Increasing the minimum wage could result in low loss of headcounts, but a noticeable reduction of lower-pay hours worked

RCTs, Epistemology, and the Minimum Wage: Can experimental evidence clear up the debate on the Minimum wage? Maxwell Tabarrok. Jan 22 2021. https://virginica.substack.com/p/rcts-epistemology-and-the-minimum

The Results

There are four main results: “(1) the wages of hired workers increases, (2) at a sufficiently high minimum wage, the probability of hiring goes down, (3) hours-worked decreases at much lower levels of the minimum wage, and (4) the size of the reductions in hours-worked can be parsimoniously explained in part by the substantial substitution of higher productivity workers for lower productivity workers.”

The significant reductions in hours worked come from two sources according to Horton’s analysis. First, firms are economizing on now more expensive labor; the labor demand curve slopes downward. Second, the substitution of higher productivity workers meant that jobs were completed faster, so the total hours worked went down. Both of these responses to the minimum wage hurt low productivity workers: “I find that workers that had been working for less than the new platform minimum wage raised their wage bids after the platform-wide minimum wage was imposed. These same workers experienced a substantial decrease in their probability of being hired.”

Interestingly, these results are consistent with finding little to no dis-employment effect in an observational study that only measures wages and headcounts (which is what the vast majority of the most popular studies do). This is because almost all of the effects of the minimum wage came from substitution of higher productivity for lower productivity ones, which wouldn’t show up in headcounts, and reduction in hours worked, which is not measured in most conventional data sets.

This finding is also consistent with the predictions of the supply-demand model. Contrary to common understanding, the supply-demand model does not actually predict a dis-employment effect from a minimum wage at all, as explained in Brian Albrecht’s great post. The model does predict a mismatch between how much labor is demanded versus how much is supplied, with deadweight loss resulting from the prevention of positive sum trades. This need not result in unemployment, however, because the supply-demand model describes a market for hours of labor, not for jobs. In our world with large fixed costs for firing and hiring, changing the hours of labor is the natural margin for employers to act on in the face of a minimum wage.

Ultimately, the minimum wage serves as a transfer payment from low productivity workers to high productivity ones. Hardly what supporters of the policy have in mind when they ‘fight for fifteen.’