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Last week’s minimum wage hike risks job losses

July 9, 2017 - 17:15 -- Admin

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 these stories 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 minimum wage is good or bad. Try to distrust your certainty a little.

David on Twitter: @shorewalker1