David R. Henderson  

Christina Romer on the Minimum Wage

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Former Obama economist Christina Romer--she was the chairman of the President's Council of Economic Advisers--has a good, though not excellent, piece on the minimum wage in the New York Times. In it, she departs from her ex-boss's views and points out some of the pitfalls of raising the minimum wage. Two excerpts follow.

On why the minimum wage is not what assures high wages for workers:

Many of my students assume that government protection is the only thing ensuring decent wages for most American workers. But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone -- perhaps not when unemployment is high, but certainly in normal times. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers' bottom lines.

On the effects of the minimum wage on employment:
A related issue is whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage. There's been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.

She's right. But she doesn't specify what she means by "small." Also, strangely, to back her point, she references a study titled, "Why Does the Minimum Wage Have No Discernible Effect on Employment?" Saying that it has "no discernible effect" is different from saying the effect is small. If the effect is small, then it's discernible. If it weren't discernible, she wouldn't know that it's small.

Moreover, Christina doesn't consider one important reason that the effect would be small: employers would adjust the compensation package to reduce the non-wage components. This also means that there's a presumption that even many of the workers who don't lose their jobs would be worse off.

HT to Greg Mankiw.


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CATEGORIES: Labor Market



COMMENTS (24 to date)
Mr. Econotarian writes:

Here is the deal, a small increase in the minimum wage is going to have small decreases in employment and small enhancements to the income of those who still have a minimum wage job. It will be in the noise.

The results will be "unseen" of the seen/unseen.

I tell my liberal friends, go ahead and pop up the minimum wage a few dollars. I'm never going to lose a minimum wage job because you raised it, so why should I care.

On the other hand, raise it to $15/hour, and then the results will BE SEEN.

maurile writes:

If the effect is small, then it's discernible. If it weren't discernible, she wouldn't know that it's small.

There's such a thing as being too small to be discernible. In fact, if some effect is not big enough to be discernible, that's pretty good evidence that it's small.

Carl writes:

maurile, you have surely contradicted yourself. If some effect is "not big enough to be discernable", that is not evidence in favour of it being small, but rather a lack of evidence of the effect being, well, ..anything!

I love this quote from Romer:

But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving.

Misbehaving, eh? What effrontery!

egd writes:

Have Ms. Romer's views on the minimum wage changed? Did she advocate for an increase in the minimum wage while working for the President?

David R. Henderson writes:

@egd,
Have Ms. Romer's views on the minimum wage changed? Did she advocate an increase in the minimum wage while working for the President?
Good question. I don't know but I don't think so. The CEA, under either Republican or Democrat president, will virtually never get out in front on pushing for a higher minimum wage than the President is advocating.

Peter G. Klein writes:

I was her TA for several years at Berkeley, working with her large undergraduate class in micro and macro principles. She was very clear and straightforward on the micro side. I don't remember her specific teaching on the minimum wage but I recall her explaining how the FAA rule that children 2 and above must have their own seats on planes, rather than sit on parents' laps, would cost lives by forcing families to substitute, on the margin, to more dangerous car travel.

Aaron Zierman writes:

Labor is a market like any other. Price ceilings and floors set by government will have an effect. To say otherwise is to ignore the most basic understanding of macro.

Where will the cost be felt the most? Some increase in unemployment? Sure. Some decrease in benefits provided to employees? Yes. Some cost shifted to consumers? Most likely. A cut in corporate profits? Possibly.

There are many ways that it can be shifted, but ultimately we are left with some decrease in overall productivity.

Markets have prices for a reason.

David R. Henderson writes:

@Peter G. Klein,
That's consistent with what I've seen.
By the way, when I got on Facebook this morning, I noticed that some of my libertarian friends were really ragging on her article. It was hard to believe we read the same piece.

Ken from Ohio writes:

I have a question

If the legally enforced minimum wage is very close to the actual market wage, there should be only a small, and maybe unmeasurable, effect on employment - right?

So those studies that show virtually no effect of the minimum wage on employment - like in the fast food industry - are unique in that it just happens that the legal minimum wage and the market wage are very nearly identical.

Am I correct?

Sam Staley writes:

Too many, like Dr. Romer, focus on the aggregate effects of the minimum wage on the labor market when it has substantial costs for particular groups and long-term impacts on pathways toward financial independent. I recently looked at this specifically in the context of Florida's tourism and hospitality industry, which a federal minimum wage would dramatically undermine. http://www.tallahassee.com/article/20130302/OPINION05/303020008/Samuel-R-Staley-Minimum-wage-hike-won-t-help

Larry Glenn writes:

I find it curious nobody is commenting on the primary problem with minimum wage legislation. Over time, it debases the currency and contributes to inflation. Apart from being a tax on everyone, it, particularly, hurts the poor, those the fools proposing such nonsense would help.

Emile writes:

how can, lets say a fast food rest employs fewer employees if wages are inceased, if they are run correctly,that cannot happen, they currently have exactly the required number of employees to be efficient, right?
so then the increased wage will reduce the owners and/or stock holders income, and thats what will happen, hence the voices you hear against the wage increases are those of the that group, why not just tell it like it is?

fiona writes:

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David Boudreau writes:

Christina Romer leaves out some important points. One is that a higher minimum wage induces employers to favor the better applicant over the lesser, reducing opportunities for many to find their first jobs. It also lengthens the time that employees will remain in minimum wage jobs instead of aggressively seeking better opportunities, again reducing the chances of the less desired candidates. These are two more ways the minimum wage helps those who need help less and hurts those who need it more.

Emil writes:

"how can, lets say a fast food rest employs fewer employees if wages are inceased, if they are run correctly,that cannot happen, they currently have exactly the required number of employees to be efficient, right?"

Wrong. A minimum wage that is higher than the current salaries will change the relative input prices. It therefore e.g. becomes relatively cheaper to use self-service tills, reduce opening hours or just let people wait longer

David Henderson writes:

By the way, when I got on Facebook this morning, I noticed that some of my libertarian friends were really ragging on her article. It was hard to believe we read the same piece.

David, I was one of those doing the ragging yesterday, and I don't know why you find it hard to believe that we read the same piece. John Papola and I focused on a Romer passage you didn't cite, so there's no conflict with your endorsing other passages. We focused on this statement:

if an increase in the minimum wage successfully redistributed some income to the poor, it could increase overall consumer spending — which could stimulate employment and output growth.

We (apologies for my presuming to speak for John) objected to the theory that greater consumer spending, rather than greater investment and capital formation, raises output growth. Romer endorsed the theory, but said the effect would be small in practice.

Carl writes:
so then the increased wage will reduce the owners and/or stock holders income, and thats what will happen, hence the voices you hear against the wage increases are those of the that group, why not just tell it like it is?

Right, all this fancy economic talk is just a cover for the greedy interests of big business. And anyone skeptical of man-made climate change must be a shill for some oil company. Anyone who defends freedom of speech for say, racists, must themselves wish to practise racism with impunity.

This is a fun game!

David R. Henderson writes:

@Lawrence H. White,
John Papola and I focused on a Romer passage you didn't cite, so there's no conflict with your endorsing other passages.
You're right, Larry. What I didn't like was a tone I perceived of "Oh, what an idiot she is." But that might have been too quick a judgment on m part. And when I went back and read what John said, I noticed this upfront:
Buried in this mostly good walkthrough of the implications from minimum wage increases by former Obama chief economic advisor Christina Romer is a whopper of sheer nonsense that really unscores how broken the economics profession really is.
Somehow I missed the first 13 words and did to John exactly what I accused John of doing to Christina. My apologies.

Lee Waaks writes:

Romer writes: "Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers' bottom lines."

What do workers contribute to the employer's bottom line that is not compensated for up front when workers initially bargain for wages? Romer's statement strikes me as question begging. The employers own the means of production and direct production. The workers are simply helpers in the endeavor. The owners supply the wages. Without these wages, workers would need to be self-sufficient and would likely be much poorer.

Steve J writes:

@Lee "What do workers contribute to the employer's bottom line that is not compensated for up front when workers initially bargain for wages?"

You act as if compensation is determined by a single bargain rather than a new bargain each day. If the market is behaving correctly these helper workers should be able to leave one employer for another with ease. There should be little ability to "milk" workers if the market is competitive. Of course it is in the owners' interest to try to make sure there is as little competition for workers as possible.

OneEyedMan writes:
If the effect is small, then it's discernible. If it weren't discernible, she wouldn't know that it's small.

In many experimental settings the equipment has a minimum detectable effect. If you can't detect any effect you know that if any effect exists it is smaller than the minimum detectable effect. Or consider a properly specified regression in a setting that warrants a causal interpretation. The standard errors and alpha tell you the minimum discernible effect as distinct from the point estimate. If a ruler has a 1mm resolution and you can't tell the difference in the heights of two buildings you both cannot discern a difference in height and know any difference is small.

JD Bryant writes:

How many lives are we talking about and whose. History shows that increases in the minimum wage tends to increase unemployment to low wage earners, especially among minorities, so a small overall increase may be a not-so-small increase for low income minorities.

ThomasH writes:

@Lawrence H White
"We (apologies for my presuming to speak for John) objected to the theory that greater consumer spending, rather than greater investment and capital formation, raises output growth. Romer endorsed the theory, but said the effect would be small in practice."

Most discussions of the effect of minimum wages are in a full employment model. This from Roemer seems to be introducing the idea that real income can rise from a transfer from consumers with lower MPC to higher MPC when there are unemployed resources. It requires no adherence to a theory that consumer spending is better than investment spending at increasing growth in the short run or the long run, which would, indeed, be a “whopper of sheer nonsense”.

IsaacM writes:

"Overall adverse employment effects are small." So we should just throw away the macro principles regarding determinants of supply because we haven't seen enough increased unemployment? As with the frog slowly being boiled, employers haven't seen a huge jump in the minimum wage and have ,so far, found ways to ofset these added production costs.

Why $9? Probably employers psyche as much as anything. It's the same as $3.79 at the pump. People feel better when they don't have to pay a full $3.80. What if the MW suddenly jumped into double digits? It could push employers to institute drastic changes to their current employment structure-as in, we could finally see the unemployment rates go up in this section of the labor force.

What about the dwindling middle class? If employers make up for the added costs by taking away from higher earners, then all we have done is manage to pull down some lower-middle income earners closer to the lower side.

The idea that results will always remain "unseen" while continually raising production costs is too short-sighted. There is always going to be a point when the cost to produce outweighs the rewards. As was so aptly pointed out, "raise the rate to $15/hr and the results will be seen."

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