Minimum Wages - A Review

David Neumark and William L. Wascher, Minimum Wages, (Cambridge, MA: The MIT Press, 2008), 295 pages.

The two economist authors wrote Minimum Wages for economists; that is except for a couple of sentences in the last chapter. The title of the last chapter, Summary and Conclusions, signals politicians and business types to the pages where they will find the conclusions they want to hear: “Based on the evidence from our nearly two decades of research on minimum wages . . . we find it very difficult to see good economic rationale for continuing to seek a higher minimum wage.”

Chapter two has the history and law of minimum wages and there are chapters describing changes on employment, wage distribution, income distribution, prices, profits and training incentives. A political economy of minimum wages chapter precedes the summary.

Chapter three has 70 pages reviewing 43 studies of the minimum wage effects of a higher minimum wage on employment. The summary reviews come after a section titled the neoclassical model where the authors narrate a description of the “textbook” neoclassical model in its “simplest” form. It assumes competition for labor and product markets, one type of labor, output produced with a mix of capital and labor, and minimum wage coverage for all. A minimum wage above the market wage creates two causes for declining employment. First, it raises establishment costs and market prices that cause falling product demand and ultimately falling employment. Second it raises wages leading to a substitution of capital for labor.

Paragraphs that begin with extensions of the model add or change selected assumptions. In one extension, minimum wages can be covered or uncovered. In a second, labor can be skilled or unskilled. In the first extension the authors assert “. . . the uncovered sector may provide alternative opportunities to workers who cannot finds jobs in the covered sector and thus can potentially mitigate the overall employment losses associated with the minimum wage.”

In the second extension the authors assert “. . . the neoclassical model’s prediction of a reduction in labor demand applies unambiguously only to less-skilled workers whose wages are directly raised by the minimum wage. The effects on other workers depend on the nature of the production process and, indeed, the minimum wage can generally be expected to lead to an increase in the employment of slightly higher-skilled workers who are good substitutes for minimum wage workers.”

To employers of dishwashers, ushers, lobby attendants, ticket takers, shampooers, and child care workers higher wage costs reduce profits pressuring employers to experiment with higher prices, and fewer work hours or jobs. Raising prices might raise revenue and restore profits as long as sales don’t fall by much. Otherwise cutting jobs or hours in response to a higher minimum wage should help restore profits. Since everyone agrees higher wages do pressure employers to cut work hours or jobs for sub-minimum wage employees that part makes for easy agreement. However, it represents a small part of minimum wage policy, unless the authors expect job losers to disappear, never to work again.

The authors do worry about what else happens after low wage employees lose their jobs. Repeatedly they pose different options with new assumptions and another chain of deductive model building. On page 50 they write under an assumption of partial minimum wage coverage “. . . the minimum wage raises the supply of labor to the uncovered sector, which lowers the wage and increases employment in that sector, thus offsetting some of the job loss in the covered sector.” Again in similar fashion on page 116, “. . . as we emphasized earlier in this chapter the potential for minimum wage increases to affect wages higher in the wage distribution is also important in assessing the effects of minimum wage policy.”

Both of these citations from the authors contradict their conclusion that a higher minimum wage necessarily harms employment. They agree if people lose their minimum wage job they do not disappear, but begin looking for other jobs in other occupations with wages higher in the wage distribution. Forced to leave a sub-minimum wage job the newly unemployed increase the supply of labor in other occupations where they moderate higher wages and add to employment. The authors might recognize the millions of opportunities to move from low wage to higher wage employment by looking at wage distributions by occupation reported by the U. S. Bureau of Labor Statistics in their Occupational Employment Survey.

Obsessive model building quickly turns the book into a tedious slog through neoclassical constructs in the specialized terminology of the economics fraternity. The authors use characterizations for model building like covered and uncovered, skilled and unskilled, union and non-union without mention of occupations like lawyer, engineer, clerk or cashier.

Many times the authors describe models that bring a “substitution of skilled for unskilled labor,” and vice versa. At page 254 readers find “In the model, an increase in the nominal wage that raises the wage rate of unskilled labor not only induces substitution of skilled for unskilled labor, it also leads to substitution of unionized skilled labor for non-unionized skilled labor because the union sector expands and the nonunion sector contracts.” Most people think of lawyers and engineers as skilled labor and clerks and cashiers as unskilled labor but not substitutes. Substitutes have characteristics similar enough to be interchangeable, but the authors repeatedly treat substitutes as different enough to be in separate markets.

A succession of models and assertions lead to conclusions of up, down, higher, lower applied to generic markets of products and jobs. The authors report regression estimates with tables of numerical coefficients, but these estimates came from aggregated data of many occupations and markets. Aggregated data doesn’t tell us what happens to fast food cooks after a minimum wage increase.

When the minimum wage jumped by $2.10 an hour from 2006 to 2009, jobs as fast food cooks dropped from 612 thousand to 539 thousand. During the same period there were jobs as cashiers, retail salespersons, rental and counter clerks and others with wage ranges above the minimum. An increase in applications for these other jobs quite likely holds down wages as economists like to predict from any increase in supply, but quite possibly in wage ranges above the minimum. A higher minimum wage might work out to higher employment, higher wages and lower wage inequality.

In the policy chapter the authors suggest some special interest groups support a higher wage because it helps them. Others who support raising the minimum wage are confused or uninformed; not clued into the power of neoclassical market forecasts. Economists have been reciting these conclusions for decades, but if you are a stickler for details and want to know how to support that view, you will not find it in this book. If you always want to oppose a higher minimum wage, do as the authors do, say it’s a bad thing that hurts employment.