Saturday, August 23, 2014

Minimum Wages, Crime, and Unemployment

Results from longitudinal panel data regarding the effects of minimum wage hikes on people who were working at minimum wage level jobs.  Appears to lead to unemployment and crime, especially among teens.  (HT: CafeHayek):
Does crime respond to changes in the minimum wage? A growing body of empirical evidence indicates that increases in the minimum wage have a displacement effect on low-skilled workers.  Economic reasoning provides the possibility that dis-employment may cause youth to substitute from legal work to crime. However, there is also the countervailing effect of a higher wage raising the opportunity cost of crime for those who remain employed. We use the National Longitudinal Survey of Youth 1997 cohort to measure the effect of increases in the minimum wage on self-reported criminal activity and examine employment-crime substitution. Exploiting changes in state and federal minimum wage laws from 1997 to 2010, we find that workers who are affected by a change in the minimum wage are more likely to commit crime, become idle, and lose employment. Individuals experiencing a binding minimum wage change were more likely to commit crime and work only part time. Analyzing heterogeneity shows those with past criminal connections are especially likely to see decreased employment and increased crime following a policy change, suggesting that reduced employment effects dominate any wage effects. The findings have implications for policy regarding both the low-wage labor market and efforts to deter criminal activity.

13 comments:

  1. You baby boomers are the most selfish generation to ever exist. You destroyed your own children's and grandchildren's future with your short-sighted selfishness and immaturity. And then you expect them to pay for your retirement????

    Can you baby boomers just hurry up and drop dead, please?

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    1. Please try to keep the comments civil. Thank you.

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  2. TravisV from TheMoneyIllusion comments section here.

    Kevin,

    What are your best-written posts explaining why you're optimistic about the outlook for U.S. housing?

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    1. You can click on the "Housing" label on the right.

      Here are a few:
      I think this was the post where I first considered my basic hypothesis. I think this is the first one Sumner linked to, so you might have seen it:
      http://idiosyncraticwhisk.blogspot.com/2013/08/real-interest-rates-and-housing-boom.html

      Here I look at home prices, relative to other assets:
      http://idiosyncraticwhisk.blogspot.com/2014/03/housing-interest-rates-rents-and.html

      Here I discussed the effect of real rates on home prices vs. inflation:
      http://idiosyncraticwhisk.blogspot.com/2014/04/new-home-sales-and-prices.html
      http://idiosyncraticwhisk.blogspot.com/2014/05/intrinsic-value-of-homes-mortgage.html

      I'll probably be posted something later this week on the topic. I had originally tried to look at homebuilders as speculative landowners, but it looks like the gains went to their bottom line in the 2000's more from higher volume than from land gains. I'm not sure why, but it seems to be the case. I'm looking into it more.

      I'd love to hear your feedback.

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    2. TravisV from TheMoneyIllusion comments section here.

      Thank you VERY MUCH, Kevin!

      (1) It seems like you've got a lot more confidence in future U.S. home price appreciation than U.S. stock price appreciation, correct? Have you written anything on your general feelings on U.S. stock valuations? The most compelling argument for higher stock prices I've seen is Christopher Mahoney's analysis of the ERP (see here, for example: http://seekingalpha.com/article/2297855-the-equity-risk-premium-is-still-high). However, I imagine your analysis of stock valuations is more sophisticated.

      (2) As for home price valuations, I don't have much to add, but I was a fan of this post by Scott Grannis six months ago: http://scottgrannis.blogspot.com/2014/02/the-housing-recovery-is-not-at-risk.html

      And Scott Sumner has a great observation that U.S. home prices generally look very cheap relative to those in other English-speaking countries:

      http://www.themoneyillusion.com/?p=23505

      http://www.themoneyillusion.com/?p=26140

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    3. Thanks for the link to Christopher Mahoney. He's got some great analysis on his blog. I suspect he's got a more sophisticated understanding of a lot of things than I do.
      I think I'm about the same place as him regarding stocks. ERP is high, but it will mostly just move inversely with treasury rates when rates start to rise, so stocks should provide decent returns in line with economic growth plus standard returns to capital for the remainder of the recovery.
      Here is a graph of stock performance in the previous two periods of rising rates:
      http://idiosyncraticwhisk.blogspot.com/2013/12/fear-of-fed.html

      I agree with Mahoney - recovery in housing, in the general economy, and in stocks, will proceed together. I'm looking at housing, in particular, just because it seems like the place where consensus is especially too pessimistic, so there might be speculative opportunities, and reactions to it might give clues about future monetary policy, etc.

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    4. TravisV from TheMoneyIllusion comments section here.

      Thanks Kevin. I've seen in places that you expect interest rates to rise. With inflation expectations falling, I'm not sure why that's your forecast but I'll study your posts........

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    5. My analysis is based on the forward Eurodollar market. I think it confuses matters, in the current context to just look at 5 or 10 year treasuries. Here's a rundown of my position:
      1) inflation might recover as credit markets continue to loosen up. This could go either way, though. I've written about how I think mortgage expansion could actually be disinflationary. On the other hand, if the Wickesellian rate has moved above zero, which it either has or will soon, volatility might start to increase, and those excess reserves might actually start being inflationary, even if slightly.

      2) Inflation is still 1.5-2%, depending on the measure. As the recovery matures, negative real rates become less and less likely. Even at this level of inflation, short term rates of 2-3% would be pretty conservative as the economy hits full recovery.

      3) The date of the first rate rise might be about where markets are forecasting it. But, the yield curve is predicting a very slow rise from that point compared to past recoveries. Monetary policy is a little different with interest on reserves, but I don't think, in the end it will slow down movement in the target rate unless the Fed really pushes IOR up to encourage reserves, and in that case, I think we'd see a deflationary mess.

      4) Over all, I think it is much more reasonable to see this as the Fed chasing the Wickesellian rate than as the Fed setting rates. The economy will be the determining factor. And, I still see the unemployment rate at 5.5-5.7% by December.

      I'd love to get your feedback. Especially on where you think I might be wrong...

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    6. TravisV from TheMoneyIllusion comments section here.

      Kevin, thank you very very much, I'll continue to grapple with this.

      And by the way, Christopher Mahoney just wrote a new post on the taper, interest rates, stock prices and CAPE:

      http://capitalismandfredom.blogspot.com/2014/08/the-taper-is-bullish-for-both-bonds-and.html

      He concludes by writing: "The evidence to date suggests that bond yields are already normalized and that the elevated equity premium will persist until stock prices rise to much higher levels. In a later article I will explain further why I don’t expect higher bond yields or higher inflation."

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    7. Thanks for the link. I pretty much agree with him on everything.

      I just would add:
      1) The unwinding of pro-cyclical labor policies is creating some extra growth this year.
      2) I don't understand the relationship, but QE appeared to lower bank credit. Bank credit is recovering very strongly coming out of QE3, and we have barely begun to see the recovery in real estate credit. So, expansion is coming from the banks that makes up for the taper, and then some.

      This is where just using something like 10 year treasuries lacks information. The drop in 10 year yields is completely reasonable, but it's all coming from the long end of the yield curve. Forward yields in the 2015-2017 range have been in a stable range all year.
      My interest rate position is very specific. I simply think the forward yields in that time range will move up slightly, because of my points above. But, I think short term rates might peak at pretty low levels, and the Fed might trigger more deflation or low inflation after that, so forward rates in the 5 to 10 year range could be very low. As of now, I am only concerned with the 2015-2017 range. After that depends on the Fed as we move forward.

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  3. TravisV from TheMoneyIllusion comments section here.

    Kevin,

    Have you read Scott Grannis's stuff? I think it's pretty great!

    You two seem to generally agree, so it would be interesting to know where your forecasts differ the most. Grannis's approach seems more econ-oriented than your approach, which is more finance-oriented.

    At any rate, here are four great posts Grannis wrote this year, explaining his reasoning:

    http://scottgrannis.blogspot.com/2014/02/the-housing-recovery-is-not-at-risk.html

    http://scottgrannis.blogspot.com/2014/09/40-trillion-and-counting.html

    http://scottgrannis.blogspot.com/2014/08/stocks-still-shy-of-real-high.html

    http://scottgrannis.blogspot.com/2014/08/why-us-economy-is-not-doomed-to-japan.html

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    1. Thanks for the links, Travis. I do like his stuff. I should have a new housing post up in the morning.

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  4. TravisV from TheMoneyIllusion comments section here.

    I also liked these comments from Benjamin Cole on reports from Bain and PWC on low interest rates:

    http://scottgrannis.blogspot.com/2014/09/why-are-yields-so-low-if-manufacturing.html?showComment=1409738307161#c3550570678663583944

    http://thefaintofheart.wordpress.com/2014/06/22/bain-co-capital-niagara-will-flood-planet-what-is-market-monetarisms-response

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