class: center, middle, inverse, title-slide # The Great Minimum Wage Debate ## EC 350: Labor Economics ### <a href="https://kyleraze.com">Kyle Raze</a> ### Winter 2022 --- # Azar et al. (2020) ## **Discussion** **Q.sub[1]:** What are the strengths of the study? **Q.sub[2]:** What are the weaknesses of the study? **Q.sub[3]:** What can we learn from the study? --- # Azar et al. (2020) The authors worry about unobserved changes in productivity within markets, so they use an **instrumental variables strategy**. - An **instrumental variable** has a direct effect on the intensity of treatment, but has no direct effect on the outcome variable. It can be used to **isolate** the **"clean" variation in treatment**. -- .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-1-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ **Variables** - .hi[D] .mono[=] Local market concentration - .hi[Y] .mono[=] Local wages - .hi[Z] .mono[=] Instrument (concentration in other markets) - .hi[U] .mono[=] Unobserved changes *within* each market ] --- # Azar et al. (2020) ## **Instrumental variables** The instrument (concentration in other markets) is valid if it only affects local wages through local market concentration. If there is a direct effect on local wages, then it is invalid. .pull-left[ .center[**Valid instrument**] <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-2-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ .center[**Invalid instrument**] <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" /> ] --- class: inverse, middle # Minimum wages --- # Minimum wages .bigger[**Policy Q:** Should the federal government increase the minimum wage to $15?] -- **Research Q:** How would a $15 minimum wage affect workers and employers? - **Q:** Would a higher minimum wage help low-wage workers? Would it reduce poverty? - **Q:** What are the tradeoffs of a higher minimum wage? - **Q:** Are there are any unintended consequences that we should be aware of? -- A great deal of economic research focuses on **how minimum wages affect employment**. - **Why?** Disemployment is one of the main (potential) unintended consequences. You only enjoy the benefits of a wage increase if you keep your job! --- # Minimum wages .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-4-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Theory** **Q:** How does a minimum wage **set below** the current equilibrium wage affect employment? ] --- count: false # Minimum wages .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Theory** **Q:** How does a minimum wage **set below** the current equilibrium wage affect employment? **A:** It doesn't. The current equilibrium wage **already satisfies** the minimum-wage requirement. No adjustments required! - At the same time, this minimum wage doesn't "do anything" for workers—no different than not having a minimum wage! - This is known as a **non-binding** minimum wage. ] --- # Minimum wages .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-6-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Theory** **Q:** How does a minimum wage **set above** the current equilibrium wage affect employment? ] --- count: false # Minimum wages .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-7-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Theory** **Q:** How does a minimum wage **set above** the current equilibrium wage affect employment? **A:** It reduces the number of employed workers. - **"Winners and losers:"** Workers who keep their jobs earn a higher wage, but workers who lose their jobs end up losing their labor income. - **Unemployment:** At the higher wage, the quantity of labor supplied exceeds the quantity demanded. ] --- # Minimum wages .pull-left[ ## **Evidence** There is considerable variation in estimates of the effect of minimum wages on employment! Most studies use **difference-in-differences designs**, but differ on other margins: - **Data** (*e.g.,* surveys *vs.* administrative data) - **Sample** (*e.g.,* restaurant workers only, teens only, all low-wage workers, *etc.*) - **Modeling** (*e.g.,* choice of control variables) - **Increases considered** (*e.g.,* case studies, federal increases, state increases, *etc.*) ] .pull-right[ <img src="dube_2019.png" width="315" style="display: block; margin: auto;" /> .footnote[*Source:* Arindrajit Dube (2019), [Impacts of Minimum Wages: Review of the International Evidence](https://www.gov.uk/government/publications/impacts-of-minimum-wages-review-of-the-international-evidence), *Report prepared for Her Majesty's Treasury (UK)*.] ] --- # Minimum wages .pull-left[ ## **Evidence** There is considerable variation in estimates of the effect of minimum wages on employment! Most studies use **difference-in-differences designs**, but differ on other margins. .hi[There is even disagreement about how to summarize the empirical literature!] ] .pull-right[ <img src="neumark_shirley_2021.png" width="613" style="display: block; margin: auto;" /> .footnote[*Source:* David Neumark and Peter Shirley (2021), [Myth or Measurement: What Does the New Minimum Wage Research Say About Minimum Wages and Job Loss in the United States?](https://www.nber.org/papers/w28388), *NBER Working Paper 28388*.] ] --- # Minimum wages ## **What do we know so far?** The traditional neoclassical model predicts **an unambiguous decrease** in employment! Economists disagree about how minimum wages affect employment, but it does appear that some increases in the minimum wage increased employment. -- This raises important questions! - **Q:** Is the neoclassical model wrong? What is missing from our analysis? - **Q:** How do employers respond to increases in the minimum wage? On what margins do they make adjustments? --- # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-10-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Consumer prices** Firms can respond to a binding minimum wage by **increasing the price** of the output good. - This is known as **pass-through**, which can partially **offset** the effects of a wage increase. ] --- count: false # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-11-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Consumer prices** Firms can respond to a binding minimum wage by **increasing the price** of the output good. - This is known as **pass-through**, which can partially **offset** the effects of a wage increase. - The ability of firms to increase prices depends on consumers' sensitivity to changes in price. In this example, the **decrease in employment is smaller** than when prices are held constant, but unemployment remains. ] --- # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-12-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Fringe benefits** Firms can respond to a binding minimum wage by **cutting fringe benefits**. - In addition to reducing supply, decreases in non-wage compensation also increase demand!.super[.hi-pink[<span>†</span>]] .footnote[.super[.hi-pink[<span>†</span>]] Fringe benefits affect the marginal cost of hiring a worker, but our previous analysis of profit maximization implicitly assumed that firms do not provide non-wage compensation.] ] --- count: false # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-13-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Fringe benefits** Firms can respond to a binding minimum wage by **cutting fringe benefits**. - In addition to reducing supply, decreases in non-wage compensation also increase demand!.super[.hi-pink[<span>†</span>]] In this example, the decrease in fringe benefits **perfectly offsets** the wage increase. - No unemployment! .footnote[.super[.hi-pink[<span>†</span>]] Fringe benefits affect the marginal cost of hiring a worker, but our previous analysis of profit maximization implicitly assumed that firms do not provide non-wage compensation.] ] --- # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-14-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Effort requirements** Firms can respond to a binding minimum wage by **making employees work harder**. - Working conditions become less desirable, which decreases labor supply. - Marginal product of labor increases, which increases labor demand ] --- count: false # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-15-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Effort requirements** Firms can respond to a binding minimum wage by **making employees work harder**. - Working conditions become less desirable, which decreases labor supply. - Marginal product of labor increases, which increases labor demand In this example, employment decreases, but there is no unemployment. ] --- # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-16-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Profit** **Q:** How would a monopsonist respond to a binding minimum wage? ] --- count: false # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-17-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Profit** **Q:** How would a monopsonist respond to a binding minimum wage? **A:** Hire additional workers at a higher wage!.super[.hi-pink[<span>†</span>]] - No unemployment, either! .footnote[.super[.hi-pink[<span>†</span>]] This is true up to a point. If the minimum wage is set above the value of marginal product of the last worker hired in an unregulated monopsony, then employment will decrease.] ] --- # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-18-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Profit** **Q:** How does this work? ] --- count: false # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-19-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Profit** **Q:** How does this work? **A:** The minimum wage "bends" the marginal cost curve. - In this example, the last worker hired is now paid the value of her marginal contribution! ] --- count: false # Margins of adjustment .pull-left[ <img src="12-Minimum_Wage_Debate_files/figure-html/unnamed-chunk-20-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ ## **Profit** **Q:** How does this work? **A:** The minimum wage "bends" the marginal cost curve. - In this example, the last worker hired is now paid the value of her marginal contribution! ] --- # Other margins of adjustment **Q:** How else could employers respond to increases in the minimum wage? -- - Long-run substitution toward capital? - Substitution toward other kinds of lasbor (*e.g.,* lower-skill to higher-skill)? - Non-compliance? -- **Q:** Why do these responses matter? -- - **A:** They determine whether minimum wage increases will have the intended effect of helping low-wage workers! --- # Minimum wages ## **What do we know?** -- The evidence on employment effects is mixed! -- That said, a closer look at **theory suggests that** the size and direction of **employment effects are ambiguous!** - **It depends!** In particular, it depends on - How much firms can increase prices - How much firms can cut non-wage compensation - Whether firms can adjust their production process - Whether firms have market power - The ability of firms to substitute toward other inputs - Compliance with the law -- Perhaps we should expect **heterogeneous effects?** --- # Minimum wages ## **Where is the empirical research frontier?** -- **Q:** *When* do minimum wages help low-wage workers? When do they hurt? - *Average* effects can provide useful summaries, but they can also mask a lot of interesting variation! -- **Q:** What is the **optimal** way to help low-wage workers? - Do other policies (*e.g.,* the EITC) provide the **same assistance at lower cost** (or more assistance at the same cost)? - Are there other things we should consider (*e.g.,* political feasibility) when making this judgement? --- # Housekeeping **Assigned reading for Monday:** [Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle](https://www.nber.org/papers/w23532) by Ekaterina Jardim and coauthors (2017). - Reading Quiz 7 is due by **Monday, February 21st at 12:00pm (noon)**. - The quiz instructions will include a reading guide.