Wednesday, April 6, 2016

Hours Worked vs. Wages

Coyoteblog has an interesting table regarding the role of hours worked vs. wages earned in total incomes.
click to enlarge
This is relevant, I think, to both the minimum wage issue and the overtime pay issue.

The regressions I did using 2 year periods before, during, and after minimum wage hikes suggested a decline in the Employment to Population ratio of about 0.17% for each 1% increase in the ratio between the minimum wage and the average wage of production and non-supervisory workers.  California and New York seem to be phasing it in, generally, at about $1 per year.  At current wage levels, that will be about a 4% rise in the MW/AW ratio per year, so that, over time, each year should cut trend EPR by about 3/4%, eventually leading to disemployment of over 3% of the population.  For states with nearly 60 million residents, this should add up to more than 2 million job losses over the next several years.

The trend in EPR is strong now, many of these displacements will be marginal workers moving out of the labor force, and most of it will be at the end of a complex series of capital allocation decisions over a period of years so that much of the dislocation will be unseen.  There is a decent likelihood that some contraction in general economic growth will confound analysis.  Maybe migration will mitigate some of the employment dislocation in the high cost areas.  With all that said, I wonder if the natural experiment aspect of this will really amount to that much, if evidence of past episodes of dislocation isn't enough to be convincing.  Although, I suspect that the fact that even the New York Times was against the minimum wage in the 1980s is because minimum wage levels were high enough at the time to tip the scales of public opinion, so maybe it is possible.


  1. Minimum wages and property zoning. Egads.

    Add on $1 trillion a year to support a "national security" complex (DOD, VA, DHS, black budget, debt).

    Tax productive behavior bur reward sloth.

    It's a wonder the US works at all...

    1. I wonder if it has to do with the cultural advantage of our history as risk taking immigrants. We currently seem especially poorly governed. How much do we owe to culture?

  2. I think worker migration plays a big role in why people (and even economists) fail to perceive disemployment effects of minimum wage. I was impressed by this recent research:

    If raising the minimum wage causes out-migration of unskilled labor and shifts in-migration toward wealthier demographics, one may never see unemployment rise at all and even give the appearance of increasing prosperity. Much like how artificially raising the property value in a neighborhood is very 'successful' at ridding the neighborhood of its poor, but could hardly be called a means of solving poverty.

    I wonder, if a hike in minimum wage leads to 'localized inflation' from higher prices for min-wage-labor produced goods and services and also causes wage compression for higher wage earning workers, then, if enough of the disemployed low-skilled workers flee the city/state, might one actually see a *decrease* in observed local unemployment despite net disemployment? In other words, the low-skill disemployed leave town, so the disemployment isn't recorded in the local statistics, while the non-low-skill laborers experience a decline in real wages leading to an increase in the employment among above-minimum-wage workers.

  3. Kevin and Mark:

    I suppose there is a book out there somewhere on culture and economic success.

    To me, the most amazing story is N. Korea vs. S. Korea. Here are nearly identical peoples 70 years ago, even family members on both sides of the DMZ. I think they have the same culture.

    Obviously, today S. Korea is a great place, and N. Korea is a hellish gong-show, economically and politically.

    So government is important. Maybe government creates the culture, or suppresses it.

    Mark-I copy you on cities effectively zoning out lower-income people. Check out any beachy town in Orange County. If you want to build any structure greater than 250,000 sf in Newport Beach, you have to get approval...from city voters. And they say Santa Monica a Red City.

    I would guess most of the cities in L.A. County are playing a modern-day version of "dump the winos off the wagon outside city limits." No cheap dense housing inside Pasadena place.

    BTW, I do not support a minimum wage. The minimum wage is slated to move to $15 in California by 2020. The right-wing blogs are shrieking.

    Adjusted for inflation, that is the same level the minimum wage was in 1970. A half-century of going sideways.

    Meanwhile, as Kevin E. has shown, the incredible increase in zoning stipulations has just about frozen housing production in SoCal, and NoCal too.

    But no matter how restrictive zoning is, it is not interesting to the right-wing blogs, Oh, once in a while, a potshot at frizzy-haired SF libs, that sort of thing. But no discussion of a wholesale elimination of zoning laws, as with the minimum wage.

    Perry (Carpe Diem) at AEI come to mind. He pounds the podium daily on the evils of the minimum wage. Property zoning is never a topic.

    I like CoyoteBlog, used to read a lot. Someone who is actually a libertarian.

    1. Mark: Good question. One of the things that I think is difficult about minimum wage analysis is that much of MW employment is marginal and is among young people, so I'm not sure there is much of an effect from breadwinners immediately reacting to changes in jobs they currently hold. Much of the outcome is filtered through an endless series of iterations in follow-on effects. I think this is why many targeted studies don't see much effect. There are many firms that are, more or less, monopsonists in a very context specific way, but that is because the variety of outcomes within an industry leaves a significant survivorship bias with a lot of written off sunk costs. The industry as a whole is not monopsonist at all. So, looking at an individual employer or location, it may look like jobs are retained or even gained, but there are unmeasured effects on the industry as a whole that effect new investment. Regardless of where the dislocations land, it isn't the $20/hr guy who ends up at the bottom of the heap, unemployable, it's the guy who was earning $9 before the wage floor went to $15.

      Anyway, that was a long-winded answer to a question you didn't ask.

      I have wondered how this plays out in the Closed Access cities. To the extent that the natural minimum wage there is less than $15, this may not lead to that much disemployment, but it mostly just serves to help a few of the poorest workers avoid migrating by funding more transfers to real estate owners. This will just put more upward pressure on rents, but at that point, there are a lot of moving parts, so I don't know what the net effect is.

      Ben, culture and governance are both important, aren't they? You could also compare subcultures that shared governments and find measurable differences. I like the "dump the winos off the wagon outside city limits" line.

      I wonder if more of the right wing opposition is due to their monetary stance, though. It seems like the conservative posture comes along with an inherent sense of distrust in abundance - a sense that you shouldn't overdo it. And, this gets tied up with monetary fear mongering, and the never-ending parade of perma bears who just KNOW this is another bubble, and all those stupid people that don't know the value of things and invest so carelessly will get their comeuppance. It's a need to identify with the ant, not the grasshopper. But, since Closed Access policies have created a context where home prices rise so much when people are investing in homes, they associate housing expansion with the grasshopper when it is really more analogous to the ant. But, until we get rid of the Closed Access policies, savings behavior will continue to be associated with speculation.

  4. Here's a left-field question. Would monetary offset apply to bad wage policy? If the Fed targets unemployment, and policy artificially raises the unemployment rate with a higher minimum wage, does that force the Fed to ease in order to force the real price of labor back down to equilibrium? Just a thought.

    Great post though. Raising min wage in the teeth of low nominal growth is a disaster waiting to happen.

    1. Well, some would say that's what happened in the 1970s. I guess it depends on how the Fed weights its targets. Certainly seems like "full employment" would happen at a higher unemployment rates or lower EPR.

    2. Specifically, Friedrich Hayek in 'A Tiger By the Tail', made exactly that point, and that it wouldn't work for long unless the monetary expansion got larger and larger. He blamed Keynes, of course.

    3. Specifically, Friedrich Hayek in 'A Tiger By the Tail', made exactly that point, and that it wouldn't work for long unless the monetary expansion got larger and larger. He blamed Keynes, of course.