So if we really, really boost the minimum wage, what happens?

 

One reason I really like the idea of expanded wage subsidies over an expanded minimum wage is that the former is the lower risk way to help low-income workers. More evidence of that in a New York Times pieces: “Raising Floor for Minimum Wage Pushes Economy Into the Unknown.” It makes clear that proposals to sharply raise the minimum wage are, well, complicated:

Even where the proposals are politically viable, the economic challenge could prove daunting. That is because the sheer magnitude of the recent minimum wage increases sets up an economics experiment the country has rarely if ever seen before. … The businesses best suited to the higher-wage world often lean more heavily on machines than their competitors or derive greater economic benefits from paying their workers a higher wage.

Along the same lines is a bunch of cautionary research highlighted in the Economist:

… Isaac Sorkin of the University of Michigan argues that firms may well substitute machines for people in response to minimum wages, but slowly. Mr Sorkin offers the example of sock-makers in the 1930s, which took years to switch to less labour-intensive machines after the federal minimum wage was brought in.  … The lack of evidence for a big impact on employment in the short term does not rule out a much larger long-term effect. …

In a second paper, written with Daniel Aaronson of the Federal Reserve Bank of Chicago and Eric French of University College London, Mr Sorkin goes further, offering empirical evidence that higher minimum wages nudge firms away from people and towards machines. The authors look at the type of restaurants that close down and start up after a minimum-wage rise. An increase in the minimum wage seems to push some restaurants out of business. The eateries that replace them are more likely to be chains, which are more reliant on machines (and therefore offer fewer jobs) than the independent outlets they replace. …

The third cautionary paper is from Jonathan Meer of Texas A&M University and Jeremy West of the Massachusetts Institute of Technology. Studies typically hunt for a fall in employment in response to a minimum-wage increase. But if the increase affects the rate of growth in employment, rather than the level, differences would appear slowly over time.  … Their results suggest that a 10% increase in the minimum wage, made permanent by linking it to inflation, could cut job growth by 0.3 percentage points a year. Over a long period, this could amount to a very large difference indeed, though the authors stress that such long-run extrapolations are difficult given the limited experience of such permanent changes. Worryingly, the effects on jobs growth they see are concentrated among people under 25, and those without a degree. These are vulnerable groups who risk being locked out of the labour force for good. … The evidence so far may therefore be a poor guide to the effects of the latest wave of minimum-wage rises. Although the short-run effects seem mild, large increases could be storing up big problems for the future.

Or as Andrew McAfee tweets:

 

 

Sarah Gustafson of AEIdeas contributed to this post.

 

 

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