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minimum wage research is more complicated than you think

When it comes to minimum wage research, most folks join one of two teams. First, Team Econ 101 will tell you, sensibly in my view, that when raise the price of something, people buy less of it. Labor is not exception. Second, Team Common Man says that this is misleading. Sensibly, they argue that firms have slack and customers who purchase services offered by low wage workers, such as fast food, can usually pay a little more. To make things worse, Team Econ 101 and Team Common Man love to cherry pick studies that show why they are right.

So what’s the deal? I recently listened to this very long and extensive interview with Jacob Vigdor, professor of public policy at the University of Washington, that sheds light on this issue. He is in a very special position to discuss minimum wage research because he designed the only major minimum wage study that collected extensive data on the labor market of a major city (Seattle) before, during, and after a minimum wage hike.

The major take home point is that minimum wage hikes have highly varied effects because minimum wage workers are diverse and so are industries that hire minimum wage workers. This is one reason that Econ 101 and Common Man appeal to conflicting studies – simply because they are choosing studies where wage increase effects vary.

Here are my take away points from Vigdor’s very thoughtful interview:

  1. There is no free lunch: On a very deep level, Team Econ 101 is correct. *Something* gets cut. Though Seattle didn’t drop into the sea after it’s wage hike, certain types of workers saw fewer hours, some types of workers were employed less, and so forth. After reviewing the wide range of evidence on the Seattle wage hike, it is hard to support the view that some Team Common Man people have, which is that you can just hike and hike without any effect at all.
  2. Industry matters: This is a big source of variation.  If an industry, like food service, has lots of substitutes for labor, you lots of big negative wage hike effects. For example, lots of restaurants shifted from waited tables to self serve, to save on labor costs. Fast food places have now shifted to computer assisted ordering. Other industries, like skilled trades, prefer to cut non-labor production factors.
  3. Worker type matters a lot: Labor market researchers know this, but in addition to industry, age matters a lot. Minimum wage hikes seem to affect young people quite a bit, so if you cut labor, you will get unemployment for young people, but some hours may be shifted to higher quality older workers. This is one reason, among many, that some minimum wage studies show higher wages for specific workers.

This is a brief summary of an incredibly rich conversation. You should really listen to it and make your own judgment. In closing, let me offer some notes for each side. I think Team Econ 101 is right on a very basic level. Honest to god, there is no free lunch. Making something more expensive usually means you buy less of it, especially if that thing is an entire labor market. Somebody will take a hit. This doesn’t mean that Team Common Man scores no points. What this means is that if your policy is meant to bolster very specific types of people in specific industries, then the minimum wage law does actually have its effect. But you have to accept that there will be costs, such as lower employment, on certain workers.

Personally, as you may guess, I don’t want public policy to pick and choose certain groups of workers.  So I definitely lean towards Team Econ 101, but I think any person seriously interested in careful empirical work on policy will learn a lot from Vigdor’s research.

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Written by fabiorojas

August 26, 2019 at 12:01 am

Posted in uncategorized

One Response

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  1. Nice.

    Liked by 1 person

    Jeffrey Smith

    September 3, 2019 at 1:03 am


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