But when we talk privately, they have a more nuanced argument. They\u2019ll 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.<\/p>\n
- \n
- Amoral utilitarianism \u2013 A large number of people will get pay raises and only a small handful will lose their jobs,
![\"\"](\"https:\/\/www.megalextoria.com\/wordpress\/wp-content\/uploads\/2017\/07\/img1_minimum-wage-unemployment.jpg\")
\u00a0and this is okay if policy is based on some notion of greatest good for the greatest number. In other words, you can\u2019t make an omelet without breaking a few eggs.<\/li>\n<\/ul>\n- \n
- Keynesian stimulus \u2013 Some people will lose their jobs, but the income gains for those who keep their jobs will boost \u201caggregate demand\u201d and thus provide a boost for the economy. Sort of like they also claim giving people unemployment benefits will somehow generate more economic activity.<\/li>\n<\/ul>\n
I\u2019ve 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.<\/p>\n
And I\u2019ve always rejected the second argument because there can\u2019t be<\/a> any net \u201cstimulus\u201d since any additional income for workers is automatically offset by less income for employers.<\/p>\n
So who is right?<\/p>\n
A Real World Failure<\/strong><\/p>\n
\n![](\"https:\/\/www.megalextoria.com\/wordpress\/wp-content\/uploads\/2017\/07\/468_60link_bucks-3.gif\")
<\/a>
\n<\/center><\/p>\nWell, the real world just kicked advocates of higher minimum wages in the teeth. Or maybe even someplace even more painful. A new study<\/a> 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.<\/p>\n
Let\u2019s start by simply citing what the local government did.<\/p>\n
This paper, using rich administrative data on employment, earnings and hours in Washington State, re-examines this prediction in the context of Seattle\u2019s minimum wage increases from $9.47 to $11\/hour in April 2015 and to $13\/hour in January 2016.<\/p><\/blockquote>\n
And here\u2019s a table from the study, showing details on the minimum-wage mandate.<\/p>\n
![\"\"](\"https:\/\/www.megalextoria.com\/wordpress\/wp-content\/uploads\/2017\/07\/img2_min-wage-seattle-1.jpg\")
<\/p>\nAnd what\u2019s been happening as a result of this intervention in the labor market?<\/p>\n
Unsurprisingly, the jump to $13 has been much more damaging than the jump to $11.<\/p>\n
\u2026conclusion: employment losses associated with Seattle\u2019s mandated wage increases are in fact large enough to have resulted in net reductions in payroll expenses \u2013 and total employee earnings \u2013 in the low-wage job market. \u2026We show that the impact of Seattle\u2019s 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.<\/p><\/blockquote>\n
Here\u2019s a chart from the study looking at the impact on hours worked.<\/p>\n
If you want a healthy labor market, it\u2019s not good to be below the line.<\/p>\n
![\"\"](\"https:\/\/www.megalextoria.com\/wordpress\/wp-content\/uploads\/2017\/07\/img3_min-wage-seattle-2.jpg\")
<\/p>\nAnd here\u2019s some of the explanatory text.<\/p>\n
\u2026Because 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 \u201cpeak\u201d calendar quarters, as shown in Table 3 above. \u2026point 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. \u2026Our 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.<\/p><\/blockquote>\n
But the biggest takeaway from the report is that hours dropped so much that the average low-wage worker wound up with less income.<\/p>\n
The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%), which is sizable for a low-wage worker.<\/p><\/blockquote>\n
Here\u2019s the relevant chart.<\/p>\n
Once again, it\u2019s not good to be below the line.<\/p>\n
![\"\"](\"https:\/\/www.megalextoria.com\/wordpress\/wp-content\/uploads\/2017\/07\/img4_min-wage-seattle-3.jpg\")
<\/p>\nHigher Wages, Lower Incomes<\/strong><\/p>\n
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.<\/p>\n
- \n
- The amoral utlitarianism argument doesn\u2019t apply because it\u2019s no longer possible to claim that income gains for those keeping jobs will more than offset income losses for those who become unemployed.<\/li>\n
- The Keynesian aggregate-demand argument doesn\u2019t apply because it\u2019s no longer possible to assert macroeconomic benefits based on the assumption of a net increase in \u201cspending power\u201d in the economy.<\/li>\n<\/ul>\n
Let\u2019s close with a couple of observations from others who have looked at the new study.<\/p>\n
Diana Furchtgott-Roth of the Manhattan Institute (and formerly Chief Economist at the Department of Labor) highlights<\/a> the most relevant findings.<\/p>\n
Raising the pay floor has led to net losses in payroll expenses and worker incomes for low-wage workers. \u2026When 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. \u00a0The number of jobs declined by 7 percent, with the result that 5,000 jobs were lost. \u2026The evidence shows that in Seattle, low-wage workers got less money in their pockets, rather than more.<\/p><\/blockquote>\n
Some proponents of intervention and mandates may want to dismiss Diana\u2019s analysis because of her reputation as a market-friendly scholar.<\/p>\n
But even Ben Casselman and Kathryn Casteel of FiveThirtyEight basically reach<\/a> the same conclusion.<\/p>\n
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. \u2026New 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 \u2013 on average, low-wage workers earned $125 per month less because of the higher wage.<\/p><\/blockquote>\n
Just Be Honest<\/strong><\/p>\n
I\u2019m amused to find more evidence that left-leaning economists admit that higher minimum wages cause damage, albeit never on the record.<\/p>\n
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.<\/p><\/blockquote>\n
I\u2019m 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.<\/p>\n
I understand that this type of dishonesty happens all the time in the political world (for example, some Republicans are now supporting Trump\u2019s plans for infrastructure boondoggles<\/a> and parental leave<\/a> when they would have been strongly opposed if the same policies had been proposed by Obama).<\/p>\n
But what\u2019s the point of being a tenured academic if you can\u2019t at least be honest?<\/p>\n
Though maybe there\u2019s some sort of cognitive dissonance at play, where they feel the rules of honesty don\u2019t apply in the political world. For instance, both Paul Krugman and Larry Summers have acknowledged<\/a> in their academic work that unemployment benefits lead to more unemployment. But they pretend that\u2019s not the case when commenting on the policy debate.<\/p>\n
But I\u2019m digressing. Let\u2019s close by recycling this video<\/a> on minimum wages from the Center for Prosperity.<\/p>\n
- Keynesian stimulus \u2013 Some people will lose their jobs, but the income gains for those who keep their jobs will boost \u201caggregate demand\u201d and thus provide a boost for the economy. Sort of like they also claim giving people unemployment benefits will somehow generate more economic activity.<\/li>\n<\/ul>\n