June 23, 2022
There’s new minimum wage evidence from Seattle, ground zero for contestation over price floors on labor.
A recent paper in the AEJ: Economic Policy illustrates some of the margins of adjustment which come into play with the constraint of a minimum wage. Here’s a brief description from AEJ: Economic Policy:
“The authors say the ordinance (which includes increases every year through 2024) appears to have delivered higher pay to longer-tenured workers while reducing earnings and opportunities for those with no prior work experience. Overall, Seattle employers appeared to respond to the minimum wage hikes by reducing hours rather than headcounts in the short run. Then, as workers left, employers restored some of those hours to the people who remained.”
As with many of the best empirical papers, one image tells most of the story:
As I recently noted for the Independent Institute, a reduction in hours is a common way for firms to adjust in light of new binding constraints:
“In other words, employers may adjust to a minimum wage by slashing employee hours, even without reducing the number of workers on the payroll. It’s common for economists to discuss how kiosks can substitute for low-skilled workers in the fast-food context. But notice how this point is consistent with a.) maintaining the size of a workforce and b.) simply having laborers work fewer hours. When companies install kiosks, they simply don’t need as many (human) hands on deck, at any given moment. Instead of the teenage, fast-food workers coming in every day, they might rotate, and each comes in every other day.
Steven Landsburg, in a comment here, notes something even subtler about underemployment. To get to the punchline, it’s possible that increasing the minimum wage can increase the total number of workers companies hire. This result is consistent with the law of demand because the higher minimum wage still decreases the total number of hours purchased.
Here’s how it works: Let’s suppose before the minimum wage a teenager works the store from 11 am to 7 pm. His busy hours are at noon and six. For the rest of the time, he mostly stares at his phone. With an increase in the minimum wage, the store owner no longer tolerates such shirking (see above). Rather than monitoring this worker (there’s not much for him to do anyway, so the benefits of monitoring are low), the owner simply closes the store during the slow hours. Finally, the owner rearranges his workforce a bit. He hires a worker for the noon hour and the six o’clock dinner hour—and he’s closed in between. More than likely, it’s not the same worker for both hours, so the total number of people he’s hired increases, while the total number of labor hours purchased falls. “Job loss,” of sorts.”
Increasingly sophisticated empirical techniques, like synthetic controls, are one great way of identifying just where these marginal adjustments show up. In my view, this analysis should generate further questions. What explains variations in these margins? Is there a political economy angle that allows us to explore whose income changes as a result of price controls and, as a result, who supports and opposes them?