Last week’s minimum wage hike risks job losses

My latest column at The CEO Magazine asks whether Australia’s 3.3 per cent minimum wage increase will cause any job losses. It focuses on a few pieces of research, including a new study of Seattle’s minimum wage hike, older work by ALP frontbencher Andrew Leigh, and one of economics’ most famous papers – the 1994 minimum wage study by David Card and Alan Krueger.

The Card and Krueger paper is a rare and widely admired paper which changed a lot of minds in economics. Before it, most economists tended to believe minimum wages cost jobs; after they had digested Card and Krueger, some began leaning the other way. Card and Krueger started with a good natural experiment and then controlled for a bunch of variables in what a lot of economists see as a very thorough manner.

What this and other economics papers don’t give you is a rock-solid conclusion about the job effects of the minimum wage.

What they gave me instead was a renewed appreciation for what you might call the Feynman Social Science Problem: in many situations, it’s very hard to isolate the relevant variables in an economic study with enough certainty to reach a conclusion. The famed physicist Richard Feynman took this to the extreme when he called social science a pseudo-science:

“I might be quite wrong, maybe they do know all these things. But I have had the advantage of having found out how hard it is to get to really know something, how careful you have to be about checking the experiments, how easy it is to make mistakes … I see how they get their information and I can’t believe that they know it – they haven’t done the work necessary, the checks necessary and [taken] the care necessary.”

This is one reason why I have grown increasingly reluctant to trust social science findings. Card and Krueger worked harder than most to check their findings, but I still don’t have complete confidence in their results.

And as I read the Card and Krueger paper, even looking at all the things they say they controlled for, I found myself thinking of other potential variables which would disturb their results. (Russ Roberts and Noah Smith also talk about this in a terrific 2015 Econtalk podcast.

My own guess is that the 3.3 per cent minimum wage rise will eventually cut some low-wage Australian jobs – anywhere between 2 and 100,000. This figure is based largely on Andrew Leigh’s numbers; his calculations run in the opposite direction to his political sympathies. And Australia has a very high minimum wage by global standards, so if anyone is affected by higher minimum wages, it will be us.

This seems to me a pretty high price being paid by Australians on the margins of paid employment.

By the way, while economics is not so good on these estimates, it does better when it has better data. One conclusion I did extract from the literature is that a few country’s safety nets really are very well designed to get people out of poverty. Australia is one of those countries, along with Ireland, the UK and Japan. The minimum wage contributes to that safety net, as long as you have a job.

As the OECD put it in 2015:

“[A] half-time minimum-wage job in Australia, Ireland and the United Kingdom can be sufficient to take a family with two children out of poverty, and out-of-work benefits in Japan provide income above the poverty threshold even when no-one in a two-parent family works.”

But Australia would still have a great social safety net, relatively speaking, even if the minimum wage was a little lower. In fact, David Card himself is on the record as saying the minimum wage is a poor way to get good social outcomes.

Read the whole thing. After that … well, honestly, you will probably still have a very strong opinion as to whether a minimum wage is good or bad. Try to distrust your certainty a little.

Update 1: The IGM panel shows how a bunch of top economists view the minimum-wage issue.

Update 2: We now also have a July 2017 NBER paper by David Neumark that similarly sees the debate as unresolved:

The literature on the employment effects of minimum wages is about a century old, and includes hundreds of studies. Yet the debate among researchers about the employment effects of minimum wages remains intense and unsettled. This essay discussed the key questions that have arisen in the past research that, if we can answer them, may prove most useful in making sense of the conflicting evidence. I also focus on additional questions we should consider to better inform the policy debate, in particular in the context of the very high minimum wages coming on line in the United States, about which past research is quite uninformative.

Neumark is doubtful about the value of the minimum wage. But he shares with David Card and some others further to the left the view that earned income tax credits will do more to help low-income people. Notably, US earned income tax credits are normally both indexed and targeted towards families in poverty, rather than individuals who may be middle-class teens replacing their pocket-money with a casual job.

David’s CEO Magazine columns are here; follow David on Twitter @shorewalker1.

About David Walker

David Walker runs publishing consultancy Shorewalker DMS ( David has previously edited the award-winning INTHEBLACK business magazine, been chief operating officer of online publisher WorkDay Media, held policy and communications roles at the Committee for Economic Development of Australia and the Business Council of Australia, and run the website for online finance start-up eChoice. He has written professionally on economics, business and public policy since 1987 and spent three years in the Canberra Press Gallery for News Limited and The Age.
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3 Responses to Last week’s minimum wage hike risks job losses

  1. derrida derider says:

    Some of this is wrong.

    The Card and Krueger paper was not as seminal as you say – the change of mind on min wages among the labour economists was driven by a wide range of empiric studies exploring a much better theory of wage determination (google “labor DMP theory”) (as Feynman would be the first to note, empirics without theory is useless because you won’t know what you’re looking at).

    Australia does not have a particularly high min wage these days – about the middle of the OECD when measured by the appropriate measure (ratio of min wage to median wage) . We USED to have a high one, but we’ve lowered ours (by the ratio measure) while most countries have raised theirs (largely as a result of those studies, BTW).

    The period when we had a high min wage was also the period when Andrew did his study of WA wages. If you read the paper you’ll discover that he was, for several reasons, chary of generalising from it. WA’s changes pushed their min wage really high for the cases studied – and no-one denies that a sufficiently high min wage costs jobs, even in the “New Labour Economics” framework. The argument is all about how high “sufficiently high” is – the answer in the last 20 years is basically “higher than we thought”.

    The flip side of our highly targeted system is that indeed part time or intermittent work gets people out of income poverty. The downside is that EMTRs are very high as they move from a small amount of work to full time or permanent work – in other words we have (correctly IMO) avoided a poverty trap by substituting a low-pay trap. This labour supply effect actually explains a bit about patterns of work in Australia.

    • David Walker says:

      Thanks DD. I suspect we disagree mainly on matters of emphasis.

      I’m sure you’re right that the developing literature on search costs played a role in making people more sympathetic to Card and Krueger’s conclusions – and their paper specifically references Mortensen (the “M” in DMP).

      I’m also sure you’re right about the problem of high EMTRs for low income earners, which looks like the biggest problem in the tax and transfer system today. A high minimum wage ameliorates this problem. (Indeed, this is one reason I started looking a bit more closely at the minimum wage issue.)

      I’m also sure you are right that the argument is about how high is high enough to induce job-loss effects.

      I do wonder a bit whether Australia’s minimum wage is reaching those heights, though. The US studies seem to deal with much lower minimum wages than the Seattle or Australian studies for most definitions of “lower”. (The US minimum wage is $A9.50 an hour, versus our $A18.29, even though US mean and median incomes are higher than Australia’s.)

      I have generally used the comparisons in this OECD paper, and would be interested in your thoughts on it:

  2. Moz of Yarramulla says:

    My question reading that was whether increasing the minimum wage is perhaps more of a last resort since we’ve got multi-partisan agreement that welfare payments should not exceed about 80% of the poverty level for any individual. Viz, we are determined to make sure welfare beneficiaries can only dream of being so rich as to experience mere poverty. So a significant jump when they get a job, any job, is highly desirable.

    Plus it’s a patch for the increasingly short-term, unreliable, intermittent work that those at the bottom are made to suffer. Part of the EMTR that’s not well captured is the interaction between the rules (which are in practice secret) and the practice. Beneficiaries are subject to arbitrary cuts in income and one way to guarantee such a cut is to work only briefly – the Centrelink model is still very much permanent, full time employment or nothing.

    I believe that’s been discussed here in the past….

    (also, any time we talk about the US minimum wage it’s important to note that they lead the developed world in sheer quantity of workers who are exempt from it.).

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