Minimum wages impede job growth in the long run

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Jonathan Meer at IZA

There is hardly any other topic in the economics profession with more diverging opinions, empirical evidence and policy recommendations than the effect of minimum wages on employment. Jonathan Meer (Texas A&M University and NBER) and Jeremy West (MIT) provide a new angle in this discussion: the long-term effects of minimum wages through changes in the rate of job growth.

In their study, they conclude that by focusing on immediate discrete changes in employment levels, previous studies have likely understated the “true” employment effects of minimum wage policies. We spoke with Jonathan Meer after his presentation in the IZA research seminar.

Minimum wages are one of the hottest topics of debate among economists. What is your take in this discussion?

Meer: My view is that the minimum wage is a blunt and deeply flawed policy instrument intended to achieve a worthy and important policy goal – namely, transferring resources to less-well-off people. My research with Jeremy West shows that the effects are more subtle than previously thought – essentially, the minimum wage reduces the rate of job growth rather than leading to substantial job losses that are readily seen in the data. It’s not that people get fired, it’s that they’re never hired in the first place. That’s particularly problematic because of the importance of early-career labor market experience.

Germany just introduced a national minimum wage in January 2015. What is your advice for a proper evaluation of this major policy change?

Meer: Truly evaluating the policy change would involve carefully examining the behavior of firms and individuals, both employed and unemployed. An increase in the cost of the labor has to be borne through some combination of consumers (through higher prices), business owners (through lower net revenues), and employees (through changes in employment status and compensation). It’s especially important to see how the nature of employment changes, including possible reductions in hours of work and non-wage compensation.

The effects on different subgroups are important as well – those who are most marginally attached to the labor force are most likely to see adverse consequences. Employers won’t – they can’t – pay workers more than the value of the product they produce. Requiring a very high entry-level wage means that firms will do their best to find more productive workers, leaving those with low levels of education, adverse events like incarceration in their past, and disabilities on the outside.

In addition, to the extent that it is possible to relocate jobs to less-restrictive jurisdictions (for example, Poland’s minimum wage works out to about 3 euros per hour at full-time work), it’s important to track whether there is any such leakage.

What are alternative policies to help the working poor?

Meer: Wage subsidies are a vastly superior approach to the minimum wage. At least in the United States, many minimum wage workers are the high-school and college-age children of upper-middle and upper class families, with many households containing a minimum wage worker actually being quite well off.  Wage subsidies are better targeted at lower income people and they are paid for from general tax revenues.

It’s an odd philosophy to insist that the employers of low-wage workers are responsible for their entire well-being. Does that suggest that wages should be means-tested, and that an employer should pay a single mother with three children more than a married father with one child? Wage subsidies are far more progressive, with the funds being paid for by taxes on the relatively well-off rather than concentrating the costs on employers who hire these workers.

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Challenges for African migration to Europe discussed at the 12th Annual Migration Meeting in Dakar, Senegal

The 12th Annual Migration Meeting (AM²) organized by IZA, the University Cheikh Anta Diop of Dakar and CRES under the leadership of IZA Program Director Amelie Constant, is currently under way in Dakar/Senegal. The central topic of this year’s meeting is migration from Africa to Europe. Last week alone, several hundred young Africans lost their lives on their way to Europe seeking a better life. The ongoing tragic loss of lives in the Mediterranean Sea makes migration from Africa to Europe one of the most pressing policy challenges at the moment.

The Policy Symposium within AM² on April 21 brought together dignitaries, policymakers, academics, and representatives of migrant organizations who discussed how such human tragedies can be avoided and how migration can help Africa to thrive economically.

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Diop, Zimmermann, Bon

His Excellency Souleymane Jules Diop (Secretary of the State of Affairs of the Senegalese Abroad), IZA Director Klaus F. Zimmermann, Professor Abdoulaye Diagne (Director of CRES), and Yvain Bon (Representative of IOM, West Africa) highlighted the vast economic potential of migration for developing countries. Diop underlined the importance of the contributions of IZA in the migration area and expressed his appreciation for its initiative to be in Dakar: “We feel privileged to host your conference and engage in this important dialogue.”

In Senegal, diaspora plays a key role for the country’s economy. Remittances amount to 10% of GDP; they go into financing roads, schools and other infrastructure all over the country. The President of Senegal has asked for, is committed to and finances these active policies:

  • the protection and assistance of the Senegalese abroad
  • a project of successful repatriation of the Senegalese abroad
  • safeguarding the Senegalese youth in the country as they represent the future and the hope of the nation.

The four panelists agreed that immediate action is needed to stop the tragic deadly accidents in the sea. Europe and Africa need to enter a deeper cooperation in order to maximize the benefits of migration for both continents. As an effective solution, IZA Director Zimmermann suggested a system of circular migration conditional on jobs, which gives migrants the legal right to enter Europe and work for the agreed upon time, before returning to their home country.

Professors Mamadou Dansokho (CRES), Abdoulaye Diagne (CRES) and Pape Demba Fall (IFAN), gave a deeper insight into how migration is shaping the Senegalese economy. Perhaps surprisingly, Senegal is also a major destination for immigrants from other parts of West Africa. Dansokho’s research shows how migration and investment can go hand in hand. Diagne’s paper highlighted the positive role of the Senegalese diaspora in alleviating poverty.

Rural areas are no longer as vulnerable to natural disasters and bad harvests because diaspora networks act as an insurance, and provide more funds to local communities when they are hit by a weather shock. Demba Fall showed that internal migration is equally important for the development of the country as is international migration. Senegal is seeing a massive urbanization, which has transformed rural and urban areas, and increased inequality within the country. At the same time, many Senegalese have escaped poverty by moving from rural to urban areas.am2-2015c

The Symposium concluded with a round table of six experts on migration from Senegal, who expressed the following demands to policymakers:

  • The loss of lives in the Mediterranean, equivalent to the loss of the young generation has to stop immediately. Any delay costs lives.
  • The legal situation of migrants in Europe should be improved. Migrants need reliable rights to thrive at their destination.
  • Diaspora can be key to maximizing the gains from migration for Senegal. Diaspora associations should help Senegalese abroad to integrate, find work, and feel part of the society.
  • Diaspora associations should also encourage remittances and foreign direct investment, which should be channeled into projects that significantly improve the livelihoods of people.

Read more:

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Earth Day 2015: Recent IZA research on climate change and air pollution

earthApril 22 marks International Earth Day. Initiated by the Earth Day Network back in 1970 to raise global awareness for the importance of environmental protection, “Earth Day’s 45th anniversary could be the most exciting year in environmental history”, according to the UN, as “economic growth and sustainability join hands.”

Since the effects of environmental change on economic behavior are also a “hot” topic in economics, IZA has established a research program area for “Environment and Employment” in 2001. The IZA World of Labor online platform for evidence-based policymaking also features an Environment subject area including articles by IZA Program Director Olivier Deschenes (“Environmental regulations and labor markets”) and Nico Pestel (“Employment effects of green energy policies”).

Read these related stories in the IZA Newsroom:

Good news: Environmental policy can make a big difference!

pollutionA recent IZA Discussion Paper by Joseph S. Shapiro and Reed Walker finds that environmental regulations have dramatically improved U.S. air quality. Between 1990 and 2008, emissions of the most common air pollutants from U.S. manufacturing fell by 60 percent, even as real U.S. manufacturing output grew substantially. The paper examines three possible explanations:

  • Trade: Outsourcing the production of pollution-intensive goods to China, Mexico, and other foreign countries may have simply “exported” U.S. pollution.
  • Regulation: Environmental regulation may have led to the adoption of increasingly effective abatement technologies.
  • Productivity: If productivity decreases pollution intensity, then rising productivity may have decreased pollution emissions.
  • Preferences: Consumer preferences may have led people to demand goods that require less pollution to produce.
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U.S. manufacturing real output and manufacturing pollution emissions in the years 1990-2008.

The results suggest that regulation had the strongest effect. Key findings:

  1. The fall in pollution emissions is due to decreasing pollution per unit output within narrowly defined products, rather than to changes in the types of products produced or changes to the total quantity of manufacturing output.
  2. The implicit pollution tax that rationalizes firm production and abatement behavior more than doubled between 1990 and 2008.
  3. Third, environmental regulation explains 75 percent or more of the observed reduction in pollution emissions from manufacturing.

Read the complete paper:

Other IZA discussion papers on related topics:

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How hot weather impedes cognitive performance

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Matthew Neidell

The threat of climate change and its associated costs are prominent in a vital and ongoing public discourse around the globe. Columbia University economist Matthew Neidell (together with his co-authors Solomon M. Hsiang and Joshua Graff Zivin) analyzes a previously under-researched dimension: Does climate change affect the acquisition of skills and human capital? They find that while short-run changes in temperature indeed decrease cognitive performance in math, in the long run people are able to adapt to changes in regional climate. We met Matt after he presented his research in the IZA seminar:

Climate change is found to severely affect agricultural output and health. Is human capital formation affected by changes in temperature as well?

Neidell: In our research, we find that warmer temperatures affect how children perform on math assessments, though not reading assessments. These effects are rather immediate: a hotter day affects math performance on that same day.

At what temperature levels does cognitive performance suffer?

Neidell: Once temperatures reach about 23 degrees C we start to see declines, and this effect increases linearly as temperature increases beyond this.

Could climate change then have a detrimental effect on human capital?

Neidell: Although we find an effect from a warmer day, this does not necessarily translate into an effect from a warmer climate. The reason is because, unlike changes in weather, people are likely to adapt to long run changes in climate, and these adaptations may minimize the harm caused by a warmer climate. In our analysis we also look at the effect from longer run changes in temperature, but do not find evidence to support a relationship between climate and human capital. So while climate change is indeed a concern for many aspects of life, we contend that human capital is not one of them.

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On this topic see also a previous post in the IZA Newsroom:

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Air pollution impairs productivity of professional soccer players

smoccerAir pollution is the top environmental risk factor of premature death. Annual costs of environmental damage for the European countries range between 60 and 200 billion euros, according to the European Environment Agency. The trade-off between the population health benefits of limiting air pollution and the negative impacts on industrial activity and employment has been well documented in the economics literature. A new paper by IZA researchers Andreas Lichter, Nico Pestel and Eric Sommer looks at an aspect that is highly relevant in this context – the negative effect of environmental pollution on individual labor productivity.

The study is based on panel data for professional soccer players in Germany over the period 1999-2011. Professional sports data offer consistent and comparable measures of productivity, which are largely missing for other occupations. The authors use a player’s total number of passes per match as the main productivity indicator and combine this data with hourly information on the concentration of particulate matter in spatial proximity to each stadium at the time of kickoff. The match scheduling rules of the “Bundesliga” are beyond the control of teams and players. This setting creates exogenous variation in the players’ exposure to air pollution, thus overcoming endogeneity concerns arising from residential sorting and avoidance behavior.

The findings indicate negative and non-linear effects of air pollution on short-run productivity even for levels well below the current limits set by the European Union. The impairment of performance further increases with the age of players and is stronger if they face an additional physical burden. Given that even moderate concentrations of particulate matter negatively affect the productivity of a selective group of young and male athletes to a considerable extent, the authors conclude that environmental pollution does not only affect population health but also impedes economic growth.

Download IZA Discussion Paper No. 8964 (PDF):
Productivity Effects of Air Pollution: Evidence from Professional Soccer

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Jan Svejnar wins 2015 IZA Prize in Labor Economics

jan_svejnarThe 2015 IZA Prize in Labor Economics goes to Czech-born economist Jan Svejnar, the James T. Shotwell Professor of Global Political Economy and Director of the Center on Global Economic Governance at Columbia University’s School of International and Public Affairs, New York.

Professor Svejnar will receive the IZA Prize, widely regarded as the most prestigious science award in the field of labor economics, for his major contributions to comparative economics in general and the economics of transition in particular. The award ceremony will be held during the annual IZA/World Bank Conference on Employment and Development in Bonn, Germany, June 4-6, 2015.

iza_prize_medalAccording to the award statement by the IZA Prize Committee, Professor Svejnar’s research on the transition from socialist to market economies “has broadened our understanding of this process in a fundamental way”. Soon after the fall of the Iron Curtain, Svejnar provided an elaborated policy agenda for a successful transition from socialist to market economies. In a seminal article published in the Journal of Economic Perspectives (1991), he emphasized the need for micro adjustments to achieve macro stabilization in the transforming socialist economies.

Svejnar’s policy proposal emphasized the importance of a suitable legal framework to guide economic activity, the need for firms to become more efficient through strong incentives for managers and workers of state enterprises, as well as specific social and labor market reforms to enhance labor mobility. His reform proposals, particularly concerning the legal framework and corporate governance, contributed substantially to the performance of the transition economies.

Beyond his academic accomplishments, Professor Svejnar has served as an advisor to governments, international institutions, non-profit organizations and private-sector companies. He also served as Economic Advisor to the late Czech President Vaclav Havel and was one of two presidential candidates in the Czech Republic in 2008.

See press releases by: IZA | SIPA, Columbia University

Read what other prominent economists say:

“Jan Svejnar is among those top economists who always have a policy perspective in mind. His insights have provided policymakers with the tools to master Europe’s greatest post-war challenge – the successful transition of the formerly socialist economies.”

(Klaus F. Zimmermann, IZA Director, University of Bonn)

stiglitz_cr“I want to congratulate my colleague Jan Svejnar for receiving the prestigious IZA Prize in Labor Economics. His contributions to our understanding of governance, globalization, and government policy – among many other topics – very much deserve this honor.”

(Joseph E. Stiglitz, Columbia University, 2001 Nobel Laureate
in Economics, 2005-2007 IZA Prize Committee)

ashenfelterJan Svejnar’s pioneering work on the transition of economies from centrally planned to market oriented has had enormous influence on both public policy and academic scholarship. Born in Czechoslovakia, Jan is himself an example of successful transition and an ideal selection for the prestigious IZA Prize.

(Orley C. Ashenfelter, Princeton University, 2003 IZA Prize Laureate)

krueger_cr“Jan Svejnar is a wonderful choice for the 2015 IZA Prize.  From his research on worker participation in firm management to the economics of transitioning communist countries, Jan Svejnar has had a profound influence on economics.  Indeed, Svejnar helped to establish the entire field of transition economics.”

(Alan B. Krueger, Princeton University, 2006 IZA Prize Laureate)

blank_cr“Jan Svejnar’s work has deepened our understanding of the pitfalls and opportunities facing emerging market economies. His analysis has contributed to economists’ theory and knowledge, but also has had direct effects on the policy choices made in various countries. The IZA Prize is a well-earned honor.”

(Rebecca M. Blank, University of Wisconsin-Madison,
2015 IZA Prize Committee)

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What France can learn from Italy about labor market reforms

kfz-italy-franceIn an opinion piece published in the Wall Street Journal, IZA Director Klaus F. Zimmermann analyzes European policymakers’ latest efforts at implementing difficult but necessary labor market reforms. Zimmermann sees remarkable progress in Italy, but lack of action in France. These are the key points he makes:

  • The coming battles over Europe’s troubled economy will be won not in Athens — but mainly in Paris and Rome.
  • The real surprise now is that it is Italy, not France, that has taken serious steps on enacting key measures on labor market reform.
  • While it is now more enticing to hire in Italy than it has been in years, things in France are progressing much more tentatively.
  • The Italian government has shown the way by creating the legislative framework for overcoming the two-tier labor market, while the French government is still dabbling with reforms that are only slightly more than symbolic.
  • Paris still shies away from other essential steps, such as making its rigid work-week regime more flexible by reforming the 35-hour work week and addressing overly rigid employment protection. These measures would bring the goal of economic growth and lower unemployment closer.

Read the full article (subscription required).

 

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