July 06, 2016
There are serious arguments to be made against raising the minimum wage to $15. At this point we really don’t have enough data to say with much certainty what the employment impact will be. But we do know that the story that Peter Salins tried to sell readers in his NYT column is wrong.
Salins, a professor of political science at Stony Brook University and a senior fellow at the Manhattan Institute, is a big advocate of an expanded earned income tax credit as an alternative to a higher minimum wage. He tells readers of his estimate that a $15 minimum wage would cost 3 million jobs and then adds:
“Regardless of the magnitude of job cuts caused by a minimum-wage increase, all the workers who lost jobs as a result would be ineligible for the earned-income tax credit. In most states they would receive unemployment insurance for up 26 weeks at a level well below their former earnings; after that, their income would fall to zero.”
The problem with this story is that it completely misrepresents the nature of the low-wage labor market. The jobs that pay near the minimum wage tend to be high turnover jobs. According to the Bureau of Labor Statistics’ Job Opening and Labor Turnover Survey, over 6.0 percent of the workers in the hotel and restaurant sector leave their job every month. That comes to more than 72 percent annually. In the strong labor market at the start of the century the turnover rate was over 8.0 percent monthly.
Given this rate of turnover, the story of job loss due to the minimum wage is not a story of people losing their jobs and going without work for the rest of the year. It’s a story of people taking longer to find jobs when they lose or leave their job. This means that there will be few workers who go without work for a whole year and see their income falling to zero, as described by Salins.
It is possible that a higher minimum wage will lead to enough job loss that the net effect will be to reduce the annual pay of a large portion of low-wage workers. This is a reasonable concern, which we will be better able to answer as we experiment with higher minimum wages, but it will not be a story of millions of losers going without employment altogether, as Salins implies.
It is striking how plans to raise the minimum wage invariably brings out calls for an expanded Earned Income Tax credit (EITC) from conservatives. This is a good policy, hopefully it will be part of the mix of measures that will raise the income of low-wage earners. (A full employment policy from the Federal Reserve Board is also a big part of this picture.) It is worth noting that in standard economic models, the EITC will also lead to lower employment, since it requires more taxes and/or more borrowing, which leads to economic distortions, slower growth, and fewer jobs.
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