that’s about to pop, but let’s hope that’s not the case.

— Jeff Bezos (@JeffBezos) October 2, 2018

The Wall Street Journal opined about this oleaginous development. The WSJ also commented on the implicit extortion. Minimum Wage Increases Are Bad News for Low-Skilled Workers in General, not Just for those Who Lose their Jobs

Posted in Economics, Government intervention, Minimum Wage, tagged Economics, Government intervention, Minimum Wage on June 27, 2017| 10 Comments »

When I debate my leftist friends on the minimum wage, it’s often a strange experience. When other people are listening or watching, they’ll adopt a very extreme position and basically claim that politicians have the power to dramatically boost take-home pay by simply mandating higher levels of pay. And somehow there won’t be any noticeable negative impact on employment and labor markets, even though businesses only create jobs if they expect some net profit.

But when we talk privately, they have a more nuanced argument. They’ll confess that higher minimum wages will cause some low-skilled workers to become unemployed, but then justify that outcome using either or both of these arguments.

I’ve always rejected the first argument because I believe in the individual right of contract. The government should not prevent an employer and employee from engaging in voluntary exchange.

And I’ve always rejected the second argument because there can’t be any net “stimulus” since any additional income for workers is automatically offset by less income for employers.

So who is right?

Well, the real world just kicked advocates of higher minimum wages in the teeth. Or maybe even someplace even more painful. A new study from the National Bureau of Economic Research looks at the impact of the $11 and $13 minimum wages in the city of Seattle and finds very bad results.

Let’s start by simply citing what the local government did.

This paper, using rich administrative data on employment, earnings and hours in Washington State, re-examines this prediction in the context of Seattle’s minimum wage increases from $9.47 to $11/hour in April 2015 and to $13/hour in January 2016.

And here’s a table from the study, showing details on the minimum-wage mandate. And what’s been happening as a result of this intervention in the labor market?

Unsurprisingly, the jump to $13 has been much more damaging that the jump to $11.

…conclusion: employment losses associated with Seattle’s mandated wage increases are in fact large enough to have resulted in net reductions in payroll expenses – and total employee earnings – in the low-wage job market. …We show that the impact of Seattle’s minimum wage increase on wage levels is much smaller than the statutory increase, reflecting the fact that most affected low-wage workers were already earning more than the statutory minimum at baseline. Our estimates imply, then, that conventionally calculated elasticities are substantially underestimated. Our preferred estimates suggest that the rise from $9.47 to $11 produced disemployment effects that approximately offset wage effects, with elasticity estimates around -1. The subsequent increase to as much as $13 yielded more substantial disemployment effects, with net elasticity estimates closer to -3.

Here’s a chart from the study looking at the impact on hours worked.

If you want a healthy labor market, it’s not good to be below the line. And here’s some of the explanatory text.

…Because the estimated magnitude of employment losses exceeds the magnitude of wage gains in the second phase-in period, we would expect a decline in total payroll for jobs paying under $13 per hour relative to baseline. Indeed, we observe this decline in first-differences when comparing “peak” calendar quarters, as shown in Table 3 above. …point estimates suggest payroll declines of 4.0% to 7.6% (averaging 5.8%) during the second phase-in period. This implies that the minimum wage increase to $13 from the baseline level of $9.47 reduced income paid to low-wage employees of single-location Seattle businesses by roughly $120 million on an annual basis. …Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs.

But the biggest takeaway from the report is that hours dropped so much that the average low-wage worker wound up with less income

Here’s the relevant chart.

Once again, it’s not good to be below the line. This data is remarkable because it shows that higher minimum wages are a bad idea, even according to the metrics of our friends on the left.

Let’s close with a couple of observations from others who have looked at the new study.

Diana Furchtgott-Roth of the Manhattan Institute (and formerly Chief Economist at the Department of Labor) highlights the most relevant findings.

Raising the pay floor has led to net losses in payroll expenses and worker incomes for low-wage workers. …When hourly wages rose from $11 to $13 in 2016, hours of work and earnings for low-wage workers were reduced by 9 percent for the first three calendar quarters, resulting in 3.5 million fewer hours worked for each calendar quarter.  The number of jobs declined by 7 percent, with the result that 5,000 jobs were lost. …The evidence shows that in Seattle, low-wage workers got less money in their pockets, rather than more.

Some proponents of intervention and mandates may want to dismiss Diana’s analysis since of her reputation as a market-friendly scholar.

But even Ben Casselman and Kathryn Casteel of FiveThirtyEight basically reach the same conclusion.

As cities across the country pushed their minimum wages to untested heights in recent years, some economists began to ask: How high is too high? Seattle, with its highest-in-the-country minimum wage, may have hit that limit. …New research released Monday by a team of economists at the University of Washington suggests the wage hike may have come at a significant cost: The increase led to steep declines in employment for low-wage workers, and a drop in hours for those who kept their jobs. Crucially, the negative impact of lost jobs and hours more than offset the benefits of higher wages — on average, low-wage workers earned $125 per month less because of the higher wage.

I’m amused to find more evidence that left-leaning economists admit that higher minimum wages cause damage, albeit never on the record.

Even some liberal economists have expressed concern, often privately, that employers might respond differently to a minimum wage of $12 or $15, which would affect a far broader swath of workers.

I’m wondering how they can look at themselves in the mirror. It seems very immoral (in other words, beyond amoral) to publicly defend a policy that you privately admit is bad.

I understand that this type of dishonesty happens all the time in the political world (for example, some Republicans are now supporting Trump’s plans for infrastructure boondoggles and parental leave when they would have been strongly opposed if the same policies had been proposed by Obama).

But what’s the point of being a tenured academic if you can’t at least be honest?

Though maybe there’s some sort of cognitive dissonance at play, where they feel the rules of honesty don’t apply in the political world. For instance, both Paul Krugman and Larry Summers have acknowledged in their academic work that unemployment benefits lead to more unemployment. But they pretend that’s not the case when commenting on the policy debate.

But I’m digressing. Let’s close by recycling this video on minimum wages from the Center for Prosperity.

P.S. If you want some minimum-wage themed humor, you can enjoy cartoons here, here, here, here, and here.

Minimum Wage Laws, Jobs, and the Sobering Impact of Decentralization

Posted in Centralization, Competitiveness, Federalism, Local government, Minimum Wage, tagged Centralization, Competitiveness, Federalism, Local government, Minimum Wage on April 4, 2017| 9 Comments »

The real world is like a cold shower for our friends on the left. Everywhere they look, there is evidence that jurisdictions with free markets and small government outperform places with big welfare states and lots of intervention.

That’s true when comparing nations. And it’s also true when comparing states. That must be a source of endless frustration an disappointment for statists.

Speaking of disappointed statists, the real world has led to more bad news. The left-wing Mayor of Baltimore campaigned in favor of a $15 minimum wage, but then decided to veto legislation to impose that mandate. The Wall Street Journal opines on this development.

Mayor Catherine Pugh, a Democrat, has rejected a bill that would raise the city’s minimum wage to $15 an hour by 2022. She did so even though she had campaigned in favor of raising the minimum wage, which shows that economic reality can be a powerful educator. She explained her change of heart by noting that raising the rate above the $8.75 an hour minimum that prevails in the rest of Maryland would send jobs and tax revenue out of Baltimore to surrounding counties. The increase would also have raised the city’s payroll costs by $116 million over the next four years when she’s already coping with a deficit of $130 million in the education budget.

The key thing to notice is that the Mayor recognized that the real-world impact of bad legislation is that economic activity would shrink in the city and expand outside the city.

Writing for Reason, Eric Boehm also points out that the Mayor was constrained by the fact neighboring jurisdictions weren’t making the same mistake.

Pugh said the bill would not be in the best interest of Baltimore’s 76,000 unemployed workers and would drive businesses out of the city to the surrounding counties. …Indeed. Raising the minimum wage would not solve Baltimore’s economic troubles, and would likely only add to them. While support for a $15 minimum wage has become something of a litmus test for progressive politicians, the true test of any politician should be whether he or she is willing to set aside campaign trail rhetoric that flies in the face of economic reality. Signing the bill would have made progressive pols and activists happy—one Baltimore city councilman called Pugh’s decision “beyond disappointing” and a minimum wage activist group said it would remind voters of Pugh’s “broken promise”—but there’s no honor in following through on a promise to do more damage to an already struggling city’s economy. Pugh’s decision to veto a $15 minimum wage bill isn’t disappointing in the least. More politicians should learn from her example of valuing economic reality over populist rhetoric.

The Mayor’s veto is good news, though it remains to be seen whether city legislators will muster enough votes for an override.

Regardless of what happens, notice that the Mayor didn’t do the right thing because she believed in economic liberty and freedom of contract. She also didn’t do the right thing because she recognized that higher minimum wage mandates would lead to more joblessness. Instead, she felt compelled to do the right thing because of jurisdictional competition. She was forced to acknowledge that bad policy in her city would explicitly backfire since economic activity is mobile. She had to admit that there are no magic boats.

And this underscores why federalism and decentralization are vital features of a good system. Governments are more likely to do bad things when the costs can be imposed on an entire nation (or, even better from their perspective, the entire world). But when bad policy is localized, it becomes very hard to disguise the costs of bad policy.

And, as today’s column illustrates, decentralization stopped the Mayor of Baltimore from a bad policy that would hurt poorly skilled workers. Just as federalism stopped Vermont politicians from imposing a destructive single-payer health system.

Let’s close by circling back to the minimum wage.

Writing in today’s Wall Street Journal, Andy Puzder makes a very timely point about automation.

Entry-level jobs matter—and you don’t have to take my word for it. In a speech last week on workforce development in low-income communities, Federal Reserve Chair Janet Yellen said that “it is crucial for younger workers to establish a solid connection to employment early in their work lives.” Unfortunately, government policies are destroying entry-level jobs by giving businesses an incentive to automate at an accelerated pace. In a survey released last month, the publication Nation’s Restaurant News asked 319 restaurant operators to name their biggest challenge for 2017. Nearly a quarter of them, 24%, said rising minimum wages. …The trend toward automation is particularly pronounced in areas where the local minimum wage is high.

Need more evidence?

By the way, even the normally left-leaning World Bank has research on the damaging impact of minimum wage mandates.

This paper uses a search-and-matching model to examine the effects of labor regulations that influence the cost of formal labor (notably minimum wages and payroll taxes) on labor market outcomes… The results indicate that these regulations, especially minimum wage policy, contribute to higher unemployment rates and constraint formalization…, especially for youth and women.

The research was about the labor market in Morocco, but the laws of supply and demand are universal. As I’ve repeatedly stated, when you mandate that workers get paid more than what they’re worth, that’s a recipe for unemployment. And as the World Bank points out, it’s the more vulnerable members of society who pay the highest price.

In an ideal world, there should be no minimum wage mandates. But since that’s not an immediately practical goal, the best way of protecting low-skilled workers is to make sure Washington does not impose a nationwide increase. That won’t stop every state and local government from imposing destructive policies that cause unemployment, but the pressure of jurisdictional competition will

And when those bad policies do occur, that will simply give us more evidence against intervention. Which brings us back to where we started. The real world is a laboratory that shows statism is a bad idea.

P.S. In honor of Equal Pay Day, I can’t resist sharing this tidbit from the Washington Free Beacon. Oh, you also won’t be surprised to learn that there was also a big pay gap in Hillary Clinton’s Senate office, as well as Obama’s White House. In reality, of course, the market punishes genuine discrimination and the pay gap is basically nonexistent when comparing workers with similar education, experience, and work patterns.

Is Anybody Shocked that Higher Minimum Wage Mandates Are Resulting in Fewer Jobs?

Posted in Economics, Government intervention, Minimum Wage, tagged Economics, Government intervention, Minimum Wage on August 25, 2016| 26 Comments »

While economists are famous for their disagreements (and their incompetent forecasts), there is universal consensus in the profession that demand curves slope downward. That may be meaningless jargon to non-economists, but it simply means that people buy less of something when it becomes more expensive.

And this is why it makes no sense to impose minimum wage requirements, or to increase mandated wages where such laws already exist.

If you don’t understand this, just do a thought experiment and imagine what would happen if the minimum wage was $100 per hour. The answer is terrible unemployment, of course, which means it’s a very bad idea.

So why, then, is it okay to throw a “modest” number of people into the unemployment line with a “small” increase in the minimum wage?

Yet some politicians can’t resist pushing such policies because it makes them seem like Santa Claus to low-information voters. Vote for me, they assert, because I’ll get you a pay raise!

All of this sounds good, and it may even be the final result for some workers. But there’s overwhelming evidence that you get more unemployment when politicians boost the minimum wage. There are no “magic boats.” In the real world, businesses only hire workers when they expect that additional employees will generate more than enough revenue to offset their costs. So when politicians artificially increase the cost of hiring workers, there will be some workers (particularly those with low skills) who become redundant.

And that’s exactly what we’re seeing in cities that have chosen to mandate higher minimum wages.

The Wall Street Journal opines on Seattle’s numbers.

Seattle’s increase last year seems to be reducing employment. That’s the finding of a new report by researchers at the University of Washington. The study compared nine months of 2015 in Seattle, where the wage is ticking up gradually and hit $13 an hour in January, with similar areas elsewhere in Washington. …The researchers found that the ordinance decreased the low-wage employment rate by about one-percentage point. …The ordinance “modestly held back” employment of low-wage earners, and hours worked “lagged behind” regional trends, on average four hours each quarter (or 19 minutes a week). Many such individuals moved to take jobs outside the city at “an elevated rate compared to historical patterns,” says the report. …None of this will surprise anyone who understands that increasing the cost of something will reduce the demand for it. Then again, that concept seems to elude both major presidential candidates, who have floated national minimum-wage increases.

By the way, it’s not just Trump and Clinton supporting this destructive policy. Mitt Romney also was on the wrong side back in 2012.

And it goes without saying that Obama has been a demagogue on the issue.

Let’s examine evidence from another city. Mark Perry of the American Enterprise Institute looks at what has been happening in Washington, DC.

Since the DC minimum wage increased in July 2015 to $10.50 an hour, restaurant employment in the city has increased less than 1% (and by 500 jobs), while restaurant jobs in the surrounding suburbs increased 4.2% (and by 7,300 jobs). An even more dramatic effect has taken place since the start of this year – DC restaurant jobs fell by 1,400 jobs (and by 2.7%) in the first six months of 2016 between January and July – that’s the largest loss of District food jobs during a 6-month period in 15 years. Perhaps some of those job losses were related to the $1 an hour minimum wage hike on July 1, bringing the city’s new minimum wage to $11.50 an hour. In contrast, restaurant employment outside the city grew at a 1.6% rate in the suburbs (and by 2,900 jobs) during the January to July period. …While it might take several more years to assess the full impact, the preliminary evidence so far suggests that DC’s minimum wage law is having a negative effect on staffing levels at the city’s restaurants. At the same time that suburban restaurants have increased employment levels by nearly 3,000 new positions since January, restaurants in the District have shed jobs in five out of the last six months, with a total loss of 1,400 jobs during that period (an average of nearly 8 jobs lost every day). The last time DC experienced restaurant job losses in five out of six consecutive months was 25 years ago in 1991, and the last time 1,400 jobs were lost over any six-month period was 15 years ago during the 2001 recession.

Here’s a chart looking at how restaurant employment in DC and the suburbs used to be closely correlated, but how there’s been a divergence since the city hiked the minimum wage. As Mark noted, we’ll know even more as time passes, but the net result so far is predictably negative.

For additional background info, this video is a succinct explanation of why minimum-wage mandates are such a bad idea.

Let’s close with something rather amusing. It turns out that the State Department, during Hillary Clinton’s tenure, actually understood that higher minimum wages destroy jobs. Indeed, her people were even willing to fight against such job-killing measures.

But in Haiti rather than America, as Politifact reports.

Memos from 2008 and 2009 obtained by Wikileaks strongly suggest…that the State Department helped block the proposed minimum wage increase. The memos show that U.S. Embassy officials in Haiti clearly opposed the wage hike and met multiple times with factory owners who directly lobbied against it to the Haitian president. …media outlets assessed the cables and found, among many other revelations, that the “U.S. Embassy in Haiti worked closely with factory owners contracted by Levi’s, Hanes, and Fruit of the Loom to aggressively block a paltry minimum wage increase” for workers in apparel factories. …Deputy Chief of Mission David Lindwall put it most bluntly, when he said the minimum wage law “did not take economic reality into account but that appealed to the unemployed and underpaid masses.” …The U.S. Embassy, meanwhile, continued to lament the hike… USAID studies found that a 200 gourdes minimum wage “would make the sector economically unviable and consequently force factories to shut down.”

Hmmm…., I wonder if some of those textile companies made contributions to the Clinton Foundation?

P.S. People in Switzerland obviously understand this issue, overwhelmingly voting against a minimum-wage mandate in 2014.

P.P.S. As Walter Williams has explained, minimum wage laws are especially harmful for blacks.

In One Cartoon Strip, Everything You Need to Know about the Minimum Wage

Posted in Economics, Government intervention, Minimum Wage, tagged Economics, Government intervention, Minimum Wage on March 7, 2016| 18 Comments »

Every so often, I see visuals that do a great job of illustrating various economic principles.

This Wizard-of-Id parody contains a lot of insight about labor economics. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

If you want to understand Keynesian economics, this Scott Stantis cartoon is a gem, as is the house-on-fire image in this post.

Regarding tax policy, the philoso-raptor explains supply-side economics and Paul Bunyan helps to illustrate why double taxation is so destructive.

You can also get clear messages about why a welfare state is economically destructive in this classic from Chuck Asay, as well as these home-made cartoons on riding the wagon vs pulling the wagon.

Regarding the minimum wage, I think Henry Payne effectively shows – in this cartoon and this cartoon – how mandating above-market wages is very bad news for those with limited skills. But this cartoon strip from Red Panels deserves special praise because it shows both what some people think and what actually happens. Amen. I’ve always been mystified why some people don’t understand that jobs are only created when an employee is expected to generate net revenue.

In other words, there are no “magic boats.” Especially in the long run, companies will shed workers that hurt the bottom line.

P.S. Here are some of my favorites images that don’t involve economic principles.

Minimum Wage Mandates Help Workers…into the Unemployment Line

Posted in Economics, Government intervention, Jobs, Minimum Wage, tagged Economics, Government intervention, Jobs, Minimum Wage on December 17, 2015| 24 Comments »

As you can see from this interview, I get rather frustrated by the minimum wage debate. I’m baffled that some people don’t realize that jobs won’t be created unless it’s profitable to create them.

You would think the negative effects of a higher minimum wage in Seattle would be all the evidence that’s needed, but I’ve noted before that many people decide this issue based on emotion rather than logic.

So even though we have lots of evidence already that wage mandates cause joblessness (especially for minorities), let’s add to our collection.

Here are some excerpts from a Wall Street Journal column by Professor David Neumark from the University of California Irvine.

Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired. Among the many studies supporting this conclusion is one completed earlier this year by Texas A&M’s Jonathan Meer and MIT’s Jeremy West, which reaffirmed that “the minimum wage reduces job growth over a period of several years”… An extensive survey of decades of minimum-wage research, published by William Wascher of the Federal Reserve Board and me in a 2008 book titled “Minimum Wages,” generally found a 1% or 2% reduction for teenage or very low-skill employment for each 10% minimum-wage increase. …let’s not pretend that a higher minimum wage doesn’t come with costs, and let’s not ignore that some of the low-skill workers the policy is intended to help will bear some of these costs.

The column also exposes some of the methodological flaws in studies that claim high minimum wages don’t lead to job losses, so the entire piece is worth reading.

Since we’re on this topic, here’s a great table prepared by Mark Perry of the American Enterprise Institute. Is anyone shocked to learn that countries with minimum wage mandates have higher unemployment levels, particularly for young people? I have two big observations and two minor comments in response to this data.

The first big observation is the caveat that minimum wage mandates are just one piece of the economic puzzle. The numbers if Greece, for instance, are miserable for many reasons. The minimum wage mandate is just another straw on the camel’s back. Moreover, it’s possible for a nation to have a decent-performing economy with a minimum wage (see Luxembourg) and a decrepit economy without one (see Italy). It’s the overall burden of government that matters, which is why the rankings from Economic Freedom of the World are the first place to look when determining if a nation is market-oriented or statist. That being said, Mark’s data certainly shows a correlation between joblessness and minimum wage mandates. Part of the reason for this link is that higher minimum wages are bad for employment, and part of the reason for the correlation is that governments foolish enough to impose minimum wages are probably foolish enough to impose other bad policies as well.

The second big observation is that I periodically encounter leftists who say a minimum wage is needed because employers have all the leverage and would pay workers starvation wages in the absence of a mandate. To which I always respond by asking them, “Then why don’t employers use that leverage to reduce the wages of the 98 percent of workers who make more than the minimum wage?” That shuts down the conversation very quickly.

But now I’ll also ask these folks, “And why aren’t workers in Austria and Sweden paid starvation wages?” Their responses will be amusing.

For my minor comments, I’ll start by noting that Switzerland is a uniquely sensible nation. Voters recently rejected a minimum wage mandate by an overwhelming 3-1 margin. I fear American voters would not be nearly as sensible if we had a national referendum.

My second minor comment is to share this amusing report about Belgian politicians whining that the lack of a minimum wage in Germany (at least as of 2013) was causing “unfair” competition. Oh, the horror!

Last but not least, let’s recycle this great video from the Center for Freedom and Prosperity.

If you have friends and colleagues who lean left but nonetheless are open-minded, please share this video with them.

And let them know that even Janet Yellen of the Federal Reserve has acknowledged that minimum wage mandates are recipe of joblessness.

P.S. I wrote a few days ago to identify several statist policies that cause inequality. Well, I’ve added to that list because it turns out that red tape also can unjustly line the pockets of the rich at the expense of the poor. Make sure to check out the updated version of that post.
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