Sunday, January 25, 2015

Minimal evidence against the minimum wage

There's nothing more Australian than the minimum wage.

Now on the eve of Australia Day it's up for grabs.

As Australian as Vegemite, the bionic ear and the preferential vote, the national minimum wage sprang to life in 1907. Victoria had gone out on its own a few years earlier. Britain, the United States and most of the rest of the developed world followed later. Even now their minimum wages are nowhere near as generous as ours.

It's why on Tuesday President Obama used his State of the Union address to call on Congress to lift the US minimum wage. And it's why on Thursday Australia's Productivity Commission raised the prospect of dumping it.

"What is the rationale for the minimum wage in contemporary Australia?" it asked in the issues paper that kicked off its inquiry into Australia's workplace relations framework.

And: "how effective is the minimum wage in meeting that rationale?"

The minimum wage is $16.87 an hour. The Commission is worried it's going to families that don't need it.

"Not all minimum wage earners are members of low-income households," it says. Only around one third of adult minimum wage earners are in the poorest 20 per cent of working households. The rest are in better off households.

The Commission cites Labor's assistant treasury spokesman Andrew Leigh who as an economics professor before entering politics wrote that high minimum wages might lift inequality if they lowered employment in low income households.

But Leigh's concern, and the Commission's, depends on the assumption that minimum wages boost unemployment.

It's a reasonable assumption. If employers can pay employees as little as they like, they'll have more spare cash to spread around employing more of them. It used to be the conventional wisdom, until researchers went looking for evidence...

Like the Loch Ness Monster, many have now reluctantly concluded that it's not there. Joshua Angrist of the Massachusetts Institute of Technology is one of the world's leading experts in the use of statistics.

He told American radio last year that the burden of proof had shifted from those who wanted to argue for a minimum wage to those that wanted to argue against it on the ground that studies show it cost jobs.

"It's been hard to find those," he said. It wasn't that the evidence against minimum wages wouldn't be found, it was just that "the scholarly work on the minimum wage today is in a very different place than it was before."

Last May The Economist magazine admitted it had been wrong. It had opposed the introduction of a nationwide minimum wage in Britain on the ground that it would cost jobs.

"No-one who has studied the effects of Britain's minimum wage now thinks it has raised unemployment," it wrote. It had "changed its mind".

A few months earlier more than 600 US economists – including seven Nobel Prize winners – signed an open letter to Congress calling for an increase in the minimum wage. They said the weight of evidence now showed increases in the wage had "little or no negative effect on the employment of minimum-wage workers".

One of the key pieces of evidence was gathered in the early 1990s when New Jersey lifted its minimum wage from $US4.25 to $US5.05 per hour.  Neighbouring Pennsylvania did not. Princeton University economists David Card and Alan Krueger surveyed 410 fast food restaurants in New Jersey and in Pennsylvania before and after the change. If minimum wages did hurt employment, employment would have suffered more in New Jersey fast food restaurants than in Pennsylvanian ones. But that's not what they found.

"Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent," they wrote. They also examined employment growth elsewhere in New Jersey at stores already paying above the minimum and unaffected by the change. They found no change in employment, suggesting no statewide phenomena was in play.

Their curious conclusion was that higher minimum wages didn't hurt employment. If anything, they helped it.

Among the possible reasons is that higher wages might make it easier for firms to attract good workers and lift profitability. It's certainly not a settled question. But the cards are stacked against those who'll want to tell the Productivity Commission Australia's minimum wage costs jobs. The Commission itself quotes a finding by the expert panel of the Fair Work Commission that "modest minimum wage adjustments lead to a small, or zero, effect on employment".

The Commission says it wants evidence. Evidence against the minimum wage is hard to find.

In The Age and Sydney Morning Herald

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