Wednesday, December 18, 2013

More on Minimum Wage & Labor Force

The Atlantic recently ran a decent article on the minimum wage, which, although it tilted to a positive spin, did a better than usual job of covering the topic.  That article referenced an Economic Policy Institute report that claimed 21.3 million workers would see wage increases if we hiked the MW to $10.10.

They assume no job losses, which makes the 21.3 million figure useful to me as an estimate of the number of workers currently making $10.10 or less.

I previously had graphed the level of MW employment at different MW rates, going back to 1979, as published by the BLS.  I found a surprisingly tight relationship:

It occurred to me that we can test the EPI assumptions by taking the 21.3 million workers they estimate would be affected by a MW hike to $10.10, and compare that to the historical number of MW workers when the MW has been at that level.

This would put MW at about 50% of the average hourly wage, and MW workers at about 13.5% of the total labor force.  The EPI report assumes no loss of jobs.  If their assumptions are correct, then this should plot near the long term trend line.  If there are job losses, then this would plot above the line, and we might infer that the distance between the trendline and the plot of all workers affected would give us an indication of the amount of job loss caused by the wage floor.  Here is the comparison:

The EPI assumption of no job loss would predict a quantity of MW workers that is much higher than historical experience.  If this long-term trend holds, we would expect 8 million workers to lose their jobs.  My regressions of past MW correlations with employment would have predicted lost employment of 5 to 10 million jobs.  I would expect the effect to strengthen as the MW level rises to a higher portion of the average wage, since there will be a denser number of workers at those levels.

The EPI report appears to depend on the following logical series:

1) The demand for low wage labor has an elasticity of zero, therefore no jobs will be lost.

2) Only 20-50% of the cost will be reflected in price increases, so 50-70% of the increased wages will be in the form of a transfer from employers to low wage employees.  (Note, then, that the inelasticity of demand for labor does not come from an ability to pass on costs, but comes from an assumption that low wage employers, as a group, have an enormous level of monopolistic profits, a level so high and so universal that a doubling of labor costs in less than a decade would not lead to a net loss of a single job, even as they face declining profit margins as a result.)

3) Low wage workers will be more likely to spend the transferred cash than employers.

4) Spending is better for the economy than saving.  The boost to the economy from the extra spending will lead to the creation of 140,000 extra jobs!

Each of these steps invites some level of skepticism, which makes the expectations of the report unlikely.  And, if we accept these assumptions at face value, the results would require us to expect a level of job retention wholly unrelated to historical experience, as shown above.

Sadly, I don't doubt that we will have a chance, eventually, to test the theory again, with low wage workers as the test subjects.  As the EPI report notes, while many current MW workers are young and single, as MW gets higher in relation to average wages, the costs and benefits of the policy fall more heavily on poor working adults.

This analysis and my estimate of job losses in the recent recession stemming from MW increases would both suggest that as a broad rule of thumb, for every two workers whose wages are below the new MW level, one will lose their job.  Keep in mind that since these tend to be workers on the edges of the labor force, many of those former employees leave the labor force instead of showing up as unemployed.

No comments:

Post a Comment