Must-Read: Fred Bateman et al.: Did New Deal and World War II Public Capital Investments Facilitate a “Big Push” in the American South?

Posted on by Brad DeLong

Must-Read: I am really glad that Fred and company have done this–helps explain why Big Defense is the only part of Big Government that America’s southern and western conservatives will admit to liking…

Fred Bateman et al.: Did New Deal and World War II Public Capital Investments Facilitate a “Big Push” in the American South?:

Abstract: The “big push” theory claims that publicly coordinated investment can break the cycle of poverty…

…by helping developing economies overcome deficiencies in private incentives that prevent firms from adopting modern production techniques and achieving scale economies. Despite a flurry of research, however, scholars have offered scarce few real-world episodes that seem to fit the theoretical model.We argue that the postwar performance of the American South, which followed large public capital investments during the Great Depression and World War II, is such an application. Both econometric analysis and a contemporary survey of firms strongly support the notion that big-push dynamics were at work.

Communism and Really Existing Socialism: A Reading List for Post-Millennials

Posted on by Brad DeLong
Manchester 1844 Google Search

What should someone coming of age in 2020 or so–someone post-millennial, who has no memories of all of any part of the twentieth century–learn about communism, and really existing socialism?

It is, I think, very clear by now to everyone except the most demented of the herbal teabaggers, and should be clear to all, that communism was not one of the brightest lights on humanity’s tree of ideas. Nobody convinced by the writings of Marx and his peers that a “communist” society was in some sense an ideal who then achieved enough political power to try to make that vision a reality has built a society that turned out well. All, measured by the yardsticks of their time and geographical situation, were either moderately bad, worse, disastrous, or candidates for the worst-régime-every prize. None attained the status of:

a prayse and glory that men shall say of succeeding plantations, “the Lord make it like that of New England.” For wee must consider that wee shall be as a citty upon a hill…

Moreover, those who took Marx most seriously and fell under his intellectual spell either did first-class work only after they had liberated themselves and attached themselves to some other’s perspective (as Perry Anderson did to Weber via “modes of domination” and as Joan Robinson did to Keynes). Too close and uncritical a study of Marx is a mode of self-programming that introduces disastrous bugs into your wetware. The thinkers useful for the twenty-first century are much more likely to be along the lines of Tocqueville, Keynes, Polanyi, de Beauvoir, Lincoln, and (albeit in his intellectual rather than his political or personal practice) Jefferson than Marx. (And Foucault? Maybe Foucault–nah, that is too likely to introduce a different set of dangerous bugs to your wetware…)

Yet the ideas and the arguments for “communism” were (and are?) powerful. And they were very convincing to millions if not billions of people for fully a century and a half. How should post-millennials understand this? How much about this ought they to learn? And how best to present the subject so that they gain the fullest and most accurate understanding, in the short time that is all that they can afford to spend on it?

Here’s my first second take on readings, in the order in which I would put them a course:

More Scattered Things I Have Written: on and About the Subject:

Gender segregation at work: “separate but equal” or “inefficient and unfair”

Posted on by Austin Clemens
PepsiCo Inc. chairman and chief executive Indra K. Nooyi, left, and Jill Beraud, PepsiCo president of sparkling brands, meet with Barclays Capital investor relations representative Carmen Barone, right, at the post that trades Pepsi on the floor of the New York Stock Exchange Monday, Feb. 1, 2010. (AP Photo/Richard Drew)

Fifty years after the arrival of the contemporary women’s movement on the national stage, the U.S. workforce and the U.S. economy are the beneficiaries of the enormous strides in gender equality. Women are working in nearly all occupations that once were exclusively the domain of men, and many are in prominent leadership roles in business and government. Yet sex segregation in the workplace remains a problem as social norms continue to restrict occupational choices by women and men, thereby distorting labor markets, depressing wages, and hurting business innovation and productivity.

Despite the early gains of women in professional and service jobs that require a college education, many such occupations remain disproportionately male, particularly at the highest levels. Furthermore, most technical and manual blue-collar jobs have undergone little to no integration since the 1970s. Economists Francine Blau at Cornell University, Peter Brummund at the University of Alabama, and Albert Yung-Hsu Liu at Mathematica Policy Research, Inc., examined trends in occupational segregation between 1970 and 2009 and found that the process of desegregation has slowed significantly in recent decades, regardless of the education level necessary for a job. (See Figure 1.)

Why does occupational segregation by gender persist

Traditional economic theory explained occupational segregation by gender as an inevitable consequence of “natural differences” in skills between women and men, but contemporary economists have refocused the blame on gender discrimination by employers, coworkers, and other actors. According to the standard model, levels of segregation should be constant over time as they are determined by occupations’ supposed compatibility with “male” and “female” labor market preferences. Contradicting this prediction, economist Jessica Pan at the National University of Singapore finds that men abandoned formerly all-male professions in droves after women’s participation reaches “tipping points,” fearing the social stigma and wage penalties associated with belonging to “feminine” occupations.

Contemporary economic research has sought to better understand the causes of this male aversion to working with female colleagues. On one hand, the discrimination in hiring and promotion that reinforces segregation is based on stereotypes about women’s skills. As Harvard University economist Claudia Goldin argues in her “pollution theory of discrimination,” men often underestimate women’s skills based on their current underrepresentation in certain occupations and thus discriminate against women in these occupations on the false assumption that increasing their representation would lower overall productivity.

On the other hand, economists George Akerlof at Georgetown University and Rachel Kranton at Duke University argue that discrimination in male-dominated professions is caused by social pressures, interpreting women’s inclusion as a threat to the professions’ masculinity. By this account, men don’t discriminate against women because they view women as less qualified but rather because they are trying to protect the social power men hold through membership in the “boys’ club.” In a similar model of “stratification economics,” economists Sandy Darity of Duke, Darrick Hamilton of the New School for Social Research, and James Stewart of Pennsylvania State University detail how socially dominant groups create and reinforce prejudices against other groups in order to protect their economic, political, and social advantages.

Despite a decline in explicit sexism, researchers argue that gender discrimination today, whether in the form of stereotypes or social pressures, is perpetuated by a new, “egalitarian” form of gender essentialism—the belief that women and men’s social, economic, and familial roles are and should be fundamentally different. While most people now support women’s access to all economic opportunities, they simultaneously expect men and women to pursue traditionally “male” and “female” jobs and regard parenting as the primary responsibility of mothers. Sociologist Paula England at New York University and other researchers note that the resurgence in differential expectations is responsible for the recent stagnation in occupational desegregation and in other indicators of women’s economic inclusion.

Assuming different roles for men and women at work and at home, male-dominated occupations remain mostly structured to meet the needs of a stereotypical male who is expected to have a spouse at home, a work-schedule issue that not only fails to accommodate women but also often actively pushes women out. The idea that women are freely “opting out” of workforce opportunities because they have different career aspirations than men has been thoroughly debunked. Instead, women usually leave their jobs because of negative experiences in the workforce, especially in male-dominated fields. In particular, jobs in these fields often demand a culture of long hours, which does not accommodate flexibility for caregiving, forces many mothers to quit, and likewise discourages fathers from helping out at home.

To make matters worse, male-dominated workplaces are often hostile work environments for women, featuring the highest rates of sexual and gender-based harassment. Overt forms of sexual harassment remain part of the “culture” of many male-dominated jobs, particularly given the limited of application of anti-discrimination laws in many blue-collar occupations, as the late Barbara Bergmann, a pioneering feminist economist, once observed. Subtler forms of gender-based harassment in which men exclusively hire, socialize with, and promote each other are even more common in the STEM (science, technology, engineering, and mathematics) professions, in finance, and in other professional environments and have been demonstrated to limit women’s prospects for advancement, decrease female labor force attachment, and reinforce segregation.

How occupational segregation drives down wages and slows economic growth

At the microeconomic level, occupational segregation by gender substantially depresses female wages and contributes to the gender wage gap. Most of the U.S. economy’s highest paying occupations are predominantly male while most of the lowest paying occupations are predominantly female. (See Figure 2.)

By pushing women into lower-paying occupations, occupational segregation depresses female wages and hurts family economic security. A recent empirical review on trends in the gender wage gap since 1980 by economists Blau and her colleague at Cornell, Lawrence Kahn, attributes half of the present gap to women working in different occupations and industries than men. In addition to keeping women out of the highest-paying occupations, a report by the Institute for Women’s Policy Research authored by Heidi Hartmann, Barbara Gault, Ariane Hegewisch, and Marc Bendick details how segregation also excludes women from the best-paying middle-skills jobs in information technology, logistics, and advanced manufacturing, even though these jobs require similar skills as predominantly female jobs with worse pay. Other researchers clearly demonstrate that this “wage penalty” for occupational feminization is a product of discrimination against women’s labor as opposed to productivity differences between predominantly male and female jobs.

As AFL-CIO chief economist William Spriggs and Case Western University historian Rhonda Williams argue, these trends also are highly racialized: women of color at all education levels are segregated into jobs with lower wages than their white female peers of similar skill level. Conversely, occupational integration produces huge wage increases for women and people of color: econometric analysis by Chang-Tai Hsieh and Erik Hurst at the University of Chicago and Charles Jones and Peter Klenow at Stanford University shows that occupational integration since 1960 was responsible for 60 percent of real wage growth for Black women, 40 percent for white women, and 45 percent for Black men (after accounting for inflation). These patterns indicate that the persistence of segregation today results in a significant loss of income for working women and their families, which should be disconcerting to policymakers given the ameliorative effects of lifting women’s wages on poverty, unemployment, and inequality.

Beyond its effect on individual workers, occupational segregation limits optimal matching of workers with jobs where they can best leverage their skills and fulfill their ambitions. If men and women are pushed into careers based on societal definitions of “masculinity” and “femininity” then they aren’t able to choose the labor market opportunities that best match their skills and ambitions. Most of this issue brief is focused on how segregation limits women’s ability to contribute to traditionally male occupations, but it also limits men’s ability to contribute to traditionally female occupations—a significant policy issue as globalization and technology continue to decrease the availability of many predominantly male blue-collar jobs in the United States.

Indeed, a growing body of evidence demonstrates that occupational integration helps both sexes contribute their human capital to enhancing the productivity of firms. A variety of studies show that establishing a “critical mass” of at least 30-percent women in corporate leadership enhances firm innovation and overall performance. This is consistent with behavioral research that gender integration improves teams’ “collective intelligence.” In the financial sector in particular, occupational integration decreases systemic risk driven by masculine-stereotyped behaviors encouraged in sex-segregated environments, argues economist Julie Nelson at the University of Massachusetts-Boston.

These individual- and firm-level gains can have a massive impact on overall productivity and growth. Research by economists Hsieh, Hurst, Jones, and Klenow demonstrates that occupational integration was responsible for driving 15 percent to 20 percent of the increase in aggregate output per worker since 1960.

Where policymakers can jumpstart integration

To counteract gender discrimination, firms should set explicit targets for increasing female representation at all levels. Because children’s labor market preferences are largely shaped by the representation of women in leadership roles, increasing women’s representation in private- and public-sector institutions can decrease stereotypes and expand opportunity for women at all levels. According to research by economists Marianne Bertrand at the University of Chicago, Sandra Black at the University of Texas-Austin, Sissel Jensen at the Norwegian School of Economics, and Adriana Lleras-Muney at the University of California-Los Angeles, Norway’s 40 percent minimum requirement for women on corporate boards increased female representation, attracted female board members with greater qualifications, and reduced gender wage gaps on boards. While it may take time for these effects to trickle-down to entry-level workers, a study by Lori Beaman at Northwestern University, Esther Duflo at the Massachusetts Institute of Technology, Rohini Pande at Harvard University, and Petia Topalova at the International Monetary Fund, shows that a law mandating increased representation for women on municipal councils in India dramatically decreased bias against women in the population as a whole while expanding girls’ educational opportunities and career aspirations.

In addition to interventions at the top, researchers, including Harvard’s Rosabeth Moss Kanter, argue that by establishing a critical mass of women in all work environments employers can dramatically reduce the prevalence of discriminatory behaviors and force their workplaces to adapt to their female employees’ needs and demands. As Yale Law professor Vicki Schultz argues, anti-discrimination law and policy should thus emphasize increasing women’s numerical strength across occupations and dismantle the workplace structures discussed above that create sex differences in labor market choices—as opposed to simply reflecting them. Sociologists Sheryl Skaggs of the University of Texas-Dallas, Kevin Stainback of Purdue University, and Phyllis Duncan of Our Lady of the Lake University find significant “bottom-up” effects of increasing women’s general representation on their representation in managerial positions, complementing the “top-down” effects of increasing their numbers on corporate boards.

While work-life reforms benefiting both fathers and mothers are essential to developing an inclusive workplace, setting explicit targets for women at all levels would help reverse discrimination against women in promotion decisions based on their greater probability of taking leave, as Cornell economist Mallika Thomas documents. Furthermore, while male-dominated occupations can and must change to include women, it is equally important to elevate and integrate female-dominated occupations by mandating equal pay for jobs of equal value or “comparable worth,” as noted by, among others, economist and IWPR president Heidi Hartmann as well as economist and former Bennett College President Julianne Malveaux.

Beyond reforms within labor markets, ending occupational sex segregation will require a comprehensive strategy to prevent the formation of gender stereotypes at a young age that later “spillover” into the workplace. Cultivating inclusion must start early in order to have a lasting impact on children’s beliefs and experiences. Research demonstrates, for example, that unnecessarily segregating boys and girls in educational or social activities creates arbitrary categories of “us” and “them,” sending a message that children’s opportunities should be determined by their gender. Efforts to counteract gender stereotypes can also help women later on in their careers. Indeed, the IWPR report by Hartmann, Gault, Hegewisch, and Bendick argues for public-private partnerships to train and match women from “on-ramp occupations” to higher paying traditionally male jobs that require similar skills.

Achieving successful integration at all levels will take work. However, social scientists including legal scholar Joan Williams at the University of California’s Hastings School of Law and behavioral economist Iris Bohnet at Harvard are proposing a variety of strategies for decreasing bias, overcoming difference, and advancing women throughout their educational and professional careers. As Goldin and Princeton University economist Cecilia Rouse argue in their seminal study on the gender equity benefits of blind auditions for symphony orchestras, these strategies should focus on results-based approaches that decrease the influence of social networks and gender biases in evaluation, hiring, and promotion of women.

Leveraging these behavioral changes to promote gender equity and inclusion in all institutions boasts enormous potential to raise wages, boost productivity, drive innovation, and expand opportunity for women and men across the economy.

Will McGrew is an intern at the Washington Center for Equitable Growth and a Dahl Research Scholar at the Yale Institution for Social and Policy Studies. He is studying Economics and Political Science at Yale University.

Subprime auto loans are not the second coming of the U.S. mortgage crisis

Posted on by Ed Paisley

This past week on his show Last Week Tonight, the comedian John Oliver highlighted the rise of subprime automobile lending in the United States over the past couple of years. The lending practices that Oliver’s segment highlights—many of them deceptive—are clearly something policymakers should investigate. This subprime lending trend has been going on for several years now, with implications for how we think about the U.S. financial system. Oliver, though, carried his observations to an unfortunately familiar place—the subprime mortgage boom of 2002-2006—an analogy that’s seems telling at first glance but which is not really apt given the smaller effects of subprime auto lending on the overall economy.

First, the sheer size of home mortgages compared to auto loans should give us pause. According to data from the Federal Reserve Bank of New York, there were $1.1 trillion worth of auto loans in the second quarter of 2016, an almost 50 percent increase since the end of the Great Recession in the second quarter of 2009. The amount of mortgage debt is much larger ($8.84 trillion in the second quarter of 2016), and its growth during the housing bubble was much faster (almost doubling from 2001 to 2007).  Oliver recognizes this size discrepancy in his segment but not the speed discrepancy.

Oliver’s analogy has other problems as well. The reason why the collapse of the housing bubble was so vicious was because the inflation of the bubble increased consumer spending quite a bit. Many households used appreciating homes as a way to finance more consumption. But it’s well known that cars are a depreciating asset. They lose value over time. It’s highly unlikely that anyone is using their car as an ATM to finance spending. More households with auto debt will reduce consumption as money is funneled to service the debt on their cars.

The role of auto loans in the financial sector is also quite different than mortgages. Oliver notes that subprime auto loans are being securitized and sold to institutional investors just as subprime mortgages were before the housing crash and the onset of the Great Recession. Yet mortgage-backed securities weren’t just incredibly popular securities bought and sold by banks. They also became an integral part of the financial system, with banks using triple-A rated securities as risk-free collateral in inter-bank lending. These bonds were, in effect, privately created money used in the shadow banking system. There is no evidence that the securities based on auto loans are serving such a function right now.

But let’s not miss the broader point. The subprime auto-loan practices highlighted by Oliver seem to be very predatory. What’s more, loans made by auto dealers, known as dealer-originated loans, are not under the jurisdiction of the U.S. Consumer Financial Protection Bureau, the federal agency that would naturally look into these issues. Policymakers concerned by these trends may want to look into this exemption. More broadly, the continuing ability of some actors in the U.S. financial system to target low-income and low-credit workers with financial products is something policymakers need to keep in mind as they consider the role of the financial sector in creating strong and sustained economic growth.

Must-Read: Alisdair McKay and Ricardo Reis: Designing effective automatic stabilisers of the business cycle

Posted on by Brad DeLong

Must_Read: Alisdair McKay and Ricardo Reis: Designing effective automatic stabilisers of the business cycle:

Brexit has raised the possibility of a recession on both sides of the Atlantic….

Unable to use traditional remedies like monetary or fiscal policy stimulus, policymakers may consider automatic fiscal stabilisers…. The social insurance system stands at the centre of automatic stabilisers, yet we still know too little about how it affects the macroeconomy (Blanchard et al. 2010)…. We focus on two key programmes: a progressive tax system, and unemployment insurance.  We find that unemployment insurance has a substantial stabilising effect on the business cycle, and as a result the optimal policy is to have a more generous unemployment benefit than would be optimal in a world without macroeconomic fluctuations.  On the other hand, the progressivity of the tax appears to have little effect on the business cycle….

[The] redistribution channel based on marginal propensities to consume is the classic explanation of how unemployment benefits function as an automatic stabiliser, we find that benefits have an even more important effect on the economy. Households face considerable uncertainty over employment and over the wages they earn when employed. The fear of losing their income because of an unemployment spell in the future leads workers to want to save, and so reduce their consumption.  That is, unemployment reduces aggregate consumption demand not just by reducing the current income of unemployed workers but also by inducing precautionary savings by all workers who fear the possibility of unemployment.  By making unemployment less painful, unemployment benefits reduce these concerns and give workers confidence to spend….

When we quantify our model, we find that business cycle stabilisation considerations increase the optimal unemployment benefit replacement quite substantially.  We find that in the optimal unemployment insurance replacement rate is 49%, while it would be 36% in the absence of business cycles…. The unemployment insurance system is very effective at stabilising the business cycle by dampening the cyclical swings in household precautionary savings motives…. Recessions have large welfare costs due to the increase in uninsurable risks that households face.

While similar arguments can be put forward for the benefit of more progressive income taxes, both in terms of redistributing resources in a recession and by lowering precautionary savings, progressive income taxes have a stronger negative effect on average economic activity and a more limited effect on volatility, because of the comparatively small variation in income of those continuously employed during the business cycle. Therefore, we find that considering automatic stabilisation has a negligible effect on the desired level of progressivity.

Must-Read: John Taylor (2000): Reassessing Discretionary Fiscal Policy

Posted on by Brad DeLong

Must-Read: This looked very good at the time. (I should know: I commissioned it, and strongly argued through the editorial process that it was an essential thing to publish–and Alan Krueger, Jim Hines, and Tim Taylor were more than eager to concur.) But today it looks a lot less smart:

John Taylor (2000): Reassessing Discretionary Fiscal Policy:

Recent changes in policy research and in policy-making call for a reassessment of countercyclical fiscal policy…

Countercyclical fiscal policy should focus on automatic stabilizers rather than discretionary actions. Monetary policy has been reacting more systematically to output and inflation; long expansions in the 1980s and 1990s demonstrate policy effectiveness. It is unlikely that discretionary countercyclical fiscal policy could improve things, even with less uncertainty about fiscal impacts. A discretionary countercyclical fiscal policy could make monetary policy making more difficult. Discretionary fiscal policy should focus on long-run issues, such as tax reform and social security reform.

Taylor, John B.. 2000. ‘Reassessing Discretionary Fiscal Policy.’ Journal of Economic Perspectives, 14(3): 21-36.
DOI: 10.1257/jep.14.3.21

Question: if you want to assign–and we may well want to–responsibility for stabilization policy to central banks, what passive support do they need more than our current automatic stabilizers and what additional active tools do they need in order to make it work well?

Posted in Uncategorized

Must-Read: Jesse Rothstein: The Economic Consequences of Denying Teachers Tenure

Posted on by Brad DeLong

Must-Read: Jesse Rothstein: The Economic Consequences of Denying Teachers Tenure:

There’s just not actually a long list of people lining up to take the jobs…

If you deny tenure to someone, that creates a new job opening. But if you’re not confident you’ll be able to fill it with someone else, that doesn’t make you any better off. Lots of schools recognize it makes more sense to keep the teacher employed, and incentivize them with tenure. It’s all about tradeoffs. If you get rid of tenure and start laying off lots of teachers, and you don’t do something else to make the job more attractive, then you won’t get enough teachers… basically economics 101…. You get more people interested in teaching when the job is better, and there is evidence that firing teachers reduces the attractiveness of the job….

During the Vergara trial there was a debate over what would happen if we lengthened the probationary period, and whether principals would wait until the end of the clock to fire a bad teacher, or if they would they fire a lot of bad teachers at the end of their first year. I argued that it was unreasonable to expect the principals to make the firing decisions before they had to. It’s a lot harder to say, “I’m confident this teacher wouldn’t work out” than it is to say, “Well let’s just give it a little more time.”

Must-Read: Nick Bunker: Why Slightly higher Inflation Might Be a Benefit

Posted on by Brad DeLong

Must-Read: A somewhat puzzling finding by Nakamura et al. that higher inflation–at least in the sub-10%/year environment of the post-WWII United States–does not degrade the functioning of the price system by increasing the spread of real prices. If this holds up, then the only remaining cost of steady, moderate inflation is having to change your prices more frequently. And even though are models tend to say that should be a heavy burden, I find that very unlikely: whatever the reason for fixed, posted prices is, I cannot see it having the implication that it is costly to change them to compensate for ongoing inflation once a year rather than once every three to five years.

Nick Bunker: Why Slightly higher Inflation Might Be a Benefit:

The U.S. Federal Reserve Board hasn’t hit its stated inflation target of two percent in more than four years….

With the central bank’s benchmark Federal Funds interest rate at close to zero, perhaps it’s time to rethink that target rate. Why not aim for a higher inflation rate of, say, 4 percent, which would allow inflation-adjusted interest rates to go even further below zero  to help boost economic growth during a possible future downturn?… Emi Nakamura [et al.]… built a brand new dataset on inflation before tackling a very important question on the costs of inflation….

Nakamura [et al.]… find… that the absolute price changes don’t vary that much regardless of the inflation rate. This means it doesn’t look like higher rates of inflation cause more price dispersion…. [Instead,] price hikes happen more frequently when inflation is higher, which gives more credence to “menu-cost” models of price setting…

Credible research designs for minimum wage studies

Posted on by David Evans

The employment consequences of increasing the minimum wage in the United States continue to be a major subject of debate, but how researchers choose to estimate the effects of raising the minimum wage can substantially affect the results of their work. In “Credible research designs for minimum wage studies”,1 my coauthors and I examine one group of low-wage workers—teenagers—whose hourly wages are significantly raised by minimum wage increases.

Download File
Issue Brief: Credible research designs for minimum wage studies

A common objection to raising minimum wages is that doing so will reduce the employment opportunities of low-skilled workers such as teenagers. We show, however, that some studies find negative effects of the minimum wage on teen employment because they fail to control for other economic factors that independently reduced employment around the time of a minimum wage increase. After controlling for these factors, we demonstrate that the large, negative effect on teen employment disappears.

State minimum wage increases are heavily concentrated in different regions of the country

After the frequency of federal minimum wage increases slowed during the 1980s and 1990s, many states began experimenting with setting their own wage floors above the federal level. By last year, more than half of all states had a minimum wage higher than the federal floor. This extensive history of state-level policies offers an attractive set of experiences for researchers to assess the effects of minimum wages.

Economists have developed a large body of research comparing the labor market outcomes in states that raise their minimum wage versus those that don’t. Yet a naive comparison of these two groups of states can lead to misleading conclusions because the variation of state-level minimum wage policies is not random (which is ideal for assessing the impact of government policies) and is instead geographically concentrated. (See Figure 1.)

Figure 1

My coauthors and I explain in our paper that the map divides states into two groups: states with high average minimum wages and states with low average minimum wages during the 1979-2014 period. States that have high minimum wages were more likely to have been raising their respective wage floors above the federal floor. States with low minimum wages typically followed federal policy. This difference is clearly region-specific.

This clustering of minimum wage policies within regions of the country is an obstacle for credible research on the minimum wage because comparing the employment of minimum wage-raising and non-raising states effectively compares regions such as the Northeast versus the South. Employment patterns differ in these regions because of a host of economic and political reasons not affected by the minimum wage. High minimum wage states, for example, also boast higher unionization rates and experienced smaller declines in unionization over the past three decades. They were much more likely to vote Democratic in the 2012 presidential election. In low minimum wage states, over the past 20 years, the foreign-born share of the population grew much faster.

In summary, there are reasons to be concerned that states that tend to raise their minimum wages have different employment trends than states that do not, irrespective of the minimum wage. Simply comparing minimum wage-raising and non-raising states can therefore give misleading estimates of the effects of the policy.

States where the minimum wage is high were experiencing employment problems even before minimum wages went into effect

Some minimum wage research does not adequately address the problems caused by the non-random pattern of minimum wage increases. In our paper my co-authors and I re-examine a key 2014 study, “More on Recent Evidence on the Effects of the Minimum Wage in the United States,” by David Neumark at the University of California-Irvine, Ian Salas at Johns Hopkins University, and William Wascher at the Federal Reserve Board.2 This study finds large, negative employment effects of the minimum wage on teenagers, a demographic group with a large share of minimum wage workers.

The methodology behind this study, however, also generates an implausible conclusion—that teen employment in high minimum wage states was falling in the years before the minimum wage was increased. The mistaken results of this study are a consequence of not controlling for the striking spatial pattern of minimum wage increases in different regions of the country.

One simple way to assess directly whether minimum wage-raising and non-raising states are comparable is to look at labor market outcomes before a minimum wage increase actually occurs. Borrowing from the language of randomized control trials in medicine, this can be thought of as a placebo or falsification test. We should not see the effects of drug before a drug is administered in a well-designed experiment. If we observe in a drug trial that the health of the treated group was improving relative to the control group even prior to taking the drug, then we should be hesitant to ascribe subsequent improvements in health to the causal effect of the drug itself.

Similarly, my co-authors and I examine the estimated effects of the minimum wage on teen employment in the years before and after minimum wage increases. We compare the results from the approach favored by Neumark, Salas, and Wascher to the approach we favor. First, we estimate the effects of the minimum wage using the preferred model of Neumark, Salas, and Wascher, in which any state is on average a good control for another state in the absence of minimum wage increases. Second, we consider the model that we prefer, one that controls for the non-random geographic pattern of minimum wage increases, allowing states to have different teen employment trends and restricting comparisons to nearby states.3

With these two models in hand, my co-authors and I calculate the elasticity of teen employment with respect to the minimum wage—specifically the percent change in teen employment in response to a 1 percent change in the minimum wage. Our findings show that the minimum wage did not lower teen employment in our preferred model (with rich spatial controls) which passes the falsification test. (See Figure 2.)

Figure 2

The model preferred by Neumark, Salas, and Wascher shows large, negative effects of the minimum wage at the time of the minimum wage increase and afterwards (years 0 through year 3, in the left panel of Figure 2). At the same time, the model decisively fails the falsification test. Teen employment in minimum wage-raising states is already low in all three years prior to the minimum wage increase (years -3 through -1). For every year prior to the minimum wage increase, their model produces a statistically significant negative employment effect—even though no minimum wage increase was enacted in those years.

This violation of the “parallel trends” assumption—that states on average have similar teen employment trends in the absence of minimum wage differences—is a clear sign not to trust the estimated employment effects of this model.

In contrast, my co-authors and I successfully control for the non-random pattern of minimum wage increases by using a model with a richer set of geographic controls (see the right panel of Figure 2). As is expected by a credible research design, there is not much change in teen employment in the years before the minimum wage increase. Teen employment elasticities during the pre-treatment period are generally small and are all statistically insignificant. In addition, there are no indications of negative employment effects in the years after the minimum wage increase. None of the point estimates are economically large or statistically significant by conventional standards.

Although these geographic controls are natural choices to account for the non-random spatial pattern of minimum wage increases presented in Figure 1, there are other research designs one could consider. In our paper, we present additional evidence from research designs that incorporate other controls for the non-random nature of minimum wage policies, such as limiting comparisons to nearby counties, or using estimators based on techniques that select alternative control groups. Many of these estimates also suggest small-to-no employment effects for teens.

As my coauthors and I explain, teenagers are a small share of the total workforce, but the studies of this group are nevertheless informative for understanding the overall employment effects of the minimum wage. If there were widespread employment losses due to the minimum wage, then we would likely see them among low-skilled groups such as teenagers. Yet the evidence we present in our paper suggests that teenagers did not suffer job losses for the kinds of minimum wage increases typically experienced in the United States over the past 35 years.

(Photo by Adam Croot, via Flickr)

Must-Reads: August 17, 2016

Posted on by Brad DeLong

Should Reads: