Tom McDonnell TASC

1 May 2013 NERI Labour Market Conference

Minimum Wages: Perspectives on their Impacts

Structure Rationales for wage minima as policy

Minimum wage comparisons

Debate on impacts: Poverty Employment Distribution Other

Conclusion

Rationales for Wage Minima as Policy Minimum wage first introduced in 1894 in New Zealand

Not introduced in Ireland until 2000 (currently €8.65 per hour) Collective bargaining and/or legal minimum wages now exist in most countries

Purposes: To prevent exploitation – minimum standards

Protects migrants and other vulnerable groups Ensuring a minimum of equity between employer’s profits and employee’s wages Undermining cut-throat ‘race to the bottom’ wage competition

To improve workers’ welfare – redistribution/anti-poverty Diminishing poverty by raising wages and providing greater income equity Helps ensure workers can earn a living wage

To promote efficiency and productivity of labour – long-run growth Ensuring low wages don’t act as a subsidy to inefficiency and don’t prevent the rational displacement of labour by

capital (jobs destroyed will be low wage and unproductive) Shifting competitive advantage to high paying sectors

Criticisms: Certain models predict minimum wages could increase poverty by increasing the number of people who are

unemployed or employed less advantageously e.g. less hours

Actual impacts are an empirical question

Adult Min. Wages in High Income OECD, 2012 In national currency expressed as hourly rate

In UK £ (PPPs) – derived from comparative price levels

France €9.40 8.84

Australia AU$15.96 8.58

Netherlands €8.40 8.08

Belgium €8.67 7.95

Ireland €8.65 7.43

New Zealand NZ$13.50 7.14

Canada C$10.10 6.60

UK £6.19 6.19

US US$7.25 6.16

Stylised Theories of Employment Impacts: The Competitive Model The ‘Iron’ Law of Demand

Minimum wage laws amount to price fixing In this case a price floor on the supply of labour

If the minimum price is set above the equilibrium wage then a surplus of labour (i.e. unemployment) will result Firms will ‘buy’ less hours of labour at the fixed price

With an excess of labour supply over labour demand firms will employ the more productive workers Unemployment will be concentrated on the lowest skilled (least productive)

workers Predictions of the competitive model:

Winners – higher wages for some low skilled workers Losers – loss of employment for other low skilled workers

Criticism: Model is unrealistically simplistic Multi-sector models are more ambiguous re net employment impacts

Stylised Employment Impacts in the Competitive Model

Stylised Theories of Employment Impacts: Monopsony/Oligopsony Monopsonistic markets have a single buyer (asymmetric market power)

Under monopsonistic conditions the consumer of labour (the employer) has market power and can use that power to keep wages below the equilibrium rate that might otherwise prevail under perfect competition

Possible explanation for monopsony/oligopsony include: Rigidities in employee mobility e.g. the company town Collusion between employers

Expectations: Lower wage rate than that prevailing under competition Market failure

labour sold under monopsony < optimal allocation - creates deadweight loss to society

Implication: Under conditions of monopsony a minimum wage higher than the market rate

(but equal to or below the competitive rate) will raise the level of employment Criticism:

Genuinely monopsonistic markets may be rare in the real world

Theories of Employment Impacts: Institutional Models Multi-sector models/complex systems:

Unlikely to be a single well-defined downward sloping demand curve Much more nuanced than the simplistic ‘competitive’ and ‘monopsony’ models

Economy and labour market seen as a complex system with: multiple elements, multiple interactions, multiple equilibria and multiple channels of adjustment to price changes

Multiple channels of adjustment implies employment impacts are ambiguous

Employment impacts seen as an empirical matter

Theories of Employment Impacts: Sample Channels of Adjustment 1. Increased productivity

Efficiency wage effects – higher cost to job loss - higher performance standards, greater work intensity;

2. Offsetting through higher aggregate demand Increased spending power for low-income workers with high MPC –offsetting losses to employment

3. Changes in composition of employment away from low wage sectors 4. Reduced churn

Reductions in employee turnover rates – lower recruitment and training costs

5. Higher prices 6. Reductions in hours worked 7. Reductions in non-wage benefits and training 8. Alternative cost savings – e.g. cutting waste 9. Wage compression

Compensating by cutting wages of workers nearer the top

10. Reductions in firm profitability Schmitt (2013): argues cost shock is modest – summarises hundreds of studies - concludes the most important channel of adjustment is through reductions in labour turnover, which yield significant cost savings to employers

Employment Impacts: Empirical Evidence (Classic Studies) Minimum Wage Study Commission conducted four year study between 1977 and 1981 (covering

US and Canada) Reduced teen employment; small but negative employment impact on young adults; direction of

impact on adults was inconclusive and uncertain Overall – dis-employment effects were small and limited to teenagers and to a lesser extent young

adults

The ‘New Minimum Wage Research’ – most famously Card and Krueger (1994) Attempted to simulate natural experiments (control and treatment groups - New Jersey increased

minimum wage but close neighbour Pennsylvania did not) Found ‘no evidence’ that the rise in New Jersey’s minimum wage reduced employment in the fast

food sector

Neumark and Wascher (2000, 2006, 2007, 2008) criticised the experimental approach – preferring time-series analysis. Argued based on a qualitative review that the preponderance of evidence suggests there is a negative

employment effect on low-wage workers Neumark and Wascher’s meta-study has itself been criticised as subjective for excluding many papers

(Schmitt, 2013)

Employment Impacts: Empirical Evidence (Meta studies) Recent meta-studies

Doucouliagos and Stanley (2009) 64 studies published between 1972 and 2007 (teen employment) Graphed over 1,000 employment estimates (weighted by statistical precision) Most precise estimates heavily clustered at or near zero employment effects Overall results corroborate finding of an insignificant employment effect from

minimum wage increases Wolfson and Belman (2013)

27 studies published since 2000 - Over 200 employment estimates Mixed results but overall the results do not corroborate the finding of statistically

significant negative employment effects

Qualitative literature reviews

Neumark and Wascher (2006) - evidence suggests negative employment effects

Employment Impacts: Recent Evidence Recent UK studies

Metcalf (2007); CEP (2008) – both found no impact on employment levels

Low Pay Commission has now commissioned over 100 research projects that have covered various aspects of the impact of the National Minimum Wage on the economy.

“...we conclude that the lowest paid had received higher than average pay rises, and the research, on balance, generally finds little or no significant adverse impact of the minimum wage on employment” (2012)

“Our overall conclusions from this work are that as a result of the NMW the lowest paid have received higher pay rises than their peers, and that there remains little evidence of a significant adverse effect of the minimum wage on employment” (2013)

Recent ‘natural experiment’ studies – controlling for regional trends and for the business cycle

Dube, Lester and Reich (2010) compared employment differences across contiguous counties…find strong earnings effects and no employment effects of minimum wage increases

Allegretto, Dube and Reich (2011)…once regional trends are controlled for…estimated employment effects of the minimum wage disappeared (positive but not significant)

Similar results found by others e.g. Addison, McKinley, Blackburn and Cotti (2012)

Poverty Impacts: The employment impact will heavily influence the poverty impact

A poverty trade-off? Poverty impacts are disputed e.g. Card and Krueger vs. Neumark and Wascher

Theoretical (ambiguous):

Fields and Kanbur (2007) find there are situations in which a higher minimum wage raises poverty, others where it reduces poverty, and yet others where poverty is unchanged

Depends on various factors e.g. the ratio of the minimum wage to the poverty line and the elasticity of labour demand;

Empirical (mixed but generally found to reduce poverty):

Morley (1995) finds that poverty falls as the minimum wage rises in Latin America McLeod and Lustig (1996) find that a higher minimum wage is associated with lower poverty in

developing economies Neumark, Cunningham and Siga (2006) find no evidence that minimum wages lift family

incomes in the lower part of the income decile in Brazil

Other Impacts: Redistribution Impact Di Nardo et al. (1996) focus on wage densities

Find that the decline in the real value of the minimum wage explains a substantial portion of the increase in wage inequality in the US between 1979 and 1988, particularly for women

OECD (1998) Minimum wages can reduce poverty rates and income inequality among working families

Brown (1999) Finds that minimum wage compress the wage distribution

Metcalf (2007) Minimum wage raised the real and relative pay of low wage workers and narrowed the gender pay gap in the

UK

Public Finance Impact An increase in the minimum wage can affect the public sector through savings to the

Exchequer resulting from increased tax receipts and reduced benefit payments. Direct impact (income tax/SSC receipts – depends on level and hours) Indirect impact (VAT receipts, Family Income Supports, Medical Card Payments etc.)

Conclusions The process of review is effectively in abeyance in Ireland Yet Joint Committee on Jobs (February 2013) Recommendation 26: “The Committee recommends that there should be an investigation into the effects of the minimum wage (both positive and

negative) on the jobs market and recommends that research should be carried out at a later stage”

Evidence Suggests: Net employment effects are likely to be small There are likely to be positive redistribution effects

Boosting wage equality between women and men Minimum wages are not a particularly powerful anti-poverty measure

But an important bulwark protecting migrant and other vulnerable groups Productivity impacts are not fully clear

Shifts the economy’s comparative advantage away from the low value added unskilled sectors and towards high value added skilled sectors

Are there alternatives to wage floors?

Recommendation: An equivalent to the UK’s Low Pay Commission should be established in Ireland to monitor, evaluate and

review the low paying sectors, to annually report to the Labour Court and to the Government, and to publish its independent findings