Minimum wages impede job growth in the long run

jmeer

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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