Increasing the Minimum Wage to $10.10 Will Make Low-Wage Workers and Their Families Better Off
It is curious that some economists, like Harry Holzer, are so totally focused on the possibility that there could be some quantitatively small loss of employment due to a higher minimum wage that they implicitly downplay a wider universal finding: a higher minimum wage will substantially lift the average annual earnings of low-wage workers (because even if there is a small negative employment effect—which the weight of the evidence shows there isn’t—that effect is swamped by the much higher wage). Consequently, we know that low-wage workers and their families will be better off financially, no ifs, ands, or buts.
Further, the weight of the evidence does in fact show that the employment effects of increasing the minimum wage are indistinguishable from zero. There is a vast literature on the effects of increases in the minimum wage on employment that spans many decades and has gone through countless methodological improvements, with each new round of literature incorporating lessons learned from the last. In the last several years, a new series of rigorous, peer-reviewed papers on the effects of the minimum wage has been published in top academic journals, and represents the best in methodological practices (see for example here and here). These studies find that increases in the minimum wage have raised wages, but have had essentially no effect on employment, even in times when the labor market is weak. In other words, incorporating decades of work that came before, the state of the literature is that increasing the minimum wage improves the earnings of low-wage workers without significant adverse employment effects.
Raising the Federal Minimum Wage to $10.10 Will Not Lead to Job Loss
Does increasing the minimum wage lead to job losses? What does economics literature say?
Based on the economic multiplier effect that results from putting additional income in the hands of lower-income workers, raising the minimum wage will likely have a modest but positive impact on job creation, leading to an additional 85,000 net new jobs when fully phased in. Lower-income earners spend their income more immediately, more completely, and more locally, than do higher income earners, and therefore generate more economic activity. Increasing the wages of 27.8 million workers by $35 billion over the phase-in period generates an additional GDP impact of $22 billion.1
This finding is consistent with the most recent, highly rigorous, peer-reviewed economic literature based on an analysis of real-world minimum wage increases across counties on state borders that shows essentially no disemployment effect resulting from raising the minimum wage.2
Mobility Needs To Do More Than Stagnate To Indicate U.S. Economy Is Performing for Low- and Moderate-Income Families
A recent paper by Raj Chetty et al found that young adults entering the labor market in recent years (they were children in roughly the 1990s) have the same chances of moving higher (or lower!) in the income distribution than their parents did as did children born in the 1970s. Some have claimed that this study somehow blunts or even overturns any narrative that the U.S. economy has performed poorly for low- and moderate-income households over the past generation. This is reading a judgment into the Chetty et al. results that just is not there.
First, some context on the mobility research literature. The Chetty et al. results are part of a recent resurgence in research about intergenerational mobility—or the likelihood that children will be in a different position in the income distribution than their parents. If where you start on the income scale as a child has a strong influence on where you wind up as an adult, then the degree of economic mobility is low. If, on the other hand, where you start is largely unrelated to where you end, then mobility is high. Chetty et al. find that the probability that a child reaches the top fifth of the income distribution given that their parents are in the bottom fifth of the income distribution is about 9 percent and also now famously found that this probability has not changed much over time.
So, do these Chetty et al. results really overturn the argument that the U.S. economy has performed poorly for low- and moderate-income families over most of the past generation? Not really.
My Favorite Measure of Labor Market Health is Looking a Little Better
It’s well-covered ground that declines in the unemployment rate have been overstating improvements in labor market conditions in this recovery, due to the fact that so many potential workers have dropped out of, or never entered, the labor force because job opportunities are so weak. By my estimates, about a third of the decline in the unemployment rate since its peak in the fall of 2009 was due to potential workers being sidelined, not potential workers finding work. (Note, workers being sidelined was not what caused the drop in the unemployment rate in January, but it has been the dominant factor for the last four+ years.)
Given that declines in the unemployment rate are providing a murky picture of trends in labor market health in this recovery, I think a much more useful indicator is the employment-to-population ratio of “prime-age” workers (workers age 25–54). (In fact, I’ve sometimes referred to this as my “desert island” measure—i.e. if I were headed to a desert island and could only take one measure with me to judge current trends in labor market conditions, this would be it.) The employment-to-population ratio (or EPOP) is simply the share of the population with a job, so this measure entirely sidesteps the issue of whether potential workers are in the labor force. Restricting our attention to prime-age workers serves the important purpose of avoiding confounding changes in employment that are not due to labor market conditions but are instead due to longer-run structural factors, such as baby boomers hitting retirement age and declining employment of young adults due to increased college enrollment.
Lately, the prime-age EPOP is showing a little spunk! There was a big jump up between December and January, but you shouldn’t focus on that because the new January population controls might be at play. If you look over the past year, the prime-age EPOP increased by eight-tenths of a percentage point, which isn’t exactly fast, but it is something.
The December 2007 Level of Employment is Not a Useful Benchmark
The January jobs report was pretty bad—the economy added just 113,000. But there has nevertheless been some excitement on social media today about how close we are getting to regaining the pre-recession level of employment. We lost 8,695,000 jobs in the downturn, but we have since gained back 7,844,000, so we are now “only” 851,000 jobs below where we were when the recession began in December 2007. Yay?
No. The December 2007 level of employment is way below where we should be now.
The working-age population—and with it, the potential labor force—is growing all the time. Over the last six years and one month, we should have added 6.7 million jobs to keep up with growth in the potential labor force. Instead, we are down 851,000 jobs. This means that the total gap in the labor market—the number of jobs we need to get back to pre-recession labor market conditions—is 7.6 million. To fill that gap in three years—which would mean, all told, the Great Recession would have caused more than nine years of weak job opportunities and incomes for American workers—we would have to be adding 280,000 jobs per month.
The Minimum Wage is Effective and Well Targeted
In a recent column, David Brooks argued that increasing the minimum wage is an ineffective response to income inequality because it would do little to raise workers above the poverty level. Instead, he contends, most of the benefits would go to those higher up the income scale. But Brooks’s understanding of the minimum wage’s role is too narrow. The central purpose of the minimum wage is not to lift the poor above the poverty line—it’s to raise the incomes of low-income workers and their families, not just those below the poverty threshold. Current research suggests that minimum-wage increases are well targeted to improving lower-income individuals’ economic condition. This is contrary to the persistent myth that the minimum wage primarily benefits young workers in high-income households.
The argument made by Brooks, and others who focus narrowly on poverty, is specious for several reasons. First, it conflates poverty and inequality. While related, they are not one and the same. Second, the poverty line is both arbitrary and woefully lacking as a measure of well-being. As currently defined, the poverty line is more descriptive of destitution than mere poverty. At $22,111 for a family of two adults and two children, it is less than a quarter of the income needed for a modest but secure living standard in New York City, and just 37 percent of the income needed in rural Nebraska. Third, it is not a weakness but a strength of the minimum wage that it not only improves the well-being workers above the poverty level who are nevertheless struggling to make ends meet. After all, its purpose is to be a floor that supports broad-based wage growth.
New Pessimism About Immigration Reform in 2014
Well, that was fast. Last week Speaker John Boehner released a draft set of “standards” (essentially, principles) on immigration reform, which I analyzed in detail. The standards are supposed to set out what the priorities are on immigration for Republicans in the House, presumably so that new House immigration legislation can be based upon them, and to signal to Democrats in the Senate the parameters for future negotiations between the two chambers to reform the immigration system. But this week, the speaker’s office has released a new one-page document, which compares the draft House standards side-by-side with the corresponding sections of the Senate’s bipartisan comprehensive immigration bill that passed in the summer (also known by its bill number, S.744), as well as a “Q&A.” Unfortunately, the side-by-side comparison document makes a number of misleading claims about the provisions in S. 744. In fact, it’s so bad that it’s difficult to take it seriously—and although I’m not in the business of making political predictions or of trying to guess how political parties will behave—as a result it’s hard to believe that the Republican Party and Speaker Boehner are serious about negotiating on immigration.
I won’t address all of the characterizations of the Senate bill in the speaker’s side-by-side document, but I’ll analyze a few notable ones:
The comparison document says the House Standards “mandate a secure border” while the Senate bill “does not guarantee the border will be secure before giving all illegal immigrants citizenship.” Perhaps S. 744 doesn’t exactly use language that “mandates” the border be secure first, but it authorizes the spending of a whopping $46 billion on militarizing the border and ports of entry, and doubling the number of border patrol agents, in order to prevent future flows of unauthorized migrants. As far as the granting of citizenship is concerned, most unauthorized immigrants who pay all the penalties and fees and are able meet the strict income and employment requirements for citizenship still would not be eligible for 13 years. That should be more than enough time to implement $46 billion in new security measures that Republican senators insisted be included in S. 744.
What to Watch on Jobs Day, Part 2: January Is Benchmark Month
January is the month for “benchmark revisions,” which is when BLS revises its sample-based estimates to match other comprehensive data sources. Preliminary estimates of the benchmark revision, released last fall, showed that with this benchmark revision, the over-the-year change in employment between March 2012 and March 2013 is likely to be revised downward by 124,000. This means that we are likely to find that the gap in the labor market due to the Great Recession and its aftermath is larger than we think it is. Right now, the gap is estimated to be 7.7 million, if the preliminary estimates hold, the gap is instead over 7.8 million.
Another thing happening with this benchmark revision is a code change that moves nearly half a million in employment from the Private Household industry—which is not counted in the establishment survey—to the Education and Health Care Services industry, which is. This means the level of employment in the establishment survey will increase to reflect this coding change. I checked with BLS and they reported they will be revising employment, hours, and wage data back to 1979 to reflect this change.
The household data (which is where the unemployment rate and the labor force participation rate come from) will also be affected by new population controls, but in accordance with standard practice, earlier household data will not be revised to reflect these changes. This means that if you want to know the change in unemployment and labor force participation between December and January, you can’t look at the regular published data, and instead must look at the extra information provided, which will show the over-the-month change after removing the effect of the new controls. Look to tables B and C here to see what information was provided last year at this time.
Court of Appeals Hands Victory to U.S. Workers
The U.S. Court of Appeals for the Third Circuit ruled yesterday that the Department of Labor’s H-2B visa wage methodology regulation is valid, handing a defeat to a coalition of employers who want to keep wages low for employees in forestry, seafood, hospitality, landscaping and other physically demanding jobs. In Louisiana Forestry Association v. Secretary, U.S. Department of Labor, the court held that the Immigration and Nationality Act gives the Department of Homeland Security the authority to rely on the Labor Department’s decisions about whether U.S. workers are available for jobs that employers want to offer to foreign workers, and whether U.S. workers will be adversely affected if foreign workers are admitted to the U.S. to do particular jobs.
The Labor Department issued a regulation in 2011 that sets out the most important element for making that determination: setting a prevailing wage rate for each occupation and requiring businesses to advertise jobs to workers in the United States at that rate before hiring foreign workers. The court held that the regulation is valid and rejected the businesses’ argument that the Department of Labor cannot set wages at a level high enough to attract U.S. workers.
What to Watch on Jobs Day: Yes, We Should Still Be Worried About the Labor Force Participation Rate
The employment data last month showed that just 74,000 payroll jobs were added in December. It is unlikely that the underlying job growth rate is this weak, so the January data, which comes out on Friday, should look substantially better. However, beating 74,000 jobs is a very low bar. To get back to pre-recession labor market conditions in three years, we would need to be adding 285,000 jobs per month. It’s more likely that we’ll see something closer to the average number of jobs added per month in 2013, which was 182,000. At that rate it will take well over five more years to get back to health in the labor market.
Another thing to watch is the labor force participation rate (LFPR), which has dropped from 66.0% to 62.8% over the last six years. My estimates suggest that about one-quarter of that drop is due to long-run factors like baby boomers hitting retirement age and increasing college enrollment of young people, and had nothing to do the Great Recession or the weak recovery. That means about three-quarters of the drop in LFPR is due to potential workers either dropping out of, or never entering, the labor force because job opportunities are so weak.
The labor force may have dropped further in January, due to the expiration of federal unemployment insurance benefits in December. Careful research (here and here) shows that these benefits were keeping people in the labor force. To receive unemployment insurance, workers must be actively seeking work, so receiving UI was giving people a reason to keep looking for work even though job prospects are bleak. (This is actually a good thing because it may increase the share of displaced workers who ultimately find work). A drop in labor force participation due to the expiration of UI extensions would likely lead to another “bad” kind of drop in the unemployment rate—one that comes from potential workers giving up looking for work, not potential workers finding work. This would compound an already serious issue—there are already 6 million “missing workers,” who, because of weak job opportunities, are neither employed nor actively seeking a job. If these missing workers were in the labor market looking for work, the unemployment rate would be 10.2% instead of 6.7%.