New minimum wage: Let’s see what happens

Sometimes people ask me where I stand on economic policy. Am I a free-marketer or an interventionist? I tell them that I’m an identificationist.

In statistics, “identification” just means separating two groups in order to tell if a treatment works. You give Group A the pill and you give Group B a placebo, and you see if Group A does better than Group B. In laboratory experiments this is usually possible to do. In the real world, it’s a lot harder — you have to wait for a policy to bring about a difference between two areas that are roughly comparable.

This is why I’m so happy about the $15 minimum wage that is being phased in in cities such as Seattle, Los Angeles and San Francisco. We’re about to find out if minimum wage laws really have big negative effects on the economy.

In theory, a higher minimum wage should cause increased unemployment. Imagine raising the minimum wage to $25,000 an hour. No employer could afford to pay that, so unemployment would skyrocket, and the only jobs left would be under the table.

But that extreme example doesn’t tell us much about the real world, where minimum wage changes are usually only a few dollars.

There is a huge literature on the impact of minimum wages on employment. Many studies show very little effect, but there is a substantial minority of studies that show the opposite. Though the general weight of evidence is on the side of minimum wage increases not being so bad, it isn’t an overwhelming consensus.

To bone up on this research, the best place to start is this 2013 review by John Schmitt of the Center for Economic and Policy Research. The most impressive and famous studies here are the various papers by economists David Card and Alan Krueger, who are often shortlisted to win a Nobel for their work. One strand of their research focuses on cases where states raised their minimum wage; another focuses on cases where a federal minimum wage increase affected various states to different degrees.

Of course, there are many other studies. Several meta-analyses have found that most of these studies find that minimum wages don’t have much of an effect on employment.

But despite this evidence, there are dissenters. Two of the most prominent are economists David Neumark and William Wascher, whose own numerous papers show a large negative employment effect of the minimum wage. These economists claim that while many studies show little effect, the more credible studies (including their own) show a bigger impact.

Some critics believe that the minimum wage causes a slowdown in employment growth, rather than an increase in unemployment. Others claim to show that high minimum wages force low-skilled workers to move to other states. These two ideas obviously fit together — if minimum wage hikes cause companies to stop hiring, unemployment may remain low if all the workers who can’t get jobs just end up moving elsewhere.

So there’s no firm consensus yet. The reason isn’t just politics (though I’m sure that plays a role), it’s the difficulty in getting clean tests of minimum wage increases. Another problem is that it’s hard to know anything about big hikes, which may have qualitatively different effects from the small changes usually observed.

That’s why it’s so great that L.A. and other cities are experimenting with $15 minimum wages. That’s a hefty raise — L.A.’s previous minimum wage was $9. Even though the $15 number will only be implemented by 2020 — which means that after inflation it will probably be less than $14 — that’s still more than a 50 percent increase.

Many free-marketers will see this as a disaster. Many interventionists will see it as a triumph. But identificationists like me see it as the closest thing we’ll get to a random controlled trial. We don’t really know what happens when you raise the minimum wage to $15 — but soon, we will know. We will be able to see whether employment rates fall in Seattle, L.A. and San Francisco. We will be able to see whether people who can’t get work migrate from these cities to cities with lower minimum wages. We will be able to see if employment growth suddenly slows after the enactment of the policy. In other words, federalism will do its job, by allowing cities to act as policy laboratories for the rest of the country.

In the end, as in medicine, a randomly controlled trial is the best way to know whether a treatment works. The early evidence said that minimum wages are a medicine without too many harmful side effects, so now we’re proceeding with a new round of trials.

Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for finance and business publications.