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Thursday, January 16, 2014

Does a Minimum Wage Reduce Poverty?

By Per Bylund

In a long and seemingly technical?blog post on the Washington Post ?wonkblog,? Roosevelt Institute fellow Mike Konczal?suggests that?raising the minimum wage will reduce poverty.?He primarily relies on one meta study (Dube 2013, unpublished) to show that economists ?do agree? ?that raising the minimum wage would reduce poverty.?

Quickly reading through the article, it is obvious that this is the kind of perception Konczal wants the reader to get. Well, not so fast.?The blog post exclusively refers to aggregates of different kinds, which obscures the analysis.?And, if one reads more closely, Konczal includes several?limitations and constraints to his thesis,?and in fact agrees with the age-old truth that raising the minimum wage would kill off jobs. Minimum wage mandates above the present market wage of course has only one direct effect: jobs below that level are outlawed. Hence, any person on the job market with a productivity level (whatever the reason) below the minimum wage mandate will not be able to find a job.

Konczal?s text is a balancing act relying on arbitrary limits and vague language. For example, he relies on extrapolating on?the elasticity of minimum wage found in several studies to be around -0.24 (which means, statistically, that raising the minimum wage by 1 % would reduce the number of poor people by 0.24 %), but says that one ?shouldn't take the effects of small changes to see what would happen if we, say, increased the minimum wage 500 percent, or to levels that don't actually exist right now.? Right. This is true, but not because the elasticity of minimum wage at the level studied ?is? -0.24, but because it was ? using the specific data and?methods in the particular study.

There are no constant relationships in the social world, which is the reason Konczal shows reluctance to extrapolate too far from the mean; but the same fact should also make him weary to assume the found elasticity is applicable on different time periods. (But the latter obviously doesn?t bother him.)

Throughout,?Konczal uses the term ?poverty.? But poverty statistics take into account only income, not what tasks are carried out within employment. If raising the minimum wage prohibits certain jobs (on which Konczal agrees), is it then not likely that the remaining jobs will change? Some of the tasks carried out by low-productivity labor cannot profitably be carried out by employees with higher wages, which means ? to the?extent they must be carried out ? business owners and entrepreneurs will need to find other ways to get them done. Perhaps through excessive automation and capital investments, which would slightly increase the demand for labor in higher-earning professions (while raising the barriers to entry for other entrepreneurs). (This is, by the way, one of the rather crazy progressive arguments for outlawing manual labor ? that it forces entrepreneurs to ?innovate,? which increases productivity and thus wages for those remaining employable.)

Is it not likely that a higher minimum wage, which prohibits certain low-producing jobs, will force those in such jobs by choice (that is, those choosing low-productivity employment though they would be able to earn higher wages elsewhere) will instead seek employment with higher productivity? Is it not also likely that those who cannot muster higher productivity levels would accept unpaid overtime or other types of?unpaid work just to remain salaried? Both of these effects may reduce the aggregate poverty statistic while forcing those unwilling or unable to get such ?perks? from employers into unemployment. (It is furthermore probable that this in turn leads to an increase in black market employment opportunities, as well as outright abuse in the work place, as unscrupulous employers seeks ways to ?deal? outside the system?s restrictions.)

But Konczal seems oblivious to these effects, perhaps because they cannot easily be studied using aggregates: the type of studies he refers to tend to perform statistical magic on selected data that reveal ?levels? of employment, wages, poverty, etc. Exactly what the results?tell us is far from clear, but this is typical for mainstream research. Changes within employment aren?t generally observable in the aggregate data, so why not assume it is unimportant?

Of course, Konczal cannot get around the fact that raising the minimum wage above the market wage?will cause unemployment. And, which is unfortunate for statistics-enamored progressives, unemployment shows up in the aggregate employment?statistics too. So he concludes that, based on?the studies he cites, it is the case that ?there are significant benefits, whatever the costs.?

Yes, some aggregate statistics will indeed look ?better.? Whatever the costs.

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