Sorry, Paul Krugman: The Minimum Wage Won’t Miraculously Cure Poverty

Sorry, Paul Krugman: The Minimum Wage Won’t Miraculously Cure Poverty

Studies Paul Krugman ignores show minimum-wage increases significantly reduce the probability of low-skill workers reaching the middle class.
Diana Furchtgott-Roth
By

Paul Krugman stated in The New York Times today that “there’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” To support his position, he cites studies by University of California professor David Card and Princeton University professor Alan Krueger.

Some commentators want a $12 minimum wage, as proposed by President Obama, a 66 percent increase. Others, such as the Restaurant Opportunities Centers United and New York Communities for Change, want a $15 minimum wage, a more than 100 percent increase.

If raising the minimum wage were cost-free, why stop at $10 or $15 an hour? Why not go straight to $25 an hour, the average hourly wage? That might be considered fair, because no one would have to earn less than today’s average.

The answer, of course, is because some people are displaced at any minimum wage. It is obvious to the general public that increasing the minimum wage to $25 an hour would displace workers. It is less obvious when amounts are smaller. But when the minimum wage is raised, employers hire higher-skilled people, or switch to different forms of technology such as placing orders through touch screens.

Let’s Look at Those Studies

Card and Krueger looked at the effects on fast-food restaurants in New Jersey and Pennsylvania of raising the minimum wage in 1992. They concluded that raising the minimum wage had no effect, or a small positive effect, on employment.

Card and Krueger infer that minimum-wage policy makes no difference. A more likely interpretation is that the equation excludes important variables.

The studies, published in 1994 and 2000, compared New Jersey with neighboring Pennsylvania, which did not raise the minimum wage. (Read the studies here and here.)

But just because economic studies are published in leading academic journals does not mean that the conclusions are accurate. The studies had a number of problems. Card and Krueger do not include information on the portion of employment at minimum wage at any date in time. No information was given on whether the minimum law was binding, and to what extent, for this sample.

The studies did not include information by county, such as income, unemployment, teen unemployment, labor force, and labor-force-participation rates. Neither did it include changes in state taxes and franchise fees.

The regression statistics explain little variance, and practically none of the coefficients are significant. Card and Krueger infer that minimum-wage policy makes no difference. A more likely interpretation is that the equation excludes important variables.

Card and Krueger focus exclusively on fast-food establishments, but many other minimum-wage employment opportunities in the service industry, particularly the hospitality industry, are also likely affected.

Better Studies Say the Minimum Wage Hurts People

Other studies have come to different conclusions. In a National Bureau of Economic Research paper published last December, University of California-San Diego professors Jeffrey Clemens and Michael Wither found that increases in the minimum wage were responsible for 14 percent of the decline in the percent of the working-age population employed between 2006 and 2012. Minimum-wage increases significantly reduced the probability of low-skill workers reaching the middle class.

In addition to reducing employment, the binding minimum-wage increase makes it more likely that people work without pay.

Clemens and Wither looked at the change in the minimum wage across states that had different minimum-wage laws. Some states have raised their minimum wage above the federal minimum wage. The authors divided states into those in which the federal minimum wage was binding and those in which it was not. They used panel data from the 2008 Survey of Income and Program Participation, and assessed the extent to which increasing the minimum wage affected the wage distribution of minimum-wage workers.

Not surprisingly, they found that some low-skill workers who earned the old minimum wage were employed at the new minimum wage. But the professors found that a minimum wage increase substantially reduced employment. By the second year after the $7.25 minimum wage, the authors estimated that employment of low-skill workers had declined by 6 percentage points, or 8 percent more in states with the binding federal minimum wage than in states with a higher minimum wage. They then examined teenagers and food service workers in more detail. For this sample, they found that employment declined by 4 percentage points.

Increasing the minimum wage had a disproportionately more harmful effect on states such as Texas, which has no minimum wage, than on states such as California and New York, which have higher minimum wages. For example, an increase in the federal minimum wage to $12 an hour, as President Obama proposes, would not affect Seattle residents, who will face a $15 hourly minimum wage in a few years.

In addition to reducing employment, the binding minimum-wage increase makes it more likely that people work without pay, such as getting internships. Recall that employers have to pay workers the minimum wage or above, but in some circumstances they have the option of paying them nothing as interns.

Almost No One Works for Minimum Wage Anyway

Finding the effects of raising the minimum wage is challenging, because 97 percent of American workers now make above the minimum wage—not because it is the law, but because employers have to pay higher compensation packages to retain workers. That is one reason that some academic studies do not find major negative effects of minimum-wage increases.

Those who would be harmed by increasing the minimum wage are young people. Half of minimum-wage workers are under 25, and 24 percent are teens. This group’s unemployment rate is already higher than the 5.3 percent overall rate. The teen unemployment rate is 18 percent, and the African-American teen unemployment rate is 32 percent. The youth unemployment rate is 10 percent.

People might respond to pollsters saying that they favor raising the minimum wage, but they are rarely willing to pay more for the services when the prices rise. Unlike Krugman’s happy message, increasing the minimum wage reduces both the likelihood of employment and average income. The research should be a warning to those who seek to conjure miraculous cures to poverty by artificially raising wages.

Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, is director of Economics21 and senior fellow at the Manhattan Institute for Policy Research.

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