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Five myths that pervade the minimum-wage debate
By Grassroot Institute @ 8:54 PM :: 810 Views :: Labor, Small Business

Five myths that pervade the minimum-wage debate

Despite what many Hawaii residents want to believe, increasing the state’s legal minimum wage can result in unemployment.

by Jensen Ahokovi, Grassroot Institute, March 16, 2022

The vast majority of Hawaii residents support increasing the state’s legal minimum wage on the grounds that it would help Hawaii’s low-income workers better cope with the state’s high cost of living.1

But that isn’t what the vast majority of evidence indicates would happen.

The data is overwhelming that legally increasing a minimum wage anywhere negatively affects employment — and not necessarily in the short term. The results typically include job loss,2 cutbacks in hours,3 fewer benefits,4 automation5 and higher consumer prices.6

In other words, setting the legal wage rate higher than the present market rate isn’t just about causing unemployment, but also triggering a range of effects, all of which negatively affect those whom the higher minimum wage is intended to help, primarily low-skilled and less-educated workers.

In the current Hawaii debate about whether to increase the state’s minimum wage — from $10.10 an hour to a higher amount still to be determined, most likely $18 by some date in the near future — there are five prominent myths favoring the proposed increase that have been more persuasive to the public than the empirical data opposing it. Those are:

>> Myth: The research that won the 2021 Nobel Prize in economics proves that minimum wages do not reduce employment.

The 2021 Nobel Prize in economics was awarded to three economists — David Card, Joshua Angrist and Guido Imbens — but it was not for their research into the minimum wage. Rather, it was their use of “natural experiments” to deal with cause and effect in a way that resembles clinical trials.

As the Royal Swedish Academy of Sciences stated in its announcement of the award, “The key is to use situations in which chance events or policy changes result in groups of people being treated differently, in a way that resembles clinical trials in medicine.”7

Card, in particular, was recognized for his contributions to “the labor market effects of minimum wages, immigration and education.” The Academy mentioned his “studies from the early 1990s [that] challenged conventional wisdom, leading to new analyses and additional insights. The results showed, among other things, that increasing the minimum wage does not necessarily lead to fewer jobs.”

The key phrase here is “not necessarily.” In addition, Card’s nearly 30-year-old minimum-wage research,8 which he and co-author Alan P. Krueger revisited in 2000,9 has been widely criticized.

For example, three years after Card and Krueger initially published their research, the Employment Policies Institute found that, “the data set used in the New Jersey study bears no relation to numbers drawn from the payroll records of the restaurants the New Jersey study claims to cover.”10

EPI President Richard Berman went so far as to say, “The data base used in the New Jersey fast food study is so bad that no credible conclusions can be drawn from the report [original emphasis].”11

A year earlier, economists David Neumark and William Wascher had found that when looking at the actual payroll data of surveyed restaurants instead of the survey data used by Card and Krueger, “the New Jersey minimum wage increase led to a 4.6% decrease in employment in New Jersey.”12

The minimum-wage debate continues, obviously.13 But it is not true to say that Card’s and Krueger’s Nobel Prize-winning research “proved” that minimum wages do not reduce employment.

>> Myth: Minimum wages do not reduce employment.

Almost 80% of all published minimum-wage research in the U.S. since 1992 has concluded that employment elasticities are negative.14

What does that mean?

It means that — all things being equal — any increase in the minimum wage by a certain percentage results in unemployment. That is because, as economist Per Bylund has stated: “Minimum wage mandates above the present market wage … have 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.”15

But again, this is not just about causing unemployment. For those who are already employed, there is the risk of being let go, or having their hours or benefits reduced, or eventually being replaced by automation — certainly nothing beneficial from the point of view of minimum-wage advocates.

>> Myth: Hawaii employment increased after the state minimum wage was increased.

Supporters of increasing Hawaii’s minimum wage have argued employment continued to increase during previous periods after the rate was increased.16 Since 1990, there have been four increases in Hawaii’s minimum wage, the most recent being in 2015.

There are probably several ways to explain this, one being that local employment data reported by the U.S. Bureau of Labor Statistics accounts for only the number of employees and not hourly-wage determinants such as the number of hours worked. Indeed, there is a significant body of evidence that indicates that minimum-wage increases do lead to reductions in hours worked by low-wage workers.17

To illustrate this issue, let’s look at Hawaii’s low-wage employment among food service workers, janitorial staff, personal care workers, cashiers and retail workers.18 There is a great deal of variation in employment among these occupations relative to the years when the state minimum wage was increased, so it is not clear that increases in the minimum wage are correlated with the fluctuations in low-wage employment.19

This myth additionally mistakes correlation for causation. As noted by economist Wayne Liou with the Hawaii Department of Business, Economic Development and Tourism:

“Even though there is some growth in employment in the face of increases in the minimum wage, this could be due to a growing economy or higher demand for certain goods or services, such as those related to the tourism industry. If other occupations that are less likely to be affected by the minimum wage are growing at a faster rate than the occupations in the above figures, it would support the theory that minimum wages have a negative effect on employment.”20

>> Myth: Minimum wages reduce poverty.

If minimum wages reduced poverty, we’d expect there to be at least a correlation between the minimum wage and the poverty rate. In reality, there is little evidence to suggest this is the case.

Cornell University economist Richard Burkhauser wrote in a 2014 paper:  “Minimum-wage increases are not a very effective mechanism for reducing poverty. They are not related to decreases in poverty rates. They can cost some low-income workers their jobs. And most minimum-wage earners who gain from a higher minimum wage do not live in poor (or near-poor) families.”21

In 2010, Burkhauser along with economist Joseph Sabia looked at state and federal minimum wage increases between 2003 and 2007 and found: “[Minimum-wage increases] had no effect on state poverty rates,” and that “the working poor face a disproportionate amount of the job losses.”22

Why is there little correlation between poverty reduction and minimum wages? It turns out that most minimum-wage workers are not poor.

For example, according to a 2017 report from the U.S. Government Accountability Office, 13% of workers earning between the federal minimum wage and $12 per hour were in poverty. Note that this wage range includes Hawaii’s current state minimum wage of $10.10.23

However, one might rightfully counter and say that this data is misleading, considering that the federal and most state minimum wages are not indexed to inflation. But in his review of the available literature on minimum wages that are tied to inflation, Joseph Sabia wrote, “The only two studies that provide empirical evidence on the employment effects of indexed minimum wages find no statistically significant differences in the low-skilled employment effects of indexed versus non-indexed minimum wages.”24

>> Myth: Minimum wages boost the economy.

The thought behind this myth is that if the minimum wage is increased, then minimum-wage workers will have more disposable income to spend on daily necessities. Moreover, if more people are spending, then that drives consumption, which subsequently drives the economy.

But it ain’t necessarily so.

In 2015, economist Joseph Sabia produced the first comprehensive study into how minimum wages affects state-level gross domestic products. Sabia found that minimum wages actually contribute to declines in state GDPs rather than increases.25

In a separate review of the relevant literature, Sabia found that, “the existing empirical evidence suggests that minimum wage increases reduce or redistribute productivity rather than increase aggregate GDP.”26

Conclusion

Clearly there is little reason or data to suggest that an increase in Hawaii’s legal minimum wage would improve the lives of those it is intended to help.

A better way forward would be to lower Hawaii’s high cost of living, so the money we do have would buy more and, in effect, give everyone a raise.

A good place to start for ideas on how to do that is the Grassroot Institute of Hawaii’s “Road map to prosperity,” issued in May 2020.

Suggestions in the report include reducing existing taxes and rejecting all proposed new ones; relying more on private contractors to help deliver public services; exempting food, medicines and healthcare providers and services from the state general excise tax; repealing or reforming the state’s medical certificate-of-need laws; liberalizing zoning and land-use laws to encourage more housing; reforming the Jones Act, which restricts shipping competition to Hawaii; and more.27

Of course, no amount of state or county legislation is going to eliminate the federal government’s constant devaluation of the dollar through inflation — as facilitated by the Federal Reserve, a spend-happy Congress and the president, whomever that might be at any particular time.

We can lower the cost of living and boost productivity, but unless America’s monetary inflation can be stopped, the minimum-wage debate will continue, and probably regardless of whether we could somehow peg Hawaii’s legal wage floor to inflation.

In fact, in the face of inflation, you could argue that leaving the minimum wage rate right where it is probably would help Hawaii’s unskilled and less-educated workers more in the long run than a minimum-wage increase. That’s because eventually it would make low-skilled and less-educated workers more employable,28 thus expanding employment and giving those new entry-level workers their first opportunity to join the workforce and begin their economic ascent.

For now, we must realize that establishing a legal wage floor above the market rate is counterproductive, as validated by the law of supply and demand and the bulk of all existing relevant data.

Unfortunately, perceptions and passions often rule the day, even in the face of facts.
_____________

Jensen Ahokovi is a research associate at the Grassroot Institute of Hawaii.
_____________

This article was inspired by many of the reader comments that followed two Honolulu Civil Beat commentaries, here and here, and statements made by both the panelists and listeners during an episode of Hawaii Public Radio’s “The Conversation.”
_____________

Andrew Gomes, “Hawaii residents strongly back minimum wage increase, poll finds,” Honolulu Star-Advertiser, Feb. 9, 2022.
David Neumark and Peter Shirley, “Myth or Measurement: What Does the New Minimum Wage Research Say about Minimum Wages and Job Loss in the United States?” National Bureau of Economic Research, first published January 2021, revised May 2021, pp. 3-4.
Quiping Yu, Shawn Mankad and Masha Shunko, “Evidence of The Unintended Labor Scheduling Implications of The Minimum Wage,” Social Science Research Network, June 16, 2021, pp. 14, 17-18.
Ibid, p. 14-16.
Grace Lordan, et al., “People Versus Machines: The Impact of Minimum Wages on Automatable Jobs,” National Bureau of Economic Research, first published  August 2017, revised January 2018, pp. 13-14.
Daniel Cooper, Marìa José Luengo-Prado and Jonathan A. Parker, “The Local Aggregate Effects of Minimum Wage Increases,” Journal of Money, Credit and Banking, Vol. 52, No. 1, May 29, 2019, p. 21.
“Press release: The Prize in Economic Sciences 2021,” The Royal Swedish Academy of Sciences, Oct. 11, 2021.
David Card and Alan P. Krueger, “Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania,” National Bureau of Economic Research, Working Paper 4509, October 1993.
David Card and Alan P. Krueger, “Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania: Reply,” American Economic Review, Vol. 90, No. 5, December 2000.
Richard B. Berman, “The Crippling Flaws in the New Jersey Fast Food Study,” Employment Policies Institute, 2nd Edition, executive summary, April 1996.
Ibid.
David Neumark and William Wascher, “The Effect of New Jersey’s Minimum Wage Increase on Fast-Food Employment: A Re-Evaluation Using Payroll Records,” National Bureau of Economic Research, August 1995.
Neumark and Shirley, “Myth or Measurement: What Does the New Minimum Wage Research Say about Minimum Wages and Job Loss in the United States?”
Ibid, p. 3.
Per Bylund, “Does a Minimum Wage Reduce Poverty?” Mises Institute, Jan. 5, 2014. Note: By “productivity level,” Bylund is referring to the fact that, according to economic theory, wages are determined by the marginal productivity of labor. There is no precise definition of “productivity” in this case, other than the mathematical definition being change in output divided by labor.
Kevin Dayton and Blaze Lovell, “House Approves Minimum Wage, Mauna Kea Bills After Emotional Floor Debate,” March 9, 2022, which stated: “Rep. Jeanne Kapela … said … the last series of increases in the state minimum wage from 2014 to 2018 did not trigger any huge loss of jobs. … In fact, the number of people employed by small businesses grew by 3% during those years, while the number of small businesses in Hawaii grew by 8%, she said.”
Wayne Liou, “The Minimum Wage in Hawai’i: Labor Market Impacts,” Research and Economic Analysis Division, Hawaii Department of Business, Economic Development & Tourism, January 2020, p. 9, Figure 4.
Per Bylund, “Does a Minimum Wage Reduce Poverty?” Mises Institute, Jan. 5, 2014. Note: By “productivity level,” Bylund is referring to the fact that, according to economic theory, wages are determined by the marginal productivity of labor. There is no precise definition of “productivity” in this case, other than the mathematical definition being change in output divided by labor.
Ibid, p. 9, Figure 4.
Ibid, p .9.
Richard Burkhauser, “Why Minimum Wage Increases Are a Poor Way to Help the Working Poor,” Institute of Labor Economics,, June 2014, p.3. Note: Until 2016, the Institute of Labor Economics was known as the Institute for the Study of Labor. See: “IZA Institute of Labor Economics,” Wikipedia, accessed March 7, 2022.
Joseph Sabia and Richard Burkhauser, “Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?”, Southern Economic Journal, Vol. 73, No. 3, January 2010, p. 592.
“Low-Wage Workers: Poverty and Use of Selected Federal Social Safety Net Programs Persist among Working Families,” U.S. Government Accountability Office, Sept. 22, 2017 (publicly released Oct. 23, 2017).
Joseph Sabia, “Do minimum wages stimulate productivity and growth?” Institute of Labor Economics, December 2015, p. 7.
Joseph Sabia, “Minimum Wages and Gross Domestic Product,” Contemporary Economic Policy, Vol. 33, Iss. 4, Jan. 23, 2015.
Joseph Sabia, “Do minimum wages stimulate productivity and growth?” Institute of Labor Economics, December 2015, p. 5.
“Road map to prosperity,” Grassroot Institute of Hawaii, May 2020.
“10.2 The Effects of a Minimum Wage: Inflation and the Minimum Wage” Saylor Academy, accessed March 16, 2022.

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