Editor’s Note: Mark Perry, an economist at University of Michigan’s Flint campus and scholar at the American Enterprise Institute, responds to billionaire and $15 minimum wage advocate Nick Hanauer’s argument that “The claim that if wages go up, jobs will go down is not a theory — it’s a scam.” Perry argues that the minimum wage hurts the low-wage workers it’s supposed to help, as business will try to adjust to an increase in costs by reducing hours, reducing the number of employees or reducing benefits.
— Kristen Doerer, Making Sen$e Editor
Nick Hanauer, “America’s worst minimum wage pundit” according to Forbes columnist Adam Ozimek, was featured recently on Making Sen$e for his 4,400-word essay, “The claim that if wages go up, jobs will go down is not a theory — it’s a scam.” Much of Hanauer’s essay displays a fundamental misunderstanding of what economic theory — developed over hundreds of years in a discipline that is honored annually with a “Nobel Prize in economic sciences” — can tell us about the predictable effects of a $15 an hour minimum wage.
Despite Hanauer’s attempt to claim the moral high ground, many of us in the economics profession, including dozens of Nobel laureates, recognize that the minimum wage is a terrible and cruel public policy, one that reduces employment opportunities for the most vulnerable Americans.
Much of Hanauer’s argument in support of raising the minimum wage to $15 an hour is based on some questionable empirical evidence from a “first-of-its-kind” minimum wage “study” by the National Employment Law Project that was released earlier this year. Let’s be very clear, this “study” has not been taken seriously by the economics profession and in fact has been dismissed by those with even a passing knowledge of economics.
For example, Jim Tankersley of The Washington Post wrote about the study in an article with a title that sums up why it isn’t being taken seriously — “Here’s a really, really, ridiculously simple way of looking at minimum wage hikes.” Tankersley aptly described the NELP study as “possibly the most un-nuanced analysis of the effects of minimum wage hikes that you’ll ever see.” Specifically, here’s how he summarized the report (emphasis mine):
Paul Sonn and Yannet Lathrop, looked at each of the 22 instances since 1938 when the United States raised its federal minimum wage. They looked at what followed with employment overall, and what happened in the leisure/hospitality and retail sectors, where minimum-wage jobs are often concentrated.
They did not look at rates of change. They simply asked one question: One year after the wage went up, were there more jobs or fewer?
Tankersley points out that the NELP study might be a “useful talking point for raise-the-wage supporters,” but is “less useful as an economic study.” And finally, he concludes that:
There are plenty of reasons total employment could keep rising even if minimum-wage hikes were holding down job growth, the simplest being, the economy was growing at a strong enough clip to offset any damage from the hike. This is why economists prefer work that attempts to isolate the effects of a minimum-wage increase, through more sophisticated means such as regressions.
Thus, the unsophisticated “study” that Hanauer gushes over to support his advocacy of more than doubling the minimum wage to $15 an hour is really not a study so much as a talking point and provides no sound, credible basis for an increase in the minimum wage to $15 an hour. Since the NELP study forms the basis for much of Hanauer’s support of the minimum wage in his Making Sen$e column, let’s continue analyzing NELP’s lack of nuance and sophistication.
The main deficiency of the NELP study is that it doesn’t capture many of the possible negative employment effects that economists predict from government price controls. To start, Tankersley correctly points out the main flaw of the NELP study: It didn’t look at the changes in the rate of employment or at the changes in the growth rate of employment. The study simply reported whether the number of jobs increased or decreased following a minimum wage hike.
But employment in the U.S. always goes up over time, from population growth and immigration, by about 2 percent per year on average since 1938. So to report that the employment level increased after many minimum wage hikes is meaningless, because it doesn’t answer this important question: How much more might it have gone up without the artificial increase in labor costs for unskilled workers?
NELP’s ignorance of the “growth rate of employment” or the “rate of change in employment level” masks some potentially serious consequences. For example, suppose that the number of employed restaurant workers actually increased slightly following a new higher minimum wage of $15 an hour, suggesting that there are no negative employment effects of a minimum wage hike. The relevant question to serious economists and researchers is this: How does that increase in low-skill restaurant jobs at $15 an hour compare to what would have happened to the number of restaurant jobs without the minimum wage increase?
Suppose, for example, that restaurant jobs in a city had been increasing at an annual rate of 4 percent and by 5,000 workers per year due to normal economic growth and increases in that area’s population. Following a minimum wage increase to $15 an hour that imposes significantly higher labor costs on employers, suppose that the growth in the city’s restaurant jobs is cut in half to only a 2 percent growth rate, that is, from 5,000 to 2,500 workers per year. Research following NELP’s unsophisticated approach would show that the number of restaurant jobs increased; but it would now be a much lower rate of job creation because of the higher minimum wage. The increase of 2,500 jobs in the year following the minimum wage hike makes it appear that there is a positive employment effect, even though there is actually a net loss of 2,500 food jobs.
Further, serious economists wouldn’t bother looking at employment levels in the aggregate like NELP did for the entire labor market, but would look at the labor markets where we could expect to find negative employment effects of minimum wage hikes, such as the labor market for unskilled or limited-experience employees. As an example, if NELP were to find a 1 percent raw increase in total U.S. payroll employment following a minimum wage hike, that overall increase could have masked a decline in employment for teenage workers, those who would be most affected by the minimum wage.
A complete and fully nuanced, serious economic analysis of the minimum wage would also consider all of the possible negative effects on low-skilled workers following minimum wage hikes. Finding that employment levels have increased following minimum wage hikes doesn’t necessarily mean that low-skilled workers haven’t experienced other negative employment effects that would include: a) reductions in work hours and b) reductions in non-wage benefits and job attributes that make low-skilled workers worse off.
From a practical business standpoint and from economic theory, we would expect to find a stronger negative correlation between minimum wage increases and work hours than employment levels. When businesses budget their labor costs and schedule staffing levels to manage those costs, employers are more concerned about the number of hours their employees are scheduled to work during a given period than the number of workers employed at that business.
And when firms are forced to respond to an increase in the minimum wage, those businesses would likely first consider adjusting (reducing) the number of work hours scheduled to contain costs before they would adjust (reduce) the number of workers. The negative employment effects of an increase in the minimum wage would tend to show up more as a reduction in the number of hours of low-skill labor demanded by employers rather than a reduction in the number of low-skilled workers employed.
Further, businesses focused on the bottom line are more concerned about total worker compensation than just the monetary component of that compensation. If the monetary component of unskilled employee compensation increases, as it does following increases in the minimum wage, a nuanced economic analysis would correctly predict that adjustments would be made to the non-wage fringe benefits provided by employers. To the extent that increases in the monetary minimum wage are offset by employers reducing the non-wage fringe benefits, even low-skilled workers who remain employed will not necessarily be better off from a minimum wage hike. Those workers’ total compensation could stay the same or maybe even be reduced if the reductions in non-wage fringe benefits more than offset the artificial increase in monetary wages.
Again these are nuances — reductions in work hours and reductions in non-wage fringe benefits — that economists consider when trying to asses all of the negative effects of higher mandated wages and are nuances not considered by NELP or Hanauer.
To summarize, America’s “worst minimum wage pundit” uses the most un-nuanced analysis of the effects of minimum wage hikes to produce what might be the most un-nuanced column on the minimum wage you’ll ever see. Hanauer’s blanket condemnation of economists who are correctly skeptical about the government’s ability to improve economic conditions with price controls is unwarranted.
The history of government price controls has a very poor track record with thousands of examples of economic distortions and suffering following government-imposed price ceilings and price floors. One only need look south to Venezuela to see an economy today in total collapse, in large part because of government price controls on food and other consumer staples that are not unlike a $15 an hour minimum wage.
Even minimum wage activists like Hanauer would have to agree that what we want is for as many Americans as possible to have good jobs, jobs that pay well and allow workers to live a good life. Minimum wage advocates must surely also recognize that before any American worker can get a really good job, he or she needs an important first job. And those first jobs are almost always entry-level jobs that will start to disappear if the federal minimum wage is increased by 107 percent to $15 an hour by government fiat.
Remember that the real minimum wage is always zero, because that’s the wage that hundreds of thousands, possibly millions of workers will receive following an increase in the minimum wage to $15 an hour, because they will either lose their jobs or fail to find jobs when they enter the labor force. (See Congressional Budget Office report for data.) That’s a very cruel public policy, and I and many economists reject that form of cruelty as a progressive “scam” — and it’s a “scam” that would inflict the most harm on the most vulnerable among us.
The most disadvantaged Americans don’t need the alleged compassion of minimum wage advocates as much as they need entry-level jobs. And to maximize entry-level jobs, economic science tells us that we should allow market forces, not government bureaucrats and politicians, to determine wages in the labor market.