The risks of California’s minimum-wage increase

https://www.washingtonpost.com/opinions/the-risks-of-californias-minimum-wage-increase/2016/03/30/6d58cc6a-f68e-11e5-a3ce-f06b5ba21f33_story.html

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A hot concept in wonkdom these days is “evidence-based policymaking.” If, for example, educators try “career academies” for low-income high school students, and data show that students get higher earnings later, then career academies should get more funding.

So widespread is support for this notion that even the House and Senate agreed to set up a federal commission “to make recommendations on how best to incorporate outcomes measurement, institutionalize randomized controlled trials, and [add] rigorous impact analysis into program design.” President Obama signed the bill on Wednesday.

Meanwhile, in California, Democratic Gov. Jerry Brown and the state’s labor leaders have announced legislation to raise the state’s minimum wage from $10 to $15 per hour; it’s likely to pass the Democratic-majority legislature.

Whatever else might be said about this plan, it does not represent an exercise in evidence-based policymaking.

To the contrary: There’s a total lack of evidence that the potential benefits would outweigh potential costs — and ample reason to worry they would not.

The basic trade-off, per Economics 101, is that the increased earnings that a higher minimum wage gives workers at the low end of the income scale might be offset by pricing those workers out of jobs they could have had at less than the new, higher minimum wage.

That view has been modified, a bit, in recent years to reflect research by Alan Krueger and David Card suggesting that employment effects of moderate increases in the minimum wage — the kind typically enacted by Congress — can be neutral or slightly positive, due in part to greater employee retention and higher productivity.

The key word there is “moderate.” California’s increase is huge, or, in the Brooklynese of that proponent of “15 bucks an hour,” Sen. Bernie Sanders (I-Vt.), “Yuuuge.”

By 2022, when fully phased in (small firms with fewer than 25 workers would have until 2023 to comply), the California minimum wage would represent 69 percent of the median hourly wage in the state, assuming 2.2 percent annual growth from the current median of roughly $19 per hour.

That 69 percent ratio would be all but unprecedented, in U.S. terms and internationally. The current California minimum wage represents about half the state’s median hourly wage, just as the federal minimum wage averaged 48 percent of the national median between 1960 and 1979, according to a 2014 Brookings Institution paper by economist Arindrajit Dube. (It is currently 38 percent of the national median.)

Other industrial democracies with statutory minimum wages typically set theirs at half the national median wage, too.

Dube, generally a supporter of minimum wages, recommended that states use 50 percent of the median as their benchmark in the United States. (He told me by email that California’s experiment is worth running and monitoring.)

Krueger has written that a “$15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences,” though he said it might be okay in certain high-wage cities and states.

In short, California has no idea what it’s getting into, because it can’t; there is simply no experience from which to learn.

Economic theory strongly suggests, however, that the California bill’s planned minimum wage increases, which would be followed by annual inflation adjustments of up to 3.5 percent, will incentivize employers to start investing now in labor-saving technology.

That would be consistent with a 2013 paper by economists Jonathan Meer of Texas A&M University and Jeremy West of MIT, which found that the negative job impact of higher minimum wages is mainly felt over the longer term, in the form of slower employment growth.

They estimated that a 10 percent permanent increase in the real minimum wage reduces employment by about 0.7 percent after three years, with the greatest impact felt by younger workers and in industries with a higher proportion of low-wage workers.

Obviously, the California governor was responding not to facts and evidence but politics, with a Sanders-Hillary Clinton primary battle looming, and labor unions planning a “$15 an hour” referendum for the November ballot — though Brown did reveal his misgivings, and added to the bill’s complexity, by insisting on a provision that allows for delayed future increases if they would hurt the state economy or blow up its budget.

Let’s put it this way: It might be the case, as advocates contend, that California’s massive minimum-wage hike wouldn’t reduce job opportunities and could even increase them. If so, more people would experience a pay increase while no one would end up shut out of employment altogether.

There is unavoidably a risk that they’re wrong, though — that the result of this experiment would be more people who end up with nothing. That risk seems especially high because California is operating in a data vacuum.

And all the risk would be borne by entry-level, low-income workers — i.e., the very people that a higher minimum wage is supposed to help.

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