Minimum Wages and Sensationalism

Having recently gotten back from beautiful Perth, I'm gonna do something I normally don't: repost a Facebook argument I had some weeks back. Not because my arguments were particularly compelling or the topic particularly novel for this audience, but because of sensationalism. Politics brings out the worst in most (all?) of us, and sensationalist claims in order to discredit one's opponent occurs on a daily basis. My list of 3 Things Australian Politics is Mistakenly Obsessed About covers a few of those, and I could have added a forth: Minimum Wages.

This particular claim comes from people I generally agree with. People who most of the time strive for logical consistency, research their facts, apply a healthy dose of scepticism and refrain from sensationalism. All the more reason to question them and scorn them when they fail to.

ABC News reported on May 31 that the nation-wide minimum wage will be increased by 2.4%, which obviously made unions and workers and political pundits cheer. Let's ban unskilled people from getting employment - that'll help them! In response to this, some critics wrote some snarky Facebook posts giving a number for how much unemployment this will create: roughly 83 000 jobs, based on research made by Andrew Leigh back in 2003 & 2004 (which I have linked to before), where he compared changes in the minimum wages over 7 years between Western Australia and the rest of the country. Allegedly, he found an elasticity of labour market participation of -0.29. My friends made the simple calculation of 0.29 * 2.4 * 11.9m, where 2.4 is the percentage change in minimum wage and 11.9 million is the number of employed Australians. Accordingly, the minimum wage would then kill roughly 83 000 jobs.

I initially questioned it based on CPI-inflation numbers. If, for instance, the price inflation over some period equalled the increase in the minimum wage, then surely it wouldn't destroy any jobs (or at least much less than the number stated) - since the minimum wage was just keeping pace with prices in the economy. That is, the minimum wage destroyed jobs at one point in history, but now only re-adjusts what price inflation had already undermined.

They wouldn't accept this, and continued to post rather unfriendly and disrespectful comments, questioning my basic understanding of economics and telling me to do the reading. Nothing could have infuriated me more - especially considering that I had read that particular article for my Hydra (The Hydra That Never Dies) post back in April. So I re-did "the reading" they were referring to. In their minds somehow, one narrow (and kinda flawed) study is permanently conclusive evidence for their claims - a stance that would make Fight For $15 and Bernie supporters seem modest and balanced.  

Here were my final responses:

Leigh’s research is based on differences-in-differences, meaning it doesn’t even try to show a reduced labour participation rate following an increase in the Minimum Wage in WA – but only if the participation rates diverges from participation rates in Rest of Australia. And we’re supposed to take that as precise calculable evidence that Minimum Wage hikes always and everywhere reduces employment by that particular coefficient -0.29? Unreasonable even on its own account. 

1. Question: how does Leigh go from “employment effect (in percentage points)” to “elasticity of labour demand”? The beauty of comparing two percentage terms with one another is that they are elasticities (speaking of Econ101 concepts..). But somehow Leigh roughly doubles them, and makes his number look scarier than it is. I am not sure what he’s doing here - If I'm right, the correct number should be -0.149 - not -0.29.
2. there are about a million other things that could influence the change in participation rates
   (Demographics, anyone?) completely unrelated to minimum wage hikes.
   
3. as Leigh himself calculated, some 4% of the working population have wages around the minimum wage -> that is, even at face value, the calculations above should have been with 11.9m x 0.04 = 0.476m, which in turn then has to be multiplied by the alleged coefficient (or lower, see #1) -0.29 * 2.4 (percentage change in minWage), and the “jobs lost” number you guys should have said was 3300 or so. Unless there is some reason that every working Australian is affected by a minor change (2.4%) in minimum wage laws?
   
4. only 2/6 in the first research and 4/6 in the second research show any statistical significance whatsoever. This is incredibly weak - but somehow Leigh can still aggregate it into A Big Number that you guys can throw around. Shape up.
   
5. to believe that those numbers particular for Western Australia over a seven-year period almost 20 years ago, are accurate for all of Australia today, is an incredible intellectual leap worthy of some kind of medal.
   
6. our conversation above dealt with counterfactuals; Leigh’s numbers are not counterfactuals, and there is no particular reason to believe that the same elasticities would apply to such counterfactuals. Presumably (if we wanna throw around econ101 concepts) there is an alternative use for those resources elsewhere: R&D, purchase machinery, whatever, that offsets negative effects of minimum wage increases.  
   
7. The real world is infinitely more complex than econometric point forecasts (that doesn’t even provide a proper confidence interval..). To believe that you could calculate loss of future employment to the nearest hundred (and be incredibly arrogant about it) is the height of hubris.
   
8. Leigh concludes: “there is substantial variation across estimates of the elasticities – between -0.037 and -0.41”. That is, the Number you are using could be anywhere between 1.5x that number and 1/8 of that number. That’s not even taken into consideration my two major critiques of that Number already.
   
   And this is not even considering my inflation point above, that necessarily mitigates the bad impacts of minimum wage laws.

Ignoring scholarly integrity and using whatever number serves your purpose in order to throw political garbage against one's opponents is not nice. It's not honest. It's not worthy of a serious discussion.

Long story short, sensationalism is stupid - even if you're generally on the right track.