EconBuff Podcast #21 with Rex Pjesky
Dr. Rex Pjesky talks with me about minimum wage. Dr. Pjesky walks us through how markets work and how labor markets respond to minimum wage laws. We discuss how wages are determined and why costs and prices go up and output must go down in the presence of minimum wage laws. We explore the data on the characteristics of minimum wage workers, and Dr. Pjesky explains how those characteristics should inform policy. Dr. Pjesky argues an understanding of how markets function has strong implications for understanding the dynamic implications of minimum wage, and I summarize the best and most recent empirical research on the topic, highlighting the study of Seattle's recent minimum wage hikes. Finally, Dr. Pjesky outlines why minimum wage is an inefficient and poor transfer program, we discuss alternatives to minimum wage, and we explore how Dr. Pjesky would like to see the field of economics study poverty in the future.
Transcript
Stitzel: Hello, and welcome to the EconBuff podcast. I'm your host, Lee Stitzel. With me today is Dr. Rex Pjesky, Professor of Economics at West Texas A&M University. Rex, welcome.
Pjesky: Good to be here Lee.
Stitzel: So, our topic today is minimum wage. So, it's one of those topics that economists end up tackling a lot. So, we're going to, kind of, break this into two rough parts here. We're going to start with a little bit of theory, and then we're going to dive into, some of, what the empirical work is, and just some data and statistics on that. So, Rex, start us off. I think most of our listeners are going to know what minimum wage is; but start us off with a nice, tight, little definition of it, and then we'll talk about some of the theory.
Pjesky: Well, a minimum wage law would be a law that[s] stated that a business can't hire an individual to work for less than some threshold. So right now, I think, what is it? $7.25 an hour federal?
Stitzel: That's right.
Pjesky: And different places have different, you know, different thresholds. But, you know, right now in Canyon, Texas (which is where I am, you know) I could not hire someone --- or, you know, a fast-food restaurant couldn't hire someone --- to work for $7.00 an hour, all right? So, they have to pay at least $7.25 an hour. There are places around the country [like] San Francisco [and] Seattle that have higher thresholds; but right now, the federal minimum wage in The United States is $7.25 an hour.
Stitzel: And there's a really wide variation in what that is, right? So, it goes as high as like $16.40 or something like that in Seattle. A lot of states have it, you know, $10.00 or $15.00. I guess not many states have it at $15.00, but there's a couple of [them that do]. Like Washington D.C. for example, has it at $15.00. But there's an enormous amount of variety there. So that's what kind of makes it interesting, I think, that there's a pretty long history of the federal one being the highest (if you will or being the state's not having some). And then we're starting to see a lot of changes recently in both cities and states upping theirs. So that's, kind of, what prompts this discussion. So, what I want you to do now is: just walk us through what our economic theory would have to say about that. And let me set it up just a little bit. I think one of the things that is so fascinating to me about this is if we were in any other field, right, we would say: well, we have this theory, we're physicists, we have a theory, and we want to go test that theory. It's not that we don't. The empirical part is good, but the theory is really important. I want to impress that upon the listeners [about] that. And I'm not talking about [the fact that] we plucked something out of the air. Like, these/this is something that's well studied, and well laid out, and it's a really strong basis from where we would start with this kind of thing. It needs to be taken very seriously. So, Rex, lay out the theory for us on how minimum wage would playout in labor markets.
Pjesky: Right. The, you know --- if we're going to think about the minimum wage like an economist would think about the minimum wage, [then] it's incredibly important to start with the theory. Because any economist, or anybody who thinks like an economist, is going to start from that point. So, we have this notion in economics about how, in general, prices are formed in a decentralized decision-making system --- which is what we have in The United States and what we have in most of the, you know, in most of the world. Now when later in the podcast when we start talking about policy, you know, there may be some empirical results that drive policy; and there might (and there may) be some trade-offs that policy makers and the voting public are willing to make. But that --- none of that changes the basic theory of the economics behind how wages are determined. So that's what I want to talk about first. When you're talking about prices specific, or wages specifically, or prices in general --- economists start out with supply and demand. I apologize [as] this might get a little wonky for a few minutes. I'll try to minimize that as much as possible. But basically, what you have in a labor market is [that] you have firms demanding inputs of production, [whereas] one of them is wages. So, if firms are going to produce, [and] if firms are going to operate, [then] they're going to have to hire workers to be a part of that production process. So, firms are going to look for ways to minimize their costs. Firms are going to look for ways to maximize their profits. And so, there's all kinds of decisions that individual firms, and firms within individual industries, and industries within the larger economy are making. So, they're thinking about: what should we produce, all right? How much of this should we produce? How should we best produce what we're making? So, sort of, collapsing the millions of production decisions that a firm might make to, you know, produce, you know, hamburgers, or cars, or whatever else --- you know, those three, kind of, encapsulate all of them in a very general way. So, you know, firms are --- again, you know, to repeat --- firms are deciding what to produce. Firms are deciding how much to produce. And firms are making decisions about how best to organize their production to make that quantity. So, the goal of the firm in all this is to maximize profits and minimize costs. Any listener that you have out there that's taken quite a bit of economics will recognize that those are, kind of, two sides of the same coin. So, profit maximization decision and a cost minimized decision are very --- they're parallel. You know, they’re parallel processes. So, to maximize profits --- you have to, you know, you have to minimize costs. On the other side of the market, you have workers. And workers are deciding whether or not to work. Workers are deciding how much do I work (If I'm going to work). You know, workers will sort of position their training, their career, [and] their experiences to, sort of, angle towards a certain kind of job. And workers are --- in the lingo of economics --- workers are trying to maximize their utility, all right? So they're making the same kinds of decisions, in the same kind of context that producers are. So, what kind of work do I want to do? How much do I want to work – things, you know, things like that. What influences those decisions in my own individual life, with my own individual preferences, that will lead to the decision to work or not? How much etc.? So, what a market does --- a market is, sort of, a theoretical representation --- or at least the way economists study markets, it's a theoretical representation --- on how all of those individuals, sort of, meet together and shake out all of the ultimate decisions that we see manifest in the economy. So, the big picture of a marketplace is all of the firms rushing to market with their decisions on what to produce, how much, and how, all right? All the workers rushing to market with their preferences, all right? [And] their decision on how much do I want to work? What kind of work [do] I want to try to do? You know, those kinds of decisions. And the big picture of that will match up all of these firms making offers for employment with all of these workers making you know accepting offers of employment. So that's the big picture, all right? And that's, sort of, what's going on [with] the supply and demand curves (that you may have learned about in economics class if you've had one). That's what's going on behind the scenes of supply and demand. You've got all of these individual firms. And you've got all these individual workers in a labor market, and they are/they're making all these decisions. And out of that process will, sort of, pop out the answers to the questions that everybody [has been] asking to begin with. What kind of jobs are going to be offered, all right? What kind of products are going to be produced? How many of these products are going to be produced? O.K., how are they going to be produced, because there's lots of different ways that firms can solve the same problem, all right? So, there's lots of different ways to make a hamburger. There's lots of different ways to make a car. There's lots of different ways to make a computer. There's lots of different ways to dig a ditch, all right? And so, markets solve all of those problems. And one of the things that pops out of that market process is a wage for workers, all right? So, if you're going to work at a certain firm, perhaps, doing a certain kind of work, [working] certain kind of hours, [working under] certain kind of conditions, [then] you will be offered a wage for that. You know, $10.00 an hour, $3.00 an hour, $80.00 an hour, [or] whatever it would be. So, part of the market processes job is to determine a wage (or a family of wages) for different kinds of work that firms want done, O.K.? And so, those wages are set; you know, sorry, those wages are discovered by the market process. The firms make their offers. The firms make their offers. The job matching occurs, and people go to work, and production happens, O.K.? So that's, sort of, the wonky way that you need to think about that. You need to think about supply and demand. So where does minimum wage fit in with that? Well…
Stitzel: Let me let me jump in before you go ahead --- not to interrupt you, because you're really gotta flow there. But you said two important things, right? You said the phrase: wage will pop out, right, from this. So, one of the things that I think's worth talking about is: that that's a non-random process, right? That's a/that is a competition process. So, I think one of the things that people get confused by is our individual experience. [Whereas an example of an individual experience] is that I went to the job market, and I found this job, and then they liked me, and I liked them, and we agreed on, and they offered me a wage. So that means they got to pick the wage. And there is some, sort of, in the least interesting way --- that's true, right? But the point that I would like to drive home, out of what you brought out (which you said very well) is: that wage isn't something that they really get to determine, right? There's a market and there's a competition. And if they were offering you or me too low of a wage, then they wouldn't be able to attract me because they have those competitors – all those, you said, firms rushing to the market. I think that's an excellent point. And one of the things that you said to me some time ago --- that I don't think has ever been brought up on the podcast, but one of the things that you that you taught me, that's been stuck with me the most --- is you wouldn't want to negotiate with the firm individually. You want the market to do that, right? So, when I came here and I negotiated over literally you know maybe a few hundred dollars getting in and out of this job. I wasn't having to convince them to pay me in this range, right? You said a family of wages, right? Or a range that we would be paid in, and then differential characteristics? You might try to find --- will I take a little bit more? Or can I get a little bit more from them, right?
Pjesky: Right. I mean…
Stitzel: Go ahead.
Pjesky: I mean, there's sort of an expectation in all these situations that that market provides us. So, you know, getting away from --- you know, I don't want to bore the point too much but, you know, getting away from --- labor markets. You know, I have an expectation about what a gallon of milk costs. So, I don't have to go to the grocery store and negotiate blindly (more or less) with the supermarket owner, the supermarket manager, [the supermarket] employer, [or] whatever about whether or not I pay a $1.00 for a gallon of milk or $50.00 per gallon milk. I know that a gallon of milk is, you know, $3-$4-$5 dollars, or so, in that range. So, I go to the store tonight, and I kind of know what to expect. The number one thing that I think that anybody needs to know about economics, in any context --- and this is something that, you know, I would emphasize in the courses that I teach (no matter what the class) --- is that these prices are not arbitrary. So, you know, the prices that we observe for labor, for milk, for hamburgers, [and] for anything --- all of those are not arbitrary. And then there's that competitive process, all right? There's a competitive discovery process that goes on among all of the separate buyers, and all of the separate sellers for an individual product. And from that process a price is discovered. So, you know, the price of gas [and] the price of wages is not an arbitrary thing at all. So, if the wage that you get offered, you know, in economies like $12.00 an hour, [then] that is not going to be something that a random number generated popped out for you.
Stitzel: Yeah.
Pjesky: All right. It's going to be based on what's produced [and] how it's produced. It's going to be based on what you and everybody else competing for that individual job ---- what their preferences are [and] what their reservation, you know, wages are (not to use another wonky term). But all of these factors are, you know, sort of, come together. Adam Smith called it The Invisible Hand. It's almost like magic. Friedrich Hayek called it literally a marble, all right, which is, kind of, like magic. But the wages that are determined out there in the economy --- they're not set, all right? They're not set in the way that you would set a thermostat.
Stitzel: Right.
Pjesky: O.K. They are the end of a process that discovers the weight. So, if I go home tonight, and my house is cold, [then] I can make it warmer by turning up the thermostat. If I'm warm, [then] I can make it colder by turning up thermostat. There's almost no consequences to me for, you know, for doing that…
Stitzel: Right.
Pjesky: Because the/my thermostat is that's a random number generator. O.K. I control it. In the grandest sense of the word that one would use, you know, I am the overlord of the thermostat. You know, whoever's pushing the button, or turning the dial on the thermostat --- they're the overlords of the thermostat. They can arbitrarily set that wherever they want to within technical limits. So, you know, anywhere between like maybe you know 50 and 100 degrees [Fahrenheit] is what I could put my house at anytime I wanted to. And there are no consequences to that…
Stitzel: Right.
Pjesky:…you know, for me. But when you're talking about a discovery process, that's based on all of these factors that are, you know, themselves based on technological constraints, people's preferences, consumers preferences, [and] what kind of stuff people want to buy. When you interfere with that kind of process, [then] there are consequences, all right? There are consequences. Markets aren't --- and individuals and markets aren't --- chess pieces that you can move, as determined by some rules, towards some sort of, you know, outcome that you find more desirable than the one that you see.
Stitzel: Well, the point is there that you have very little control, right? You have a very small set of choices that you --- I shouldn't say that actually. Let's turn to that very briefly. You've used the word discovery several times, and I think that's enormously important. And maybe one of the linchpins, I think, in the difficulty in understanding what it is, and how it is that economists think about these things, and how markets work --- I don't want to get too wonkish in there, right, because you were talking about [the fact that] I can just manipulate the thermostat, and that doesn't end up working out the same way in a market --- and that's because markets are spontaneously ordered. I have the things that I control, but I'm a very, very small part of the totality of the market. And that's why those things can react. But that discovery idea, that you're talking about, is rooted in a pretty long tradition in economics; [and] that I think [it] gets too little attention. And I spent a lot of time talking about this in my principle classes this Fall --- is the discovery process is distinct from the learning process, right? And that is to say: discovery means there is something out there I didn't know that I didn't know. Learning means: here's a thing that I know [that] I don't know, and then I learn about it, right? And so the market's not a learning process, it's a discovery process. So you use that term very precisely and, I think, very well. And the reason that is so important is because you mentioned worker preferences. This would be the same as part of the discovery process for firms --- is they make decisions, and those decisions are a part of a discovery process. That has two very important implications. One is they forego a set of choices --- which are unobserved, even in some sense to them, right? Like, I make choices. I'm going to focus on producing hamburgers quickly, so you don't spend long times in the drive thru. And there's some trade-off there between quality and/or how precise I get your orders (or any number of variables that you and I probably can't even imagine not being in the industry). And those are options forgone, and ergo they are never observed, right? That's what we mean by, like, opportunity cost. So, that's part of the discovery process. They discover whether or not that works. That's why we have McDonald's, right? It's because that probably works pretty well in certain cases. The workers do the same thing, right? So, I get offered a job, and I take it, or I don't take it. That's part of my individual discovery process. Many workers do that, right? And a job that you might not want --- I might think is great, right? And a job that I am torn: do I want this job or don't want that job --- there's a road not taken. And that path is never observed by me; which is this is, a sort, of a philosophical way to say something very distinct (by what we mean by discovery) is that is not a process that can be replicated, right? It's not a process that can be top-down manufactured. It's not a process that can be even thoroughly studied, in a certain way, that we could recreate it in an experimental environment (which is going to be very important to remember when we come down the road here in a minute to talking about our specific policy). Any thoughts you want to weigh in on that?
Pjesky: Yeah. The, I mean, the comparison of the learning process to the discovery process, I think, that you that you brought up is, I mean, that's the key point. A learning process sort of implies that we are moving towards a, you know, a specific outcome that is better. So, if I learn, say, calculus --- what that process will involve is me mastering calculus. And at the end of my journey in learning calculus, I will know calculus. And so, if I'm presented with a calculus problem, I can do it. The discovery process that markets go through is completely, really completely, different than that. It doesn't really share any of those characteristics that I just described about learning calculus at all. So, what markets are trying to do is discover a price for every good or service that coordinates all the disparate goals, and constraints, and, you know, aspirations (I think would even be an appropriate word) of all the participants in the market. So, you know, economics is at the heart the study of how strangers coordinate their actions.
Stitzel: Hmm mmm.
Pjesky: All right? So, you know, I have aspirations. You have aspirations. You know, a firm --- the owners of a firm --- have aspirations. My, everybody in the [world] --- you know, 7 billion people on this planet --- have aspirations. We're all strangers. Since, and so, the question becomes: how do we coordinate, you know, our activities? How do we work in such a way that makes it possible for me to contribute to your aspirations, O.K.? And that's what markets do. And since we can't communicate in any normal way, so I can't call up 7 billion people, all right? I can't call up 7 billion people, and find out what their aspirations are, and find out also how I can satisfy them. You know, this shirt on this probably made in China. I don't know where it's made in. But, you know, the clothes that we're wearing are made all across the world. It's not like we can communicate with the workers in the supply chain of those; and we can, you know, work out a coordination scheme, so that they have a job and I have a shirt. It doesn't work that way. There's no way that you can, based on the numbers involved, there's no way you can do that, all right? So you've got --- you have to have some mechanism that will discover a method to coordinate all of these activities. And in markets --- that's what prices do, all right? So, if I know the price of everything, if I know the price that I can command for my labor, if I know the price I have to pay for milk and everything else, then I can adjust my life in such a way that fits in with other people. I don't have to learn what their aspirations are in order for that to happen. So, we mentioned Smith and Hayek a minute ago. This is what Smith was talking about when he was, again, when he was talking about The Invisible Hand. There seemed to be some way that everybody/that everybody's methods were coordinated with one another. And The Invisible Hand is prices, all right? Smith never did say that if everybody acted in their service, in their own self-interest, that everything would work out. That's, I mean, anybody interprets Smith that way is wrong. That's not at all what Smith said. Smith said that if everybody pursues their own self-interest, and there was a coordinating mechanism like prices to temper those self-interests, and direct those self-interest in away that makes all of our aspirations match together, then…
Stitzel: Right.
Pjesky:…then, all right, then we would achieve a better outcome for society, and more of our aspirations would be satisfied. So, prices coordinate --- all of the, you know, thinking about the big picture I mentioned a few minutes ago, prices coordinate --- that big picture, all right? Prices are what facilitate the job matching between people who want jobs, and the people who want to hire those individuals to produce outputs for society, all right? So prices are the coordinating mechanism for that. And if you're talking about decentralized markets, [and] if you're talking about (for lack of a better word) a free market system, then those prices are the mechanism that's used to coordinate those strangers.
Stitzel: So, we're at an excellent juncture now. We've said: O.K., this is what minimum wage is. This is what a market [is and] how [a] market functions. Here are some of the key ideas in play, [with] the discovery process [being] central among them. So now, kind of, take those two ideas, put them together, and talk to us about what that understanding [is]. I want to throw away the word theory just now, [in order] that we understand how a market functions. How do we understand the impact on a market that a minimum wage law would have?
Pjesky: Well, I mean, the minimum wage comes about because you have available political process that says: O.K., we observe these wages and we don't like them, O.K. (which is perfectly understandable thing to do). I don't know anyone, I mean, you would have to be incredibly spiteful to not want people to make more money.
Stitzel: Right.
Pjesky: So, you know, everybody wants everybody to make more money. Everybody would like to see everybody else have, you know. command of more resources. And so it's not, you know, it's not a surprising thing that people would take the desire to see themselves --- and see everybody else --- make more money; and [hence] conclude [that]: well, we just need laws that require pay to be higher, all right? And that's especially going to be true among people that make very, very low [reiterates] very, very low wages, all right? So, you know, the lower earner neighbors that I have --- the lower earned people in society --- I think: good grief, they need more. They ain't be able to buy more stuff. And well, one of the many ways that we could achieve that is to mandate that their pay goes up. So, the minimum wage is the, you know --- not to sound too melodramatic here, but the minimum wage is the --- political process throwing away the market process; and [therefore] replacing the market's outcome with what the political outcome (the preferred political outcome) would be. So, you know, you can't have a wage for $5.00 dollars an hour, all right? It's got to be at least $7.25. You can't work in Seattle for $14.00 an hour. You have to make at least $16.40, all right? And so on down the board. So, the political process is among those different levels of government. You’ve got federal, state, city, municipal, [and] county. It could be anybody. The federal has a minimum, but the, you know, states, and counties, and municipal governments can pass whatever minimum wage legislation they want to. The federal government doesn't ban them from doing that. So that's what's happened around the country, especially in the last generation or so --- especially in the last maybe 10 years or so --- where individuals in certain municipalities or states have wanted to throw out the market outcome and increase wages using the political process. So when you throw out the market outcome, you also disrupt the discovery process. You disrupt the market that, you know, you disrupt the market outcome. And that has some theoretical consequences that economists can describe. And later when we talk about empirical --- it has some consequences that economists can measure, all right? So, you know, probably the first thing that would happen. You know, remember all the questions that firms are doing. They're asking: what should I produce? Firms are asking how much should I produce? And firms--- I'll focus on the last question who we could do this with (any of them), but firms --- are asking the question how should I produce this?
So, you know, when a fast-food firm makes, you know, hamburgers, or when a bike firm makes bicycles, or cars, or, you know, whatever else is made ---- there's not just one way to do all these things, right? There are many ways to produce anything that you could think of. So, one thing that would be the case would be: you could choose between using high-skilled labor and low-skill labor, all right? So, you could produce a certain number of hamburgers using a few high-skilled workers; or you could produce a certain number of hamburgers using a lot of low-skilled workers. And that decision is generally going to involve how much capital you're going to employ in your production process. Perhaps a better [and] more direct example would be: let's say you're digging a ditch, all right? There might be two broad ways to dig a ditch. You could dig a ditch with a bunch of people that have shovels. A shovel is capital. Or you could dig a ditch with one individual that has a backhoe, O.K.? So, when a firm is making that decision, one of the most important drivers of that decision is going to be: how much do they have to pay for low-skilled workers and shovels, versus how much they have to pay for high-skilled workers and backhoes, all right? So, if the task is to dig it, if the task is to dig a ditch, all right, [then] the firm is going to do that in the cheapest way possible, all right? So, some firms dig ditches with shovels, and a lot of workers (some firms) dig ditches with one person and with [a] backhoe, O.K.? So, when you change the prices, that mix of ditch digging-production technology infused in the economy is gonna change. It's gonna change. So, if you can hire people to dig your ditch for, you know, $7.25 an hour, all right, you know, on some margin, [then] a firm is going to, you know, go buy some shovels, hire some workers, [and] dig the ditch that way, O.K.? I almost said by hand, but you're still using shovel.
Stitzel: Yeah.
Pjesky: You're not digging it. You know, you're not digging it. You're not digging by hand. All workers have some capital…
Stitzel: Yeah.
Pjesky:…all right, almost, you know, even if it’s human capital. But, you know, and then if you wake up one morning, and you have to pay those workers $15.00 an hour, [then] all of a sudden (relatively speaking) the backhoe looks better.
Stitzel: Which by the way, you know, you went from $7.25 to $15.00. And somebody's gonna say: oh, that well, that's a number that you're picking out and it exaggerates the impact. But that's almost exactly what we've seen in certain places --- is going from the federal up to $15.00 an hour. So, like, literally doubling your labor cost is on the table here.
Pjesky: Right. And theoretically speaking, there are some predictable consequences of disrupting that firm's decision on which technology to employ, O.K.? Very, very predictable, very, very predictable disruption. The first thing that we will see is fewer ditches are going to be dug, O.K.? Fewer dishes are going to be dug. The second thing that we're going to see is that the cost of ditching ditch digging is going to go up, all right? We know those two consequences are going to happen, because the firm had the option. This is key. This is key. The firm had the option to hire the backhoe before, while wages were low.
Stitzel: Hmm mmm.
Pjesky: Does that make sense?
Stitzel: Yeah. That's actually what I was going to interject there. [What I was going to interject] Is this is not the type of prediction that, you know, even reasonable proponents of minimum wage would acknowledge, right? [And also, I wanted to say] is that the interference here, that most, I think, proponents of the minimum wage are saying [is]: well, the wages that are being picked are arbitrary. So, there are no consequences of them. But, I think, even if you have a reasonable one, they'll often say: O.K. well, you know, cost and price. And this acknowledgement --- this point that you're drawing out, I think, is really important to say [that] output must go down. And so, I think, that's relatively clear. But I want you to draw it out just a little bit more for us. So why is it that output has to go down, in this scenario, if we raise the minimum wage?
Pjesky: O.K. the, you know, continuing the logic that I presented before --- is that the presence of the new minimum wage is going to disrupt the firm's decision and on margins, all right? On margins, firms are going to decide to use a different technology [and a] different production. In economics, the word technology means production process, all right? So that might be a little different than an engineer might use the word. But the firm is going to choose a different --- on the margin, the firm is going to choose a --- different technology, O.K.? A different technology. And that technology is going to necessarily be more expensive, because if it would have been cheaper (holding all else constant), [then] they would have been using the backhoe to begin with.
Stitzel: Right.
Pjesky: So, for the firms that are disrupted, and for the firms that it causes to, you know, change how the production has happened, [then] costs go up. If costs go up, price must go up, all right? Costs go up, [then] price must go up. And if price goes up, [then] whoever the ultimate consumer of the service is, [that ultimate consumer is] going to move along their demand curve, and they're going to demand it. They're going to demand a lower quantity, O.K.? So, costs are going to go up, [and] production is going to go up. That's going to push employment of all the resources down to a certain extent, all right? Down to a certain extent. So, all of these decisions --- they're based on price. You know, prices are not arbitrary. But all these decisions that firms make in how to produce things --- well, they're not arbitrary either, all right? They're all part of a goal that firms have to minimize costs, all right? So, for the firms that switch production methods, all right, the employment of low-skilled workers are going to down, O.K. (for the firms that are, sort of, not on the margin, but they're sort of infra-marginal, all right). So, you know, some firm might have to pay their shovel diggers the higher amount. They might not switch technology, O.K.? But their labor costs are going to go up, O.K.? Their labor costs are going to go up. And we should be able to see that directly. They're paying their workers more. Of course, labor costs are [going to go up]. You know, of course we would expect labor costs to, you know, to go up per unit. They do by definition. So that's going to cause the ultimate consumer to have to pay more, O.K.? That's unavoidable, all right? That's unavoidable. The ultimate consumer is going to have to pay more, and the consumer is gonna want fewer ditches dug, all right? Less yards or miles or, you know, however you measure ditches, all right? There's gonna be fewer ditches dug, all right? And the fact that there's lower production, means that there's gonna be (that there's going to be) lower employment. So regardless of what kinds of substitutions take place, because of the market disruption, you're going to have lower output (which means lower overall inputs are going to have to be produced). So, the uncontradicted theoretical prediction of economics, to a meaningful increase in the minimum wage, is going to be lower employment, O.K.? So, you're either going to have fewer workers hired because they're high-skilled workers; or you're going to have fewer workers hired because there's less of the activity going on directly in that infra-marginal case. So, it then becomes, you know, it is then becomes of the effect of the minimum wage within that prediction [that] becomes an empirical question. Because the theory cannot tell us how much employment will go down, all right? It could go down a lot, all right? It could go down almost none, all right? But the absolute theoretical prediction of economics, in this case, would be for lower employment of low-skilled workers.
Stitzel: So, I want to interject here a little bit [and] maybe get your thoughts on this as well. One of the things that, I think, is fundamental to understanding economics well is to understand that when you're talking about a market interchange, right --- and this gets back to the stuff that you were talking about Smith with The Invisible Hand and that kind of idea --- is things that happen in a marketplace are voluntary interactions. That means both sides agreed to this, right? And I think that's one of the characterizations of what happens in a labor situation that, I think, badly misses the point, right? And, I think, it stems from people thinking: well, I don't I don't like my job or something like that. Or do none of us like to work, right? We'd love to [not work]. That's probably not true. But there is some distaste for a certain amount of work that we're doing. And oh, wouldn't it be nice if we could, you know, have all of our wants and still be kicked up on the beach at all times, right; [thus] forgetting that the job that you're going to, if you didn't have it, you would then be an unhappy person, right? If, you know, somebody who's unemployed --- if you've been unemployed, it's not a great situation, right? And the other side of the coin, is exactly the same scenario. So, the person who's foregoing hiring you to dig the ditch that they need ---- taking that option away from them didn't make them better off, right? So, everybody involved --- the labor of the firm [and] the people involved are --- they're having options that are taken away that are [a] mutually beneficial exchange. You're made better off by being able to buy and sell --- whether that's your labor, or whether that's digging a ditch. You're better off by being able to have those options available to you. So, I think that urge that you talked about --- the political urge --- is misguided, but maybe well grounded, right? It's seemingly a good idea. But the eventual consequence of that is that people have less of what it is that they want. They have less of what it is that they want, to be able to trade for; or want to be able to produce and trade away, so that they can trade for other things. That's not a trivial factor, right? That's a huge, huge cost. And I'm glad you drew out the point that why output ends up having to go down, and why that's built on all the prices and costs that are involved. One of the common things that, I think, you'll hear in the political arena (from maybe non-economists who are still opposed to minimum wage) is something like: sure, raise the minimum wage. You know, they'll just get the robots to come and replace them. And I think there's some truth to that. And that's part of what you're talking about is: swapping towards high-skilled labor with higher capital, away from low-skilled labor with less capital --- that kind of combination. So, I think, that is true, but it misses the greater point which is if that were already about [weighing that decision]. It's not as if business owners are out there going: well, I could switch to the robots and make more, but I'm not going to do that. Because, you know, fill in the blank _______ reason here. There won't be any good reasons for that the business owners as we're speaking are weighing that decision. Am I going to stay with the situation I have, or am I going to switch over to robots that make hamburger patties? If they're not switching to that, [then] that's because that wasn't the best option. The best option was to hire people to work in their stores, or to dig the ditches. So, thoughts on that?
Pjesky: Yeah. I mean, the/when you introduce this artificial factor of a minimum wage, all right, in into the process you're going to create, all right --- and I'm making exactly the same point you're making here, you're going to end up creating --- all of these kinds of trade-offs that didn't exist before. Like, there were trade-offs before, right? You work or not you work under these conditions or not. And you, know, you're swapping all kinds of somewhat undesirable things for things that you find even more desirable. So, you know, it's not like in the absence of minimum wages there aren't any trade-offs. But the minimum wage introduces all kinds of trade-offs to workers, all right? So low-skilled workers --- they're impacted by the minimum wage ship that didn't exist before. And not all of those trade-offs will end up being, you know, sort of, realized in ways that make workers unambiguously better off, O.K.? so there are hidden costs, all right? There are, you know, there are there are hidden costs to earning more money, because of, you know, because of the minimum wage. And, you know, you might find yourself, you know, suddenly valuing your job much more than you did, right? Because if I'm, you know, making $7.25 an hour, and I go to work the next day doing exactly the same thing, making $9.00 dollars an hour or $12.00 dollars an hour, then unambiguously, in this case, [then] I value that job more, O.K.? I value that. I value that job more. And that means that, you know, I might expect that job to become unpleasant, in ways that it wasn't unpleasant in before in, you know, in the past at that/at the lower wage. So again, you've got a trade-off, all right? You've got trade-offs going on there. And, you know, if you're more tied --- because remember at the same time, jobs are becoming more scarce. So, at $7.25 an hour, you know, perhaps one of the benefits of making $7.25 an hour is that if you want to quit one job and go get another one the next day [then] you can. So, but, at that same job doing the same thing, now things change your productivity. Nothing has changed. You know, if you go to that job in the morning and make an $12.00 hour, where yesterday you made $7.25 an hour, and all of your alternatives have disappeared (even if you've held on to your job), now that job is much more urgent to you. And the cost of losing that job is as much higher to you, all right? Your employer is going to know that, O.K.? Your employer is going to know that. So, your employer might be able to --- I don't know, I'm searching for the right word here, you know your employer’s behavior might change in ways that make your work more unpleasant. Now, you know, you and I have about the most pleasant job that I can think of, O.K.? And, you know, there are things that our employer could do that would make our job less pleasant. You know, our employer could, you know, ban us from parking. I can't [think of many unpleasant things they could do but], you know, our employer could ban us from parking on campus. You know, our employer might, you know, have us teach a class at you know 6:00 a.m., or something like that might make our job unpleasant. That might not make us quit, all right? But yet, our job would be unpleasant compared to the way that it used to. So, for the people, you know, for the people that keep their jobs after an increase in minimum wage, they're going to, sort of, they're going to be these trade-offs that manifest itself somewhat arbitrarily, O.K.? And so, it's not an unambiguous win for people to get raises.
Stitzel: Yeah. Let's talk about several of those things, because I want to lay the groundwork for all the various costs to minimum wage, right? Which one of the things that this understanding of the market --- that you've laid out really well --- is that they're going to be fewer jobs available; and there will be a subset of those people that were having jobs, working these/this kind of work, getting this kind of pay. Some of those people will lose out. And one of the things that prices do is they're a function for rationing out things that are scarce, right? That's, just like, first day of econ 101 kind of understanding of things. And that holds true, by the way. I'm not saying that's rudimentary in any way. And so, if you remove [and] if you limit the price mechanism's ability to do that, [then] the consequence will be [that] we will ration these jobs other ways, right? And you will have fiercer competition for a smaller pool of jobs. One of the things that I would argue is: this is likely to be regressive, right? So, your single mom without a working car, [and it comes down to] when both her and, you know, your teenage son are competing for the same job. And when there's/when the minimum wage is lower, or unbinding, or doesn't exist at all, [then] both of those people end up having jobs [and are] in a situation where now we've got fewer of those jobs to go around, right? You’re well-spoken, well-dressed, you know, high school student with a working car has a huge advantage over a single mother with a poorly working car. Because if I'm an employer, right, and people listening to this are going to say: well O.K., what kind of employer would make this kind of decision? It's not apparent to the employer often why. But if my choice is [that] I have to choose between somebody whose car isn't working, who might need the occasional day off because they have a sick kid, versus the person with the working reliable car who has no such constraint, [then] that will become a deciding factor when it previously wasn't. So, I'd argue these things are actually likely to be very regressive. I often tell my students consider, for example, somebody who's lived a rough life, and they have the markings of said rough life --- I don't know something ridiculous like a face tattoo, right? And then my kid shows up to interview for the job, and now he's got a collared shirt on, because I had the good sense to tell him, you know, [to] dress up nice for the job interview, right? For a minimum wage job, who is the employer choosing, right?
Pjesky: Right.
Stitzel: That's regressive. You don't need to live in a world where that becomes a deciding factor, right, if prices can sort out that mechanism by themselves.
Pjesky: Right. And there, I mean, there's all kinds of ways that could show up. You know, I mean, you know, I might know the manager of the grocery store.
Stitzel: Yes.
Pjesky: Right. And, you know, I might tell that individual look you know I got a 16-year-old kid looking for a job. I absolutely guarantee you he'll be there on time.
Stitzel: Yeah.
Pjesky: Every time.
Stitzel: Yes.
Pjesky: You know, and that would, you know, that statement from me would really give the manager a lot of confidence and want to hire, want to hire my kid. Somebody that that fact was uncertain about is going to lose out.
Stitzel: Yeah. So, I think that is an interesting, that’s interesting and that is probably the principal thing to be talking about here. But you were talking about these other (I think some people call them) fringe benefits, which to me is just a hilariously bad way to think about them. But you and I have a high level of education, [and] probably a high level of skill in the type of things that markets often value, right? That's what a PhD in economics means. And yet, you and I don't have the most high-paying jobs. But the reason is: we get many benefits from this job, that have nothing to do with the amount that they pay us here to do this job, right? And…
Pjesky: Like this.
Stitzel: Like this. Like, literally ---- we're sitting here and…
Pjesky: Talking about.
Stitzel:…we're in the middle…
Pjesky: Talking about ideas.
Stitzel:…[of] talking about ideas, talking with colleagues, you know, [and] having that campus environment around us. You know, there's no clock for us to punch. There's no, you know, there's no production quotas to meet or any of this. We could have a job where every day we have to wear a tie, and we have to show up at 8:00 a.m., and we have to leave at 5:00 p.m. And then, but we don't. And in fact, if we had that job, we would make more money, right? And so, all those things that you're talking about --- an uncomfortable class time [and] a ridiculous parking situation ---- there are many things that could be done. But if they were to go about doing those things, they'd probably have to end up paying more on average; [whereas] maybe in my case or your case they wouldn't, because we might be getting some excess benefit, right? But in the market situation, if the job of a professor, like, moved towards these more and more uncomfortable [and] undesirable things, [then] the pay would end up needing to reflect that (you know, assuming something else hadn't changed), right?
Pjesky: Yeah. I mean the, you know, the parking and the 6 a.m. class are --- you know, I'd use those examples because they're ridiculous.
Stitzel: Yeah.
Pjesky: And so, you know, let me introduce a ridiculous example on the other side of the spectrum. You know, the university could hire someone to be in my office poking me with a stick all day.
Stitzel: Sure.
Pjesky: And yeah.
Stitzel: Get more out of you…
Pjesky: Well, I mean, not even for that. Just to make my day unpleasant.
Stitzel: O.K.
Pjesky: All right? And, you know, I if that happened, [then] I'd probably quit.
Stitzel: Yeah.
Pjesky: Yeah. If that happened, I would probably quit. And, you know, I would think that: well, you know, I would rather go get a job where I had to, you know, be on duty from 8:00 a.m. to 5:00 p.m. with a tie on…
Stitzel: Hmm mmm.
Pjesky:…all the time. And, you know, because, you know, those circumstances are a lot better than getting poked by a stick.
Stitzel: Yeah.
Pjesky: All right? So, you know, these, sort of --- you know, fringes is not the right word, but these, sort of --- non-wage job attributes…
Stitzel: Yeah.
Pjesky:…are incredibly important to workers decisions on what kind of job that they want. You know, I became a college professor because job security is very important to me.
Stitzel: Yeah.
Pjesky: And, you know, I don't see how people live if they're uncertain that they'll have a job in six months.
Stitzel: Yeah.
Pjesky: So, you know, I am reasonably certain that my employment here will continue for quite a long time, as long as I want to be here. And if I separate from this job, [then] it'll be my choice, and not my, you know, not the state of Texas’s choice. It'll be (it will be) mine. It could happen.
Stitzel: Yeah.
Pjesky: But it's, you know, compared to, you know, compared to the situation that most people have in their job, you know, a college professor is incredibly stable employment.
Stitzel: Yes.
Pjesky: And that is something that I value. That is something that I value greatly. And so, if the university said: all right, we're going to have random firings after every year. So, there's just going to be a certain number of you that are not going to have your contract renewed, and you're going to be out of here. Well, it would make this job incredibly less desirable for me. And, you know, I would be, you know, I would be preparing to leave. Because I don't want to, you know. I don’t, you know --- just, I'm very risk averse.
Stitzel: So, let me fill in that way. Let me fill in an example there, because what you're talking about actually happens. So, you know, my family --- many of them work in the oil industry. And there's a particular firm up atop the oil industry that prides itself on being the most competitive [and] productive. And that's literally what they do. They hire more people every year than they need. They pay more than anyone else in the industry does. And they fire the top (I forget, I don't want to say but let's say) 5% of performers every year. So, you're in an absolute cutthroat situation, and you're getting paid more. Because if they had that policy, but they didn't pay more, [then] they would get the worst workers --- not the best, right? And so, they pay more, so that they can then try to weed people out, and fire the lowest performing workers, and get as much out of them. And that's their strategy. I think to the listeners that's going to sound, you know, how inhumane, right? But they're intentionally trying to get type A personalities that want to compete and perform. They're doing that on purpose. And there are probably some and firms in that industry that, sort of, want to do the opposite. They want to develop culture, and they want people to work together, and, you know, and they want that kind of environment. But I say that to drive home the point of: you can have an environment that reflects exactly what you're talking about, right? It would be unheard of, I think, in a university. I could be wrong. There might be examples of that somewhere, because that's not how our industry works. Because that's not the type of people that we're attracting, right? And you and I probably, you know, went through PhD programs with people who ended up in the industry, even maybe if they didn't even finish. Like, I had several people that started the PhD while I was there in school and ended up not finishing it because somebody came along and offered them a job. And they were like: well, I'd rather go do that than then continue this, and then end up ostensibly in the situation that you and I are talking about. There's a long list of things, right? So, we've mentioned a bunch, you know, parking, and hours, and dress attire, and whatnot. But, you know, often jobs will --- if we're talking thinking about minimum wage jobs, [then] there are --- often [offer] other types of benefits. I know if you end up working fast food, for example, I worked fast food at a donut shop. Actually, I guess I don't know if that qualifies as fast food, but it feels like the same industry to me. And, you know, one of the benefits of working in a donut shop is: you come in and there're fresh donuts, you know, and they let you have one, right? You're not eating a dozen donuts or something. But I'd imagine if they were suddenly, you know, paying me going from $7.00 to $15.00, probably the free donuts are being taken away then. There's lots and lots of amenities. There are lots and lots of amenities there. Just the expectation of what you're going to have to do at work is probably going to change, right? Yeah. So, you know, some people would argue even things like workplace safety, and different training, and all that might increase or decrease. I guess the safety might decrease, [whereas] the training requirements might increase etc. So, there's lots of ways for jobs to change, and these are likely to be bad. And in fact, they almost have to be, for exactly the same reason that you were talking about. Output would have to go down, because if requiring more training and offering less food, but paying you more were the optimal, then that would be how that firm organized itself.
Pjesky: Right. I mean, if it was (if it were) better for the state to pay me $200,000 dollars and have somebody in here poking me with a stick, [then] they can do that.
Stitzel: Yes. Absolutely.
Pjesky: You know, they can do that. If, you know, if your donut shop wants to pay you more and take away your free donut, [then] they can do that.
Stitzel: Yeah.
Pjesky: And the fact that they don't do those kinds of things indicates that they either can't, all right, because of competitive forces, or they won't because it's not ultimately good for them. So, either way…
Stitzel: Excellent.
Pjesky:…all right, the world that we observe out there is --- this is the point [that] the world that we observe out there is --- not arbitrary.
Stitzel: Yes.
Pjesky: O.K.? But these, you know, these minimum wage laws introduce a notion of, sort of, a random factor, all right, into the process that does manifest itself in [a] somewhat random or even arbitrary ways, all right? Things that, you know, things that economists at least cannot predict with any degree of certainty. So, the, you know, the minimum wage, you know, creates all kinds of circumstances where, you know, purchasing power, earnings, income, [and] jobs themselves are distributed among different groups of people. So, you know, there's a loss to certain low-skilled workers that lose their job, or find their jobs more unpleasant after the minimum wage takes effect, all right? The/those trade-offs --- there's counterparties to those trade-offs, all right? So, who gains? Well, there's trade-offs between low-skilled workers, all right? So, some low-skilled workers won't have their life changed in any way except they get a raise, all right? So that benefit to that individual comes at the expense of someone else, all right? A high-skilled individual that makes robots might suddenly have a new employment opportunity. Or the demand for their label will increase, so they'll get a raise, O.K.? So the loss on one end becomes somebody else's gain.
Stitzel: Hmm mmm.
Pjesky: So, you know, these losses and gains are offset, you know, somehow. Some low-skilled worker that remains relatively stable in their situation, you know --- that individual's counterparty might be the customer who has, you know, who is able to eat at the fast-food restaurant one fewer time…
Stitzel: Hmm mmm.
Pjesky: O.K. than they would otherwise choose. So, they're the loser. So, it's hard for me to come up with a story that would lead me to believe that increases in the minimum wage would increase productivity or increase production, all right? So, since either production [goes up] in the best-case scenario --- even if you assume production stays the same ---- but as we said before, production is going to go down, all right? So, the total pie, you know --- to use a common, you know, to use common vernacular --- the pie gets smaller, all right? You know, not only is the pie getting smaller, you know, [but] some people are going to get a bigger slice, all right? So that makes it absolutely a mathematical certainty that other people must get smaller slices…
Stitzel: That's right.
Pjesky:…all right? So, who gets a bigger slice [and] who gets a smaller slice is something that theory cannot inform, all right? We know that those trade-offs are going to exist. We know those trade-offs are going to be generated by increases in minimum wage. But we can't say much about how those gains and benefits are going to be distributed down to individuals, or down to really, really narrowly defined groups, all right? We just know that those transfers are going to take place, but they're going to be arbitrary, in the sense that we can't predict what they're going to be.
Stitzel: So, it's a good place to transition into talking a little bit about some of the empirical evidence and studies of policy. Anytime that I talk about minimum wage, the first place that I want to start is just to set the scope. So, if I do this in class --- I did this a few weeks ago in my in my principles class --- actually say: how many people do you think are on minimum wage? For how many people is that binding? Right now, how many people are at or below minimum wage? You can be below minimum wage, because certain jobs are somewhat exempt from it --- jobs that get tips, like waiting.
Pjesky: Well, if, you know, if I were the typical survey respondent, [then] I would say about 30%.
Stitzel: Yes. So that’s exactly what I was going to say.
Pjesky: All workers in The United States, you know, you survey people [and] you ask them that question. And sort of, the mean (or the median) answer is going to be around 30%. So, people out there --- this might be something else that's driving incredibly vast support for minimum wage laws, people out there --- think that about a 1/3 or so (a 1/4 to 1/3) of workers in The United States make this minimum wage. What/what's the real answer?
Stitzel: Yeah. So, the real answer is that --- about 2% of wage earners. So that sets aside salary earners. So, it's in the ballpark.
Pjesky: But we're not even in that.
Stitzel: Yeah.
Pjesky: Yeah. We're not in the denominator.
Stitzel: Right. That's exactly right. So, 2% --- less than 2% --- and it's actually been going down over the last few years. So, in 2018 it was like 2.1%. It's now 1.9% for 2019. So that number is very, very small and it's decreasing. So, it's always useful to set the scope of that. Of course, the other observation that's important in this case is that you're talking about relatively young people. So, you're about --- 25 and under makeup about --- a 1/5 of all wage earners that, you know, people that are making wages (not salaries), but they make up over 2/5. So [we are] close [to] getting up to around 50% of people on minimum wage, right? So, it's important to understand that, yes, there are people that are making minimum wage. There are people that might be trying to raise a family or something on minimum wage. But we're talking about a very, very small proportion of the total workforce. We're talking about a very young [proportion of the workforce] --- and often we've used the word low-skill --- in this case, right? And some people might bristle at that, but we mean something specific, right? And I think there's --- it's important to think about the type of people that are in this situation. We all started from the same place, right? You and I started in the same place, as anybody who's currently working at a minimum wage job. You have to start somewhere, and you have to work up. Those are the people who are in that minimum wage territory. So, thoughts on that before we jump over to the empirical element and policy?
Pjesky: I mean, yeah. It's just striking to me that, you know, especially in the 25 and over group, that the, you know, number of people that make minimum wage is less than 1%.
Stitzel: Yeah. Way under.
Pjesky: So, I mean, this is what I mean. We're truly talking about a very, very small people that make that threshold. Now what this data doesn't tell us is, you know, how many people make $9.00 or less?
Stitzel: Sure.
Pjesky: So, you know, we don't know the distribution of this above that. But, you know, if we raise the federal minimum wage to $7.25 to $7.26, all right, [then] almost no one would be eligible for a raise in the workforce.
Stitzel: That's right.
Pjesky: All right. So, we don't know how many people are making $8.00. We don't know how many people are making $10.00, all right? So, if we raise the minimum wage to $15.00 an hour, all right, these simple [calculations could be performed]. I mean, this could be figured out. I mean, the data's out there, all right? But, you know, [a] tiny [proportion of the workforce make the minimum wage]. You know, very few people make at the threshold of minimum wage, and they tend to be extremely young. So about you know 6% of teenagers make the minimum wage. 6% of the teenagers that are working make minimum wage. It's pretty low, much lower than people think.
Stitzel: Yeah. And I would say one: you get very far away from minimum wage, and I would argue from a, sort of, philosophical basis. There's no reason to worry about that if you say: well O.K. sure. That only so many people are making $5.00 or whatever. But how many people are out there making $10.00 bucks an hour. $10.000 bucks an hour is a huge difference from $7.00 bucks an hour.
Pjesky: Right. Exactly.
Stitzel: So yeah. Maybe the question between $7.00 and $8.00 is interesting. But you start getting very far beyond that --- it's just. I don't think that's very interesting or relevant. Now, the reason that you're saying that is because we're about to talk about these studies that move it up into the mid-teens. And that stuff is very important. Do you want to set the stage for, sort of, what we're talking about? There's a historical literature of things that have been studied in economics about minimum wage. But as we observed more than once, earlier in the podcast, is there's a recent trend towards differential city and state minimum wages from the federal. And so, that's why I think the new research on this is the most important by a long shot.
Pjesky: Yeah. There's, I mean, there's that. And I'll ask you some questions. There are thousands and thousands of studies on this. You know, more than any one person could read. There's, you know, probably thousands and thousands of meta-analyses, isn't there, all over the place?
Stitzel: Yeah. Yeah.
Pjesky: You know, I had my, you know, had my students, you know --- I gave them a choice between reading some papers from CATO and reading some papers from Vox; [whereas] that had differing views on the minimum wage and different views on the empirical literature on the minimum wage. I just, you know --- I told them they could pick whichever they wanted, you know, regardless of. You know, sometimes I might say: if you're in favor of minimum wage pick some, you know, (there are) good reasons to pick something that agrees with you or disagrees with you. I just let the students pick whatever they wanted to. And, you know, one student in, you know, his or her answer, you know, said to me the most remarkable thing. And he's, in his paper, he's, you know, the student said: you know, with how important this is, and with the strong opinions that people have about this topic, it was amazing that this wasn't settled. So, it's, like, you know, he basically said: you would think that economists would have this answer.
Stitzel: Hmm mmm.
Pjesky: So, you know, when he's not talking about the theory, of course he's talking about the empirics of this. So, what impact? Because we don't --- honestly, we don't know, all right? We know the direction. I think we know the direction. I don't think anybody who is a serious economist would disagree with the direction, you know, for the reasons that we've been talking about for the last hour, all right? But every economist is going to perhaps disagree about the magnitude of that.
Stitzel: Hmm mmm.
Pjesky: So if we raise the minimum wage from you know $7.00ish dollars an hour to $15.00 an hour, are we gonna lose 1% employment low-skilled? Are we gonna lose a bunch more than that, all right? So it was remarkable to the student, and it's remarkable to me…
Stitzel: Hmm mmm.
Pjesky:…that we don't know the answer to that. So, you know, given the thousands of papers that are out there to read. Lee, what do you think is the best word on this question right now? So…
Stitzel: Yeah.
Pjesky: Can you identify something that that's a study that's really well done, big sample, a tremendous amount of research, and experimental design effort going into it, you know, [and] top-notch people doing it? Can you think of a study, or a study or two, that meets all those criteria [and] that might give us some insight as to what would happen if we went to $15.00 minimum wage?
Stitzel: Yeah. So, let me step back and defend the field just a little bit, right? So, if we're in a situation where you want to study something empirically, [then] you have to have something to study. And the hard part about economics is [that] it's very difficult for me to cook up an experiment, right? So, things have to happen that allow for that, given that we have a long history --- I want to say something like 1920 --- [that] we start having a minimum wage at the federal level. {So] it becomes extremely challenging to study that because of the nature of being able to find (O.K. again, we're trying to use fewer wonky words here) a counterfactual, right? So, a change happens, but it happens to everyone. How do I study what the impact was, right? It becomes very, very challenging to do. And of course, economics are many other factors at play. So, the first thing that I would say is: it's not like I start my classes with economics is a science, right? And it's a science that has a long history, and it's well studied, and bright minds do it. And I would put enormous, enormous weight on all the discussion that you and I have had up to this point, right? Like, you just said it. We know what the impacts are. The question is: O.K. in practice when these things start to happen, what are the magnitudes going to be? And so, because of that, [and] because there's only been recent changes in things, [then] the reason it's not settled is because we have an extraordinarily strong theory. And we know much about what these kind of market interferences are going to do. That's been worn out time and time gain. But it takes time when you actually start to have opportunities, where individual cities or states begin to change things. Now we begin to study [and should] be able to study what the actual empirical evidence is going to be, O.K.? So that's what I would say to your student first. As to your specific questions --- so what is the best recent case? Well, the answer to that is what's happened in Seattle. So Seattle, not only did it Institute a minimum wage, it instituted it in waves --- starting from their 2015 change from about $9.50 to $11.00 an hour, [and] then going in 2016 from $11.00 to $13.00 --- as we started off here on the podcast they're up to, like, $16.00, [and] almost 50 cents, like $16.39 or $16.40 an hour. So, Seattle has provided this opportunity. And to their credit, they actually have also gotten more than one group to study it. And the most important group is called the Seattle Minimum Wage Study, or The Minimum Wage Study done by the University of Washington. They have an excellent team of people there, who coming out of a policy group that specifically studies that, O.K.? The details of that aren't interesting to the listener, so I’m just going to leave it there. Those are --- that's the best and the least biased group of economists, right? So it's not a think tank. It's a policy studying group that does that. And then of course, they've produced a set of studies in succession as the new waves have come out. Of course, these latest waves that have got them over $15.00 an hour. The, I'm sure, the/that work is in progress [and is] not available to us yet. So go ahead. Do you have a question?
Pjesky: Oh no. No. go ahead you're doing it.
Stitzel: Yeah.
Pjesky: Ha.
Stitzel: So, the, I think, there's two really important things that come out of it, right? And one is that the type of employment effects that we would expect take several different forms, right? And what people mostly want to talk about is unemployment, and I think that's for good reasons. But we have another idea that we call disemployment, right, which is you still keep your job [and] you just get fewer hours, right? And so, there's been enormous effects on that front. And then the other side is: O.K., what are the people who are actually keeping their jobs and keeping ours --- what are their earnings doing? And so, the long track record of economic studies on this front have always been like: well, the people who are keeping their jobs --- the amount that they're going to get a raise is proportional to the amount that the minimum wage goes up, right? But it doesn't take very much thinking, you think, to realize: well, that actually isn't going to play out like that. Because if you end up losing hours, you can make more money, but work fewer hours. The amount that you earn could actually go down, right? Now that might be a benefit, like you said, to some of the people who end up keeping their jobs. So, there's some transfer to those people. And maybe we would like to make more or the same, but work fewer hours, right? That would be a certain type of benefit. But what the studies find is that there are very, very large disemployment effects, right? And so, they estimate --- remember Seattle's a big city, and so these numbers have to be contextualized by that, but they actually find --- that there are 3.5 million hours per quarter. So, per every three months [there are a] reduction in the number of hours that are worked by low-wage workers. If I worked --- I mean in the people that are in that that bracket, O.K.? So, what they find is a gigantic decrease in the number of people that work underneath the $13.00 dollars an hour. But that's literally the intent of the policy. So, we might hail that as a good thing, right? The problem is the total number of hours worked, and the total number of people employed in Seattle for everyone goes up. So, it's a good environment that Seattle's doing this in, right? So maybe you say: O.K. well, those numbers go down, but everybody got worse than that. Unemployment went up. But that's not the case, right? Everything improved during this time period. And what happens is [that] the group that's under $19.00 an hour --- so what you said earlier: O.K., what happens to the group of people that are just over the minimum wage --- the number of hours between $13.00 an hour (the number of hours worked for people who make between $13.00 an hour) and $19.00 an hour also went down. And so, that's a critical point which is: there's a disemployment effect, in addition to an unemployment effect that is very strong, [and] fits perfectly with what we would expect in the theory. So, what happens, like you laid out very elegantly to start this off, [is] you have a new set of decisions that have to be made in front of a new set of prices. There are many ways that employers could respond to this, right, [such as] reducing the number of workers, hiring more capital, [and hiring more] higher skilled laborers. They can also just keep the number of workers that they have, but reduce the number of hours that they get --- which is a big part of the evidence that we see, O.K.? So, then what happens on net, is that we actually see $120 million dollars per year less in earnings, right? So actually, the total amount that low wage earners get in this study goes down dramatically. So, one of the things that, I think, happens --- and you talked about this early on --- is we're doing this ostensibly to help these individuals, but they're working fewer hours, and they're making less money, and fewer of them are employed. I'm having a hard time seeing how you've helped those people, right? And so, to me, this study is, you know --- I'd want to not engage in too much hyperbole --- but my instinct is that this is the first of a real damaging set of studies to what's going to happen if you install minimum wage. And we're going to see this evidence borne out. That fits with our understanding of markets, right? We've used the word theory a lot, but I think it's just an understanding of how markets function and how labor markets work. It isn't gonna be good, because the people that you're trying to help are actually hurt. So, on average, your low wage workers actually lose $125 bucks a month, and that's not counting the people who then don't have any job, right? So that transfer [of] power --- not power, but that transfer process that you were talking about --- it is actually on net a negative for the people that we would ostensibly want to be helping. So, I would hasten to say what they typically find --- what they have found in this scenario, is when you transferred from --- [is] when you went from $9.50 to about an $11.00 an hour, the effects were kind of muddled, right? So, you have these negative effects. And you have these effects where people who keep their jobs make a little bit more. And so, they're, sort of, a something of a wash. And it's not really a good way to characterize it, because there are winners and losers, like you said earlier. But once you get up into going from $11.00 to $13.00, the effects become very, very large, right? And so, you actually see a little bit. So, people who are keeping their jobs, in that their earnings might be going up a little bit, but the total effect is that people end up losing quite a lot. And now, they make the point here, that it may also be the case, that some of those people are then supplementing with jobs outside of Seattle, right? So, you might be displacing workers a little bit too. But for the same reasons that we've talked about before --- that's a cost as well, right? For me having to pick up a second job, that's somewhere outside of Seattle, so that I can avoid the minimum wage thing, is a very, very real cost to me. So, the last thing that I'll comment here on this is related to job turnover. So, we've discussed labor markets in the past ---you and me, actually here on the podcast. It's very important that people be able to switch jobs, right? Hopefully that's a reflection of them getting experience and moving up into better jobs. There's actually almost a 10% reduction in job turnover. So, people get in these jobs and then stay in these jobs, for exactly the reasons that you talked about earlier. That's potentially really bad, right, is [that] this person now feels stuck in the job that they have. They can't move on to bigger and better jobs, in part, because the minimum wage has crowded those out, right? And now I'm being asked to do more, and I can't leave the job. Probably, anybody who's worked a minimum wage job knows [that] many of the people that you worked with --- or maybe even you yourself, you might have changed jobs --- quickly realized: O.K., I worked at McDonald's, but I'd really rather work at Burger King, maybe, right? Or hopefully, you work that, and you just work that job for the summer, and then you go back to school. So, there's a lot of negatives there. But the Seattle Minimum Wage Study is by far, and there are a lot of challenges, but this is by far the one that's handled the best; [whereas it is] done by the best economists that are looking at this, since there's been a bunch of things to study going back (to what I would say) to your student first of all. What do you think?
Pjesky: Well, I think of all of the results that came out of the Seattle Study --- the, you know, the thing to me that represents the smoke, you know, from (if there's smoke, there's fire) that, that gives me, you know, quite a bit of confidence --- that my line of thinking, that I laid out in the first part of this conversation is, right --- is the reduction in turnover…
Stitzel: Yes.
Pjesky:…because that is that is exactly what we would expect. It's evidence that because, you know, and again, you know, assuming that the study was well designed --- it's evidence that people in these jobs are much more likely to hold on to them. And I don't think there's anything going on in Seattle, at the same time of this, that would make people want to hold on to their jobs more than they than they were.
Stitzel: It’s the opposite.
Pjesky: Like you said: that it's probably the opposite if things are getting better, in general in Seattle, then all the labor market churn is…
Stitzel: Yeah.
Pjesky:…going to suggest that people are going to read just their matches. And I would expect there, you know, to be more turnover…
Stitzel: Yeah, it should be…
Pjesky:…as people as people move, you know, as people hop from one better job, you know, one better job to another. So, you know, given the nature of the study, and given the environment that the study was conducted in --- it's extremely convincing that, you know, I would say most (if not all) of the concerns that people have about raising the minimum wage --- from people that have concerns about raising minimum wag --- manifested itself in an extreme manner in Seattle there with their minimum wage increases.
Stitzel: So let me make a comment on that. I think one of the things that happens in the political environment is [that] the proponents of minimum wage say: well, we want to help people that are in that low end. They have that instinct that you talked about. We want to help people make more money. Everybody wants everybody to make more money, right? We're all good people here. And the opponents of it say: well but, there's business costs in their firm. We've talked about that, and those people are right in many respects. What the empirical research is coming in and saying is: you can't use minimum wage to say that you're going to help low-skilled workers. You're going to transfer from some low-skilled workers --- by the way, those will be the least educated, the least experienced, probably the youngest or the people that have the kind of other considerations that we talked about earlier, you know, people that don't have a working car, for example ---[and they] would be hurt very hard by this. Those are the people that are gonna be hurt in this scenario, right? If I came out and I took this policy and I said: O.K., Amarillo's gonna install a minimum wage. And the reason that we're going to do it is because it's going to reduce low wage workers pay by at $125 a month, [then] that policy would be dead on arrival. Or at least I hope it would. It would be.
Pjesky: Right.
Stitzel: I'd be very concerned about the politics in Amarillo if I could somehow get that policy passed, with that particular set of arguments for it. And so, I think it's very important to remember that the people that are being hurt here are everybody. It's the individuals who are working, it's the individuals who are hiring, [and] it's the individuals who are consuming. There's nobody that benefits from this. So it's not even good as a transfer program, right?
Pjesky: Right.
Stitzel: And not just because cost but because you're hurting…
Pjesky: The pie has shrunk, and the pie has shrunk so much [that] it's possible that no one is getting a better slice.
Stitzel: Right. Right. And that. Yeah. You mentioned that the/it's important to remember that when you are preventing mutually beneficial exchange, [then] you're making both parties worse off. And that's what, I think, is really important about seeing the highest-level empirical research, like what we're talking about. And it's not coming out of somewhere like CATO, right? I'm talking about University of Washington. This isn't…
Pjesky: Right.
Stitzel: Like a well-known conservative think tank. I'm talking about professional economists here. So, the science is matching up really well. When --- my instinct was actually when --- I first read about the research is that the minimum wage debate was over. I mean, I don't, when you find a well-done study at the front of the field match perfectly with the theory basically --- we're done here right? And not to say that we shouldn't study future things. And there are many margins on which we want O.K. What happens when you go from $15.00 to $16.00 right? Like, that's gonna matter. But even if you had some studies that said there were benefits to lower-wage workers, the other things [then] might offset them. But the fact that you don't even have that, I think, [then] you can basically throw that away. So, I want to wrap it up --- unless you have a thought about that before we go. So, I want to wrap this up, because we're way over an hour now (as I sort of thought we might be with this episode). Some people out there are still saying: but wait a minute, I want to help low-wage workers. And if minimum wage, isn't it, [then] hopefully we've convinced you listener that that's not it. What can we look towards if we want to help those kind of individuals that are in that low wage category?
Pjesky: Well, I mean, there are all kinds of possibilities. The, you know, I saw a table one time. I refer it to all the time, where if, you know, if you divide workers up by quintile, or if you divide households up by quintile, [then] the biggest difference between the lowest quintile and the second lowest quintile isn't wages earned --- its hours worked.
Stitzel: Hmm mmm.
Pjesky: So, you want to institute policies that, you know --- and think about what that means. So, if you're at the if you're at 10th the percentile of earnings, and you're comparing yourself to someone that's in the 30th percentile of earnings, then the biggest difference, on average, between people that match those two descriptions is the number of hours that they work, all right? So, if that's indeed the case, [and] if that's a true representation of people who are low earners in The United States economy, then raising wages is going to do nothing; because, you know, you could double wages [and] it wouldn't matter. Twice nothing is still nothing.
Stitzel: Hmm mmm.
Pjesky: Right. So, and since there's nothing to indicate to me that raising the minimum wage is going to cause jobs, all right, [then] I don't/I just don't see that happening. Then you've got to look towards policies that somehow encourage employment.
Stitzel: Hmm mmm.
Pjesky: O.K.? And probably the biggest one that we have, you know, right now (that's in operation) is the earned income tax credit. So, I'd be a huge proponent of expanding the urgent/the earned income tax credit as a way to help out households that have low earnings so, you don't have the kind of employment disincentives that the minimum wage gives. You encourage increases in labor supply, all right? You don't, at the very least, you don't discourage labor demand, right? There might be ways that we can encourage labor demand and the, you know, the earned income tax credit almost ends up like a wage subsidy, all right? It almost ends up like a wage subsidy, with the legal incidence of the payment to the worker instead of the firm, all right? So, you have encouragement of employment. And I would say that earnings of people that are --- as a group earnings of people that are --- involved in that program and ambiguously go up, all right? And, you know, there's really no downside to it, except the budgetary cost to the federal government. That's really the only thing this should be concerned about that, all right? But that's much less of a concern than disrupting low-end labor markets, O.K.? That's much less of a concern, I think, to most economists than disrupting the labor one. So, that would be the one that I would (that I think that I would) be the one, I think, I would start with. I think that a lot of people really, really underestimate the value of a person's first job, O.K.? Because, you know, the statistics also show, you know, in addition to not very many people making minimum wage, all right, statistics also show that even people that make minimum wage, [they] tend to not make it very long. So, people get raises. People move on, all right, to either raises within their firm, [or] they move on to different firms, [in] different industries [with] different job titles. And they do that because along the time they might accumulate human capital, all right, through formal learning. But they also will accumulate a reputation that they can take with them from job to job; [whereas the accumulated human capital is comprised] of someone that knows how to work, someone that can perform tasks, someone that can work in teams, someone that can show up on time, [and] someone that can do all this. So, the earned income tax credit, I would imagine, is incredibly successful at actually giving money to people that we want to have it. And it's probably also incredibly successful in helping workers. You know, I don't want to call it human capital, because that's something else; but it's also incredibly helpful at having workers accumulate these personal characteristics that they cannot just state but can demonstrate to future employers that they're a decent employee that is worthy of higher. If you go beyond that, you know --- you mentioned several times, you know, having a working car. When we study poverty, and the more that we study poverty, we find out that, you know, poverty is caused by all of these, sort of, disadvantageous factors coming together for a person all at once. So, you know, having programs that might help people get a working vehicle [and] having programs that might help people get childcare for instance. You know, and you could rattle off or of you know 10 or 20 of these. You know, helping people, you know, get apparel that's suitable for employment, and just on and on. You know, you take a hundred of these programs that would be similar --- some of them might be great ideas. Some of them might be really, really bad ideas. But studying those, all right, you know, studying those might be much more fruitful than just arbitrarily raising people's, you know, raising people's wages. So, you know, programs that have, you know, community college childcare. You know, so if you're a student --- it's a community college, and you're taking classes, [and] you have somewhere to take your kids. You know, maybe having reliable transportation to and from class, or to and from a work, would be something that, I think, should be studied in in depth. And again, you know, buying everybody a car might not be the answer either. But I think that's a much more interesting idea than just using a blunt force instrument like: oh, let's have, you know, let's fight for, let's have $15.00 minimum wage. So, I would like to see more innovative and more creative thinking from economists and policy makers on the problem of poverty.
Stitzel: My guest today has been Rex Pjesky. Rex, thanks for joining us on the EconBuff.
Pjesky: I enjoyed it. Thanks for having me.
Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econbuffpodcast.wixsite.com. You can contact us at econbuffpodcast@yahoo.com.
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