Saturday, December 7, 2013

Minimum Wages in the 2008 Recession

Before I bring all of the issues together from the previous posts, regarding the 2008 recession, I want to look at the minimum wage, alone.  The BLS publishes annual surveys of minimum wage worker characteristics.  So, I can compare the number of minimum wage workers from the BLS reports to the number of workers affected by the minimum wage increase, which I have estimated by using the correlations from past MW episodes.

All of these graphs are additive (the lines are stacked).

Edit:  After looking some more at the relationship between the MW and the proportion of workers at or below MW, I noticed a non-linearity at the low end of the range, where MW levels were in 2007.  The first hike in 2007 hardly budged the proportion of workers at MW.  This was likely because the legislated MW had fallen below the typical voluntary MW.  This finding led me to discount the disemployment effects of the most recent episode, with changes large enough that I have edited the numbers here, and replaced the graphs with updated graphs.

Total Employment

This first graph is for the entire labor force, expressed as a percentage of the labor force.  What we see is that as the minimum wage was increased from $5.15 to $7.25, the number of workers at or below minimum wage increased from 1.2% to a peak of 2.8%, falling to 2.4% by the end of 2011.

If the forecast from past MW episodes is accurate, then, over that time, we should expect that 1.4% 0.9% of workers have become unemployed as a result of the MW hike and an additional 2%  1.6% have left the labor force.

I don't find this surprising, considering the latest string of MW hikes lifted the nominal wage price floor by 40%.

Old Graph

2.4% Employed at wages up to 40% higher
3.4% Exit employment coincident with MW hikes
2.5% Exit employment coincident with MW hikes

If this is accurate, then, not only are there tremendous deadweight losses, but, for every dollar gained in wages nearly $5 about $3.50 in wages have been lost by the job losers.

Young Workers

Since about half of minimum wage workers are under 25 years old, my intuition was that this would mean that age group would really get dinged.  But, I think the result is kind of interesting.

For 16-24 year olds, the proportion of workers at or below minimum wage starts out at 3.8%, rises to 10.3%, and then falls to 8.8% by the end of 2011.

On the other hand, I estimate that by March 2011, 2.4% 1.9% had become unemployed and 2.7% 0.2% had come into the labor force.

So, at first glance, this seems worse than for the population as a whole, because 5.1% of young workers are losing their jobs versus 3.4% of older workers.
old graph

But, since so many young workers earn minimum wage, this is a much smaller percentage of the number of workers affected.  In addition, according to the historical regressions, young workers recover earlier in the episode, so that, by the end of 2011, only 4.1% 0.7% of young workers are unemployed or out of the work force, coincident with the MW hike.

8.8% Employed at wages up to 40% higher
4.1% Exit employment coincident with MW hikes
0.7% Exit employment coincident with MW hikes

For this age group, for each dollar of higher wages earned, only about $0.27 was estimated lost.  This still seems like a bad deal, but it's not nearly as bad as for the rest of the labor force.  Possibly this episode of MW hikes benefitted young workers.

Additionally, since there appears to be a substitution effect between 16-19 year olds and 20-24 year olds, I suspect that 20-24 year olds are actually gaining here at the expense of 16-19 year olds and everyone else.  Although, I have to admit, looking at the raw labor force participation rates and unemployment rates for the 16-19 and 20-24 year olds, they both seem to have the same trends through the recent period of time.  My lack of success in finding anything to back this up is causing me to doubt the notion that I have developed about the substitution between these ages.

Workers 25 and Older

If we subtract the younger workers from the data, the data for workers 25 and older looks like this.  This is shown in thousands of workers instead of percentages:
Here, by the end of 2011:

1.8 million Employed at wages up to 40% higher
4.3 3.6 million Exit Employment

Here, $6.60 is lost for every $1 in higher wages.

old graph
I had expected to see most of the pain borne by the younger age group, so this has been a surprising finding to me.  This leads to the question, if the outcomes are worse for older workers, does the higher minimum wage especially hurt the older, poor, full-time workers that MW proponents intend to help?  (There are very, very few workers in this category among MW workers, according to the BLS, incidentally.)  Or, since MW jobs tend to be marginal and part-time, does this exodus from the job market among older minimum wage workers simply reflect life-style jobs people have for non-pecuniary reasons, which they leave when the higher wage floor requires a heightened work environment?  The mix of jobs in the BLS surveys appears to be remarkably stable throughout the period of rate hikes.  I haven't found any clues to answer this question.

Of course, there is also the possibility that my forecast model is simply mis-calibrated, but I think these graphs are helpful, because they help to create a visual comparison of the costs and benefits.  Even if net wages were unchanged as a result of a MW hike, the dislocations caused by the law would create a net harm.  But, even to justify it on those grounds, the total number of jobs lost would need to be a small fraction of the jobs retained.  My model claims that over 5 nearly 4 million workers lost their jobs in the last wave of MW hikes.  That number would have to be in the low hundreds of thousands for the law to deserve any deference.

In any case, I hope now to use these more definitive numbers to try to quantify the effects of MW, Emergency Unemployment Insurance, and Demographics on recent labor statistics.

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