Will a minimum wage increase induce an apocalyptic conflagration of small businesses and low wage employment? Here’s one prediction:
This is not the time to force businesses to raise prices by laying-off employees in order to stay in business.
What good is raising the minimum wage if prices go up? What good is raising the minimum wage if there are no jobs available?
Businesses will be forced to raise prices in order to absorb a 26% pay increase. Restaurants will be especially hard hit.
That is not a quote addressing the impending increase in the SF minimum wage. Rather, it’s the statement by the SF Restaurant Association regarding San Francisco’s Proposition L, in 2003 (ballot instructions here). For a current incarnation of this apocalyptic vision, one has to go no further than Michael Saltsman, in the oped pages of the Wall Street Journal:
Last fall, voters in the Bay Area cities of San Francisco and Oakland followed Seattle’s lead and approved costly new minimum-wage mandates ($15 an hour and $12.25 an hour, respectively) for most businesses in the city boundaries. Now the bills have begun arriving, and some businesses can’t pay them.
Then, as befits the research director of an organization the sometimes publishes irreproducible results (at least I can’t reproduce ‘em – maybe a more imaginative researcher could), Mr. Saltsman conducts a proof by anecdote.
In Oakland, local restaurants are raising prices by as much as 20%, with the San Francisco Chronicle reporting that “some of the city’s top restaurateurs fear they will lose customers to higher prices.” Thanks to a quirk in California law that prohibits full-service restaurants from counting tips as income, other operators—who were forced to give their best-paid employees a raise—are rethinking their business model by eliminating tips as they raise prices.
Though higher prices are a risk that some businesses were able to take, others haven’t had the option. The San Francisco retailer Borderlands Books made national news in February when the owner announced that the city’s $15 minimum wage would put him out of business, in part because the prices of his products were already printed on the covers. (A unique customer fundraiser gave Borderlands a stay of execution until at least March of 2016.)
One block away from Borderlands, a fine-dining establishment called The Abbot’s Cellar—twice selected as one of the city’s top-100 restaurants—wasn’t so lucky. The forthcoming $15 minimum wage, combined with a series of factors like the city’s soaring rents, put the business over the edge and compelled its owners to close. One of the partners told me the restaurant had no ability to absorb the added cost, and neither a miraculous increase in sales volume nor higher prices were viable options.
These aren’t isolated anecdotes. In the city’s popular SoMa neighborhood, a vegetarian diner called The Source closed in January, again citing the higher minimum wage as a factor.
I found the oped particularly resonant because just hours before reading this “piece”, I had been cautioning my students in the econometrics course I teach not to argue by anecdote, and in fact to be particularly wary of those who did. My example of the hazards of relying on anecdotes was drawn from the Card and Krueger’s 1994 American Economic Review paper on the minimum wage. Scrolling through the data set, I highlighted the fact that one particular fast food restaurant reduced employment in after the imposition of a minimum wage in NJ. Of course, those familiar with the Card-Krueger results, which rely upon a differences-in-differences approach, know that overall, average store employment increased in NJ, post-minimum wage imposition, relative to the change in PA average store employment. That is, there was a statistically significant and economically significant increase in employment, even though there were individual cases of employment falling in NJ.
Now, in the context of the impending increase in the minimum wage from $10.25 to $15, what’s going to happen? Well, first thing to mention (mentioned finally in para three of Mr. Saltsman’s piece) is that the minimum wage increase is phased in, so that the $15 level is achieved in 2018. Second, it’s useful to observe what has happened since the 2004 increase in the minimum wage. From L. Thompson/Seattle Times:
So, one can properly take into account the facts, then observe what has happened in the past, and then finally, one can appeal to statistical analyses. Dube, Lester and Reich (2010 Review of Economics and Statistics) report their estimates of the impact of minimum wage changes on income and employment.
Table 2 from Dube et al. (2010).
In general, the results suggest that earnings rise and employment is either unaffected, or declines slightly.
Obviously, there are many different estimates, and this is but one set. And I would never rule out the possibility of significant employment effects (never say never is the lesson delivered by Don Luskin’s example). However, as previously discussed, the bulk of the evidence suggests small negative impacts on employment, if any (see e.g., [1]).
Update, 7:30PM Pacific: It is of importance to keep in mind the cost of living is substantially higher in San Francisco than in the Nation as a whole. In Figure 1, I show the evolution of the real minimum wage in US 2010$.
Figure 1: Federal minimum wage, deflated by CPI-all urban, rescaled to 2010=100 (blue), and San Francisco minimum wage, deflated by SF Bay Area CPI, rescaled to 2010=100, and adjusted to be 1.64 higher than US CPI in 2010. NBER defined recession dates shaded gray. Source: BLS via FRED, ACCRA, and author’s calculations.
Note that taking into account San Francisco’s higher cost of living, the SF minimum wage does not appear particularly high, and as of 2015M02, lower by a dollar than the real Federal minimum wage. Projecting forward, one finds the SF real minimum wage climbing to the Federal level in mid-year, and eventually exceeding — although that is half-attributable to the failure to raise the minimum wage at the Federal level.
Figure 2: Federal minimum wage, deflated by CPI-all urban, rescaled to 2010=100 (blue), and San Francisco minimum wage, deflated by SF Bay Area CPI, rescaled to 2010=100, and adjusted to be 1.64 higher than US CPI in 2010. CPI are assumed to grow at the rate experienced over the 2009M06-2015M02 period. NBER defined recession dates shaded gray. Source: BLS via FRED, ACCRA, and author’s calculations.
It’s likely, low-wage workers are more sensitive to price hikes than high-wage workers.
A $15 an hour minimum wage will result in a greater increase in wages than prices for a lot of workers.
So, just curious, why not raise it to $50/hour? By this logic, wouldn’t we all be better off?
Is there an inflection point at which raising the minimum wage starts to impact jobs, in your opinion, Dr. Chinn? Or is there another mechanism at work here?
A $50 minimum wage is suboptimal like a $5 minimum wage.
Is it optimal to pay high-skilled workers the same as low-skilled workers?
And, is it optimal to exploit low-skilled workers?
Do you really think anyone would come to work at $5 per hour, Peak?
Patrick R. Sullivan: I am still waiting to hear you admit you were in error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
So, this means that you teach your students that people will come to work for $5/hr, Menzie?
What would you teach them about the evidence that the average hourly rate for babysitters in San Francisco is $16.56?
http://blogs.wsj.com/totalreturn/2015/03/27/date-night-what-parents-pay-babysitters/?mod=WSJ_hpp_sections_yourmoney
Patrick R. Sullivan: I made no comment on that point.
I’m just waiting to see you admit you were wrong on a point of fact, to wit:
You stated that the depth of the downturn in Canada was less than that of the US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
I will keep on asking as long as you keep on posting.
‘I will keep on asking as long as you keep on posting.’
And I will (as a service to any of Menzie’s students who are paying good money to supposedly be taught economics at UW) that your question was a classic Red Herring fallacy the first time you did it, and continues to be every time you resort to it, in lieu of actually addressing the substantive point.
Note for those students; this is what debaters do who have no real argument. They change the subject.
Patrick R. Sullivan: To be honest, I have no idea what you are talking about, as I didn’t understand your point. It was Peak‘s point about $5 being suboptimal.
Directly to your question. Since we see lots of observations at the $7.25 minimum wage, and many latent variables are distributed Normally (the observed is censored because of the minimum wage), then at least some individuals would be willing to work at $5.00. Duh. Pretty trivial, and obvious. Surprising that even you couldn’t figure that out on your own…
I am still waiting to hear you admit you were in error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
If $7.25 an hour is suboptimal, there are people working at $7.25 per hour Patrick.
‘If $7.25 an hour is suboptimal, there are people working at $7.25 per hour Patrick.’
Not in San Francisco there aren’t. You can’t even hire a baby sitter for that little.
Anyway, how do you know what is ‘suboptimal’?
Patrick R. Sullivan: I am still waiting to hear you admit you were in error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
If the marginal productivity of labor is or can be higher than the minimum wage, then that’s suboptimal.
More that if you raise it to too high a fraction of the median wage, it just becomes meaningless inflation – the entire wage scheme shifts except at the top, and costs get passed on everywhere. But a raise to $15-20/hr probably won’t do that.
If one glass of water is good for you, then 50 glasses of water would even be better.
The logic is irrefutable!
The higher the minimum wage, the more poor people will have to leave the city to find work. So SF natives no longer have to endure the sight of those unattractive poor people. Property values rise, and business picks up, especially at restaurants. And SF natives get to pat themselves on the back for helping the poor.
So, the higher minimum wage makes people richer and more attractive, even the lady cleaning toilets?
No; the higher min wage makes it harder for unattractive people to find work, so they leave town.
“No; the higher min wage makes it harder for unattractive people to find work, so they leave town.”
I resent that remark, but I’m leaving town in any case, heading back to the Ozarks or Appalachia on the next Blue Bus calling us that I can fetch; and don’t try to talk me out of it ’cause I’m outta here. I can live in a truck or van in WVa, KY, IN, and OH in the summer cheaper than I can be homeless in the SF Bay Area and pay car registration and the fines and court costs for being homeless.
So, it’s a win-win situation for all; it’s all good.
Now, will someone lend me the bus or Amtrak fare to get the bloody heck outta here?
I’m wondering about this issue as well. When you focus on a single state or municipality, you have to control for the flow of workers, and for the birth/death of businesses. What would be really interesting is if San Francisco can accelerate the wage increase without increasing volatility in business license turnover. Watch Seattle. Their franchise businesses will have to raise minimum wages on an accelerated schedule.
Or, per capita income is high in and around San Francisco, which suggests greater income inequality.
The data we need are spending on restaurants by minimum wage workers before and after the change. i think we see increased sales at Burger King after the increase, because minimum wage workers will have more disposable income to eat out. And they would be more likely to spend it than save it. So, the increase in wages is offset by an increase in sales, and business do not need to adjust working hours. Menzie, do you know of any studies who examined this kind of equilibrium effects?
The demand for steak may rise and the demand for hamburger may fall.
Sales may rise at the Sizzler and the Outback, and fall at Burger King and McDonalds, resulting in better jobs.
If the government is good at setting the price of labor, why doesn’t it try regulating the price of the meals the restaurants serve? Why not set a maximum price on restaurant meals? Wouldn’t that help low-income people, too?
I don’t think the government sets a price on labor, but rather the floor price on labor (at least for businesses acting legally).
That is a nice point. Being somewhat acquainted with small businesses, I know that many pay their help the minimum wage to report for taxes, but pay cash ‘under the table.’ While they lose a net income tax deduction (not much of a penalty for many, who under-report income anyway), the practice lowers the wages they have to pay workers, lowers social security payments, UI and worker comp payments, and helps justify their low reported income.
How would price controls help anyone? It would lead to scarcity.
A higher minimum wage can lead to a rise in real income, and consumption, for low-wage workers that exceeds the loss in real income, and consumption, of high-wage workers.
Moreover, a higher minimum wage can increase productivity and produce better jobs through more capital spending.
Wages don’t equal prices. A wage is also an input and income.
A wage is a price, guy.
Patrick R. Sullivan: I am still waiting to hear you admit you were in error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
When you pay more for a box of cereal, does it become more productive, raise its quality, or improves its life?
How about when you come back when you realize that a human being is different the a plant? Maybe the problem here is that you don’t differentiate yourself form crops and therefore can’t grasp that people who produce goods are different then goods that are produced.
Btw, are San Francisco restaurants ALL monopsonists?
Patrick R. Sullivan: To the extent that restaurants sell differentiated goods, and/or are geographically separated, then restaurants are the prototypical example of a monopsonistically competitive firm. Refer to an intermediate micro textbook; since that will undoubtedly contradict your deeply held convictions, I suggest you contact the author of that textbook with your theory of how the world works.
I am still waiting to hear you admit you were in error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
Are we to conclude that the UW employs as an economist, a guy who doesn’t recognize that wages are the prices paid to attract labor? And who thinks SF’s restaurateurs are all monopsonists?
While I’m at it, I might as well warn any of Menzie’s students who read here, that this is a near textbook example of a logical fallacy (a false dilemma);
‘Will a minimum wage increase induce an apocalyptic conflagration of small businesses and low wage employment?’
Patrick R. Sullivan: I am still waiting to hear you admit you were in error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
I am normally opposed to price control (e.g. minimum wage or rent control) imposed by the government. However, there are several papers that have shown how certain markets have sub-optimal minima, that only a government mandate can overcome. A good example is a market where child labor is practiced: In such a market the price of child labor can be so low that adults can’t successfully demand a high enough salary to be able to afford to keep their children in school (they depend on the income generated by their own children). Any employer who offers a living wage to adults will find that competitors will have a lower labor cost, thus out-competing him.
This local minimum can be overcome by outlawing child labor, thus shrinking the labor pool, forcing up salaries, allowing adults a wage that enables them to survive without supplemental income from their own children. With the new adult wage, the employer can demand & get higher productivity, and in the end find that his production costs are the same as under child labor conditions. The economy will even grow, because productivity gains carries over to newly started companies – it’s the old story of capitalism – but it’s worth noting that Adam Smith’s invisible hand can sometimes be “tied”.
I believe that we may have a similar situation with minimum wage, especially in the restaurant market. No restaurant owner can afford to pay a decent wage for fear of being undersold by their competitors – the result is that minimum wage earners can’t afford a lot of things (housing etc.) and more important to the restaurants: minimum wage earners can’t afford to go to restaurants.
Since labor is less than 100% of the cost of running a restaurant ( roughly equal parts labor, rent & food is my guess), then the meal prices will not increase as much as the minimum wage, allowing the minimum wage earner a higher standard of living, thus boosting the income – even of his/her employer – win-win-win
An interesting question has been raised: under what set of circumstances is this true? I imagine that if the minimum wage was set too high, this win-win situation would be eroded, and result in general inflation.
Menzie, do you know of any papers that analyze this situation?
Do you believe in labor standards (e.g. a minimum wage)?
Walter Williams: Minimum wage increases discrimination against poor people.
The minimum wage not only discriminates against low-skilled workers but also is one of the most effective tools of racists everywhere.
Minimum wage was implemented FIRST in South Africa by White Racist Apartheid practitioners to drive low skilled black Africans out of the market.
If you want the real truth on this subject, check out famed economist Walter Williams article.
http://www.washingtonexaminer.com/walter-williams-minimum-wage-increases-discrimination-against-poor-people/article/2523335
You will also get the truth on this subject from renowned Professor Thomas Sewell.
Anonymous: I would be curious to see you source indicating that the first appearance of a minimum wage is in South Africa (even if it is irrelevant). Wikipedia seems to locate the first appearance in New Zealand in 1894. I know facts are of no importance to some people, but I for one would like to have verification of otherwise unfounded assertions.
By the way, you might try to at least spell correctly the names of people you are citing, so we can go to Google Scholar to check the refs. It’s Thomas Sowell. Geez.
It’s ridiculous to assume there can’t be a minimum wage with full employment.
Sorry adata unscientific red herrings and logical fallacies are only good arguments for dum.b people. Since I have billions of working brain cells please provide an argument, and it needs to be good enough to refutes the fact that minimum wage increases in America in local areas follow better economic times then other similar areas that did not increase minimum wages.
How much do you want to bet the restaurant that closed, had to close for reasons other than what it pays its workers? A successful, popular restaurant is not going to go out of business because it pays its dishwashers $3 more per hour. It might cut into his profit a little, but the owner probably still makes a bundle. I know a jerk who owns a restaurant in the Minneapolis area who is always grousing about what he pays his workers. I asked him once what he makes in a year – he smiled and proudly said $700,000. Yeah, I feel really bad that he might only make $500K or $600K because he pays some poor stiff a living wage. Boo f-ing hoo!
Ironically enough, I actually discussed this post with my econometrics class at the Department of Free Market Economics at Wassamotta U. People might be interested in what my students learned:
1) Be very skeptical of anyone who exaggerates the argument of the other side in order to discredit it. Where are the apocalyptic predictions in Saltsman’s article? Did he really say that the minimum wage was like a volcano that was going to bury San Francisco?
2) Be very skeptical of anyone who mistates the argument of the other side in order to refute it. Did Saltsman argue by anecdote as alleged, i.e., did he try to generalize from a few particular examples? Not at all, as is plain if you read the article. Saltsman starts by making two points which he backs up by citing statistical studies. First, he cites a study by the very well-known minimum wage economist David Neumark who reports the very well-known finding that the minimum wage has negative employment effects. Then, he cites a Chicago Fed study that finds that minimum wage increases result in price increases at fast food restaurants. So, Saltsman starts with two general points about the disemployment and price effects of the minimum wage that are established by statistical studies. He does not start with anecdotes that he then generalizes from.
Once Saltsman states the general points, he then mentions examples to illustrate those abstract points and make them come alive for the reader. He mentions Borderland Books as an example of the relationship between the first and second points. Borderland books cannot raise prices to mitigate the disemployment effects and so is going under. Saltsman’s view is exactly consistent with what the owner of Borderland himself said in his blogpost announcing the bookstore’s closing. The owner expressed the view that other businesses might be able to raise prices but he couldn’t. To illustrate the second point further, Saltsman refers to this SF Chronicle Article on the effects of the minimum wage hike in Oakland. The article notes that some restaurants raised their prices as much as 20% and some were changing their tips policy.
3) Unless Moses went up the mountain and brought down an econometric study chiseled on some tablets, don’t assume any econometric study has established some unassailable truth. Look at each one carefully. Take Dube, Lester, and Reich mentioned in this post for example. The authors acknowledge that the national estimates using more conventional econometric techniques do find the well-know disemployment effects of the minimum wage. However, Dube et al are arguing that the econometrics in these studies is not correct. They use a case-study approach and are saying that failure to include heterogenous geographic trends has biased the estimates from the true small or zero effect to a negative effect. And they are also saying that not accounting for spatial autocorrelation of the error terms has produced a false precision in the national estimates. These are very technical econometrics points. Dube et al may be right but the authors of the national estimates have their points as well. A controversy like this will not be resolved with one paper.
4) Make sure you interpret econometric findings in terms of an underlying economic model. Since the minimum wage affects small businesses primarily, it’s natural to suppose that a good model would be the neo-classical perfect competition model that would predict some disemployment effects as a result of a minimum wage, while prices would rise. Once you start generalizing the model, the effects become more subtle. For example, if the labor force is not homogenous, then an increase in the minimum wage will lower the demand for unskilled labor and increase the demand for skilled labor, with the effect on total employment being ambiguous. Some researchers have reported employment increasing with a hike in the minimum wage. That would also be possible if the market was characterized by a monopsonistic model in which firms have some market power, implying that employment would be predicted to rise over some range of minimum wage hikes and prices would fall. The important point is that it’s not at all clear that there should be disemployment effects–it depends on the underlying model. But having a theoretical model in the background allows you to interpret your findings. For example, if you do find results consistent with monopsony, how do you square that with the evidence that prices tend to rise with a minimum wage hike?
5) Once you have a theoretical model in mind to help you interpret results, you can start to ask the real question: is the minimum wage good policy? That’s a much more complex question than is answered by whether disemployment effects are small. When you think about the theoretical models, you come to realize that maybe employment is not the right quantity to look at. Can’t employment stay constant but hours go down? Dube et al are aware of this criticism and they try to do a back of the envelope to argue the hours effect is small, but that’s not a substitute for a serious study. What about the distribution of employment changes? Dube et al acknowledge that their model can’t tell if higher skilled workers have substituted for lower skilled workers, with a small net effect of employment. If the minimum wage is designed to help the least able, is substituting away from the least able a good policy? What about family income? Does family income of single mothers with children go up because of the minimum wage or go down, even if net employment effects are close to zero. Does the minimum wage discourage schooling and training? Does it prevent young African Americans from getting jobs and training? All these questions need to be answered before we can make a judgement about whether this is a good policy.
Of course, over the course of the semester, I will review the whole body of evidence with the class. I don’t think you can dismiss the standard national disemployment evidence so easily. Disemployment effects are large enough to matter in my view. Plus, the evidence on distributional effects of skill vs. unskilled and substitution of technology for unskilled workers are not favorable. And the evidence is weak that the people the minimum wage is designed to help actually are helped. The minimum wage is just one more progressive policy that does more harm than good.
Rick Stryker: Well, Mr. Saltsman cites studies, but they don’t pertain to the anecdotes, which refer to overall employment loss (not youth). The other anecdotes referred to firms unable to sustain price increases.
I thought this end para was pretty apocalyptic.
Too late…too late… the end is nigh.
Menzie,
As I said, the anecdotes just illustrated the main points Saltsman started with. And I don’t see how you get something apocalyptic from the closing paragraph. Saltsman is merely saying that the minimum wage is a fait accompli in SF and Oakland and there is nothing we can do at this point about the businesses that are going to be harmed by the policy. But let’s not do any further damage to other businesses by setting a minimum wage policy in cities like LA and NY.
Rick Stryker: Let me repeat — the first estimate Mr. Saltsman cites refer to youth unemployment, and yet cites no anecdotes about increasing youth unemployment. The second estimate refers to price increases, yet the negative anecdotes refer to the inability to raise prices thereby resulting in closure. The points Mr. Saltsman highlights as negative outcomes are not the ones supported by the studies. That is what is sometimes called a “bait and switch”.
But if you are persuaded by op-eds of the nature written by Mr. Saltsman, then I am unsurprised.
Menzie,
No, Saltsman cited David Neumark’s recent Institute of Labor study Employment Effects of Minimum Wages and pulled a particular statistic out on teen employment. But his point wasn’t about teen employment. As you well know, teem employment is taken as a proxy for low skilled worker employment and Saltsman was making the broader point that the minimum wage reduces the employment of the low skilled labor sector. Neumark’s article is about a lot more than teen employment.
The structure of Saltsman’s argument is:
1) There is substantial statistical evidence of disemployment effects of the minimum wage, as Neumark’s recent review shows
2) Prices go up as a result of the minimum wage as illustrated by the Chicago Fed study on fast food prices
3) Businesses mitigate the disemployment effects of the minimum wages by attempting to pass on price increases
4) Restaurant prices in Oakland after the minimum wage hike are an example
5) However, some businesses can’t mitigate the disemployment effects by raising prices and some may go out of business as a result
6) Borderland books, The Abbot’s Cellar, and The Source are examples
7) Given the minimum wage policy is probably baked in in SF and can’t realistically be changed, there is not much we can do about the damage to other businesses the policy will produce
8) But let’s recognize the mistake that SF made and not bring a minimum wage to LA or NY so that we don’t also damage businesses in those cities
There is no generalization from anecdotes.
Rick Stryker, how can you conclude, in your last paragraph, the minimum wage does more harm than good based on your statement?
How do you know the positive income and multiplier effects don’t exceed the negative employment effect, up to $15 an hour?
How do you know the substitution effect, to more skilled work, isn’t positive for both unskilled and skilled labor (given a higher educated workforce, e.g. from the education boom)?
PeakTrader,
I come to that conclusion because that’s what I think the preponderance of the empirical evidence shows.
Minimum wage laws poll very well, typically getting 70-80% support. The reason is that people think that if we set a minimum wage, the poor will get a much needed raise, which will be paid for by the rich business owner who can well afford it or by the public paying slightly higher prices. Many people are willing to pay somewhat higher prices to help a poor worker–at least they say they are.
However, the evidence in my view is mostly against the notion that the minimum wage helps the poor worker. If you are interested in looking at that evidence, one place to start is Neumark’s review article Employment Effects of Minimum Wages that I linked to in my comment to Menzie. Take a look at the section entitled “Distributional effects—in brief” for an introduction and you can follow the references if you want to get into more detail.
I mentioned in my comment above that the paper that Menzie cited in this post, Dube, Lester, and Reich, should not be taken as a decisive econometric smackdown of the national evidence which shows significant disemployment effects of the minimum wage. In fact, Neumark, Salas, and Wascher in their NBER paper Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater? provide a serious critique of Dube et al. If any econometrics students want to read this paper and don’t have access to NBER working papers, and ungated version is here
Rick Stryker, citing a couple of papers and a poll doesn’t explain much.
The labor economics literature shows a minimum wage affects the economy in many ways.
I’ve concluded a minimum wage can have a net positive effect on the economy.
However, employment isn’t the the most important factor. There are more powerful factors that can create employment.
PeakTrader,
The explanation would become more clear if you actually read the paper I linked to. And if you followed the linked paper into the references, the explanation would be clearer still.
Menzie,
You guys in the econ racket ought to be very happy SF is running the experiment for you. More papers to publish!! More citations!!! Fun! Fun! Fun!
SF is a poor place to run the experiment. Money is pouring into the place via the Silly Con Valley effect. When my old house in San Jose can be estimated to sell for $1million, all of economics is upside down and crazy.
Dilbert,
It’s not necessarily a very happy experience. I’m sure many economists feel more like grizzled detectives who have to file a report about the crime that was just committed.
I think, a worker would rather work 30 hours a week at $15 an hour with a shovel than work 40 hours a week at $8 an hour with a spoon (to paraphrase Milton Friedman). 🙂
Raising the minimum wage will deploy some idle or unproductive capital and employ some idle or little used skills of labor.
‘To the extent that restaurants sell differentiated goods…’
In which case, we aren’t talking about fast food nor low or unskilled labor, are we.
‘…and/or are geographically separated…’
In San Francisco, with BART and little cable cars that climb halfway to the stars! The workforce is confined to the neighborhood where there’s only one restaurant.
‘… then restaurants are the prototypical example of a monopsonistically competitive firm.’
Did you really think you’d get away with trying to sneak an oxymoron past me, Menzie?
Note to the students; Menzie has again changed the definition of ‘one buyer’ to ‘many buyers’, to salvage his, ‘George Stigler says there’s monopsony.’ argument.
‘To be honest, I have no idea what you are talking about, as I didn’t understand your point. It was Peak‘s point about $5 being suboptimal.’
Peaks point was, ‘A $50 minimum wage is suboptimal like a $5 minimum wage.’
Your response is that my asking if Peak thought anyone would come to work for $5 (to demonstrate that a legal minimum well below the market clearing wage is completely different from one well above it) is too subtle for a guy who went to the same high school as George Stigler and earned an econ Phd? My guess is that there are plenty of undergrad econ students at Madison who would get it.
Patrick R. Sullivan: I now understand your mind-numbingly prosaic point, but you keep on relying on the neoclassical model as a basis for your assessment for a market that seems the least amenable to analysis in that framework. If there is greater market power on one side than the other, then a non-binding minimum wage might lead to a more distortion-ridden equilibrium than a binding minimum wage.
You still have not responded to my pointing out your error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
I guess, some people believe without any labor standards, including a minimum wage, everything will work out well, for everyone, like it did in the 19th century 🙂
PeakTrader: Yes, I suspect that some of our commentators would not object to a little child labor, and a little violation of OSHA regs that are deemed “unreasonable”.
Yes, and are food and drug standards really needed 🙂
‘ I now understand your mind-numbingly prosaic point…’
AKA, elementary economics.
‘… but you keep on relying on the neoclassical model as a basis for your assessment for a market that seems the least amenable to analysis in that framework.’
Says you. On the other hand I have a number of Nobel prize winning economists, including Paul Krugman who agree with me.
‘ If there is greater market power on one side than the other, then a non-binding minimum wage might lead to a more distortion-ridden equilibrium than a binding minimum wage.’
‘If…might….’ And, if we ignore all the actual scholarship to the contrary, you mean.
Patrick R. Sullivan: We have developed more sophisticated economic models because sometimes elementary economics fails; could you explain the 1960’s used car market in a neoclassical model? Sure, if you ignored the data, which brings me to … I am still waiting to hear you admit you were in error regarding depth of the downturn in Canada vs. US during the Great Depression. As you recall, you stated unequivocally:
And this statement is wrong.
By the way, I don’t know of any welfare (as opposed to outcomes) analyses of the minimum wage. So how can we ignore a scholarship if it doesn’t exist. If you have a citation, I would welcome it. I would like to know how individual utility levels were aggregated. I believe I have recommended Varian’s Microeconomic Analysis and the sections on the first and second welfare theorems therein.
That is a stunning admission of ignorance, Menzie.
So stunning, I don’t believe you are that ignorant.