Sunday, January 26, 2014

Minimum Wage - The Bad Luck Policy

I graphed minimum wage rises against the Fed's Yield Curve Recession Model.

Recession probability (left), MW/AW change (right)
1976-1982 shaded because high inflation/multiple MW hikes make binary distinctions about MW behavior difficult

The minimum wage's bad luck is even worse than we thought.  Not only do recessions tend to come after minimum wage hikes, coincidentally.  Not only do larger minimum wage hikes tend to precede lower real GDP growth and lower employment growth....coincidentally.  But, according to the Fed indicator, there were 3 times in the past 50 years when we avoided recessions, even though the probability of a recession topped 20%.  And, believe it or not, the world's unluckiest policy just happens to have coincided with two of them.

Now, I'm kind of joking about the bad luck.  Maybe it's a conspiracy.  This indicator looks ahead one year.  So, the interest rate spread, which is ostensibly managed by the Federal Reserve, that served as the indicator, would have happened a year before.  So, Congress would have known when they implemented these hikes that an economic downturn was possible.  And, unemployment in downturns is widely attributed to nominal rigidity in wages.  Our representatives might possibly be sadists.  (This would explain a lot, now that I think about it.)  And here's the smoking gun - in 2008, the second in a series of hikes was implemented in July.....the month after Congress passed the first Emergency Unemployment Insurance extension because of concerns that laid off workers were having trouble finding jobs quickly.  In July 2008, I wonder how many workers were thinking that walking into their boss's office and demanding a raise would be a good career move.

The hikes in 1961 and 1963 were implemented as the US was coming out of a recession, and managed to avoid this odd series of misfortunes.  But, strangely, even though real GDP was growing at more than 5% per year, the teenage Employment-Population Ratio and Labor Force Participation Rate managed to decline by 3%.  (You'll note that this means the teen unemployment rate remained fairly level during this period.)  Another amazing coincidence.  And, there again in 1967 is this strange coincidence of the teen labor force dropping sharply, right as the minimum wage is raised, during strong RGDP growth.  This policy can't catch a break!

So, there you have it.  Here's your headline:  "Before it hit a 50 year streak of bad timing, the minimum wage was raised twice in the 1960's, where analysts find that it was not associated with a rise in the teen unemployment rate."

PS.  Arindrajit Dube , (referring to this post) , says, reasonably, that we should be skeptical of glibly attributing these patterns in employment to the minimum wage.  Instead we should attribute the teen labor force patterns from 1961 to 1969 to the two short recessions in 1960 and 1970:
Well, here’s a reason why this evidence should be written off as a coincidence.......This (KE: recessions) tends to make the red post-MW trends smaller, providing a very simple explanation for why in 5 out of the 6 cases, the teen employment trend slowed down. And the 6th increase (in September 1961)  happened right after the recession officially ended in February, so one could make an argument that the business cycle can help explain that one too.... In other words, business cycles can explain the pattern of employment trend changes in at least 6 out of the 7 episodes, and maybe even partly in the 7th.
It can be stated with certainty that Arindrajit Dube has forgotten more about minimum wage research than I will ever begin to know, so it's hard to dismiss his point.

In other news, Robin Hanson had an interesting post today.

1 comment:

  1. I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here: