 to Hawaii Together on the Think Tech Hawaii Broadcast Network. I'm your host, Tili Akinah, president of the Grassroot Institute. Hawaii lawmakers are poised to hike the minimum wage, but some say that could actually hurt people it's supposed to help. Now there are many arguments by those who have opposing points of view, but the research is in. The minimum wage mostly hurts the people it's intended to help. That's what we found, and that's the finding of David Newmark, economist and co-director of the Center for Population, Inequality and Policy at the University of California, Irvine, and he's also the co-author of Minimum Wages published by the MIT Breasts. On today's program, I'm going to talk with Newmark about his comprehensive review of evidence on the effect of minimum wages on employment, skills, wages, and income distributions, and also on the longer-term labor market outcomes. But most notably, we're going to take a look at his conclusion that ultimately, minimum wage laws aren't a good policy tool. Please welcome to the program David Newmark. David, thank you so much for joining us today all the way from California. Thanks, Kili. Well, I'm so glad to have you. I've been looking forward to chatting with you. Tell me a little bit first about your own background and how you got into the field of researching minimum wages. It's a long story. It's not a long story. It goes back a long way. It's a little funny though. I was a grad student. I finished in 87, my Ph.D. at Harvard, and sometime must have around 84 when we first started taking our courses in our fields. I actually remember my advisor coming in and saying on the first lecture was kind of, well, what do labor economists do? What might you do research on? And he said, let me tell you one thing you shouldn't waste any time on is the minimum wage. And he plopped down on the table, and it's going to be generation specific, whether you know what I'm talking about, what looked like something as thick as the New York phone book, which used to be like five euros. And it was about that high. It was the comprehensive report by the U.S. Department of Labor by something called the Minimum Wage Study Commission. And they had commissioned papers by everyone under the sun who was at that time probably eight or nine years older than me or more who worked in labor. And he said, look, we know everything. Forget about it. And then my first job was at the Federal Reserve Board. And one of the things that happened when you work there is, you know, they obviously keep you very up on the news, right? Because you're working at the Fed. And we would get these, this thing called the Daily Labor Report, which was a compendium of state laws, court rulings, anything that might affect labor policy. And my co-author, Bill Washer and I noticed that a bunch of states started raising the minimum wages. Previously, we had pretty much only had a national minimum wage. Well, David, you mentioned Bill Washer. He's the co-author of your book, Minimum Wages. How extensively have you researched this topic compared to other people across the country? I'm pretty sure I've written more papers than anybody else. That's right. So we really appreciate that. And we're glad to be able to pick your brain today. Overall, just a banner question I have for you. What are the effects of minimum wage laws? We'll dive into it a little more deeply as we go on, but just in general. Sure. So first of all, let me say, you know, I think my view is a little more nuanced than your introduction. All right. Because this is the point of my research, but something that is often missed by advocates. Well, as frankly, I would say by sort of the blanket opponents. And that is that the effects are heterogeneous. Okay, so obviously the first thing minimum wage laws do, wages for some workers. I mean, that's what the laws do. And, you know, we tend to comply with these things in the US. So wages are pushed up now. As far as the advocates are concerned, you know, end of story. So that's all good. Right. It's a free lunch, apparently. And people who make low wages now earn more. But what the research shows, I think most of the research shows is that there are other consequences. There is some job loss that stems from the minimum wage going up, which doesn't mean that everybody is hurt, right? Because obviously some people still keep their jobs and earn higher wages. And if your wage has gone up and A, you have your job and B, your hours haven't been cut, well, you're happier, right? But there are offsetting effects and there are some tradeoffs. So my point is always based on the research that you got to think about these tradeoffs and you can't pretend they don't exist. The other key point, I think that is slightly more subtle, but we can get into it in more detail is that the minimum wage is really blunt, by which I mean not precise, a really blunt tool to try to affect the underlying problem. The underlying problem is low family income. That's what we care about. I don't care if I don't know if you have a teenage son or not, but I don't really care if your teenage son works at a low-wage job. That is not a policy problem that any business owner or taxpayer should be worried about. What I am worried about is a single mother who works at a very low-wage job and how many resources she has available for her and her kids between what she earns at work and what she earns and what she gets from other government programs. But that's a problem of poverty, which we define or low income, which we define at the family level. And the simple fact is, and then I'll stop, is that while obviously being a low-wage worker and being in a low income family are related, they're not very related. And as a result, when you try to increase incomes of low income families by raising the minimum wage, you give a lot of benefits to people who aren't low income families, like the upper middle class teenager. And you don't do anything for the people who don't work very much because you don't get anything for the minimum wage unless you work. I think you've explained it very well that the minimum wage is a very blunt tool and probably the wrong tool for trying to solve the problem of overall low wages. But you spoke about the fact that the effects of minimum wage laws are not homogenous. They're different for different people in different categories. So specifically, how do minimum wage laws affect the poor? So let's just go back to heterogeneous effects for a minute. So in the aggregate, some people's wages are pushed up, and then there's some job loss and some hours reduction as well. We don't actually have great evidence on how the employment effects or the hours effects differ across the income distribution that is for a low wage work in a poor versus non-poor family, which is sort of mystifying because I think we should. It just turns out, and this is a reflection of my point, that low wage work and low income families are by no means the same thing, that when you start slicing the data really finely to divide it by both wage level, it was really affected by a high minimum wage, and very low income families. Unless you have really huge samples, you don't have many people left. But what you can do is say, what does a high minimum wage do to the poverty rate or some other measure of the instance of low income? The poverty rate is one we use. It's not necessarily the ideal one, but it's sort of an agreed upon one. And the answer there is, say, there's been more research since my book, but essentially you can't find any strong evidence, I think, that minimum wages reduce poverty. It's probably largely awash, whereas obviously a policy that is intended to reduce property, the instance of low income, ought to have the effect. I mean, look, if we take TANF, the welfare, the current incarnation of our welfare program in the U.S., in Hawaii as well, and raise the amount of income we gave to families that were eligible for TANF, we would clearly reduce poverty and increase incomes of low income families. Why? Because the program is targeted to low income families. You don't get it if you're not a low income family. If you do kind of simple back of the envelope calculations, I know it's recent one of these I've seen as a grad student of mine from a few years ago, and you say, let's imagine we raise the minimum wage. I don't have a calculation for Hawaii, for Hawaii, or for an $18 minimum, but he was considering sort of a $15 minimum for the U.S. as a whole. And you say, let's assume there's no response. Everyone keeps their job. No one's hours fall really simple. But so your wage simply gets swept up to the minimum. There's a big increase in the wage bill, right? Employers are paying low wage to workers more. And now you simply say, okay, all those extra dollars going to workers who are now making more because of the higher minimum, how are they distributed across families at different parts of the income distribution? And a very small share goes to poor families. Even a smaller share goes to what we call extremely poor families, families half the property line. It's it varies slightly, but about 15%, you know, varies a bit than what you would use data. And in contrast, about 40% goes to families with above median income, right? Median is the income level, which half are below, half are above. So median income is not high income, it's still a fairly low income. But the point is more, you know, nearly half the benefits go to families in the top half of the income distribution. And it's exactly because there's a lot of young workers, age, just because they're younger, they don't know anything yet. They're not going to be poor later. They might be an MIT engineer later on, but they have to have some job in high school. And as I said, you know, so they get the benefits when you raise the minimum, employers have to pay them more. It's not clear we're accomplishing anything from a policy perspective. And it's even conceivable that yet another sort of side of the equation is that the people paying the higher prices to pay those, you know, higher income teenagers, higher minimum wages have lower incomes than they do. David, your research findings are based on having reviewed a vast amount of studies that is out there now. And there's tremendous research. My question is this, why is there still so much economic debate about the minimum wage? Why do people come to so many different conclusions about it? What do you think is going on here? Well, let me just first to tell us the two premises. Is there a lot of continuing research on the minimum wage? Yes, there is. We'll come back to the wine a second. You said, why do people come to so many different conclusions? Actually, that's the surprising thing. So I have a recent student of mine who finished Pete, very recently, Pete Shirley and I. We wrote a paper which just got accepted from publication. And we were asking, it seems like a very simple question for a researcher to ask, which is what all the other papers actually say? Because you often get this summary of the literature. Oh, half the evidence finds job loss and half doesn't or no one can agree or estimates are all over the map. And I was kind of interested in actually systematically tabulating that all up and seeing if that's true or not. Which you might think I should be able to do because I study this stuff all the time, but you know, someone sends me a paper or someone else doesn't send me a paper. Who knows what I'm seeing. So we did this very systematic survey and we actually surveyed the authors of all the US minimum wage papers, pretty much all of them published since 1992. And I don't have the picture with me. I didn't think to prepare for the talk for this for this discussion. But we kind of plot the distribution of estimates, almost all negative, right? There's some outliers. Sure. This is not laboratory science where, you know, you replicate something under identical conditions, you get the same answer. It's social science. People study minimum wage effects differently. But actually, there's a very strong preponderance of the evidence that says there is job loss from a higher minimum. And again, that doesn't mean you shouldn't do it. It just means there's a trade-off and you should think about the cost and benefits and not just the benefits. I like the fact that you point out that it's a trade-off that it's not either or but what if you could summarize for us or some of the fundamental downsides of imposed minimum wages. Right. So the fundamental, okay, so this is, I think it's most useful to go back to the economic model, you know, how do we teach, how do we think about it? And how do I just finish teaching my undergrad labor course? How do we teach this? So the standard story, which I think is largely worn out in the data, is the following. The minimum wage goes up, right? Government raised the minimum wage, federal government, state government, city government now. That, of course, forces up the wage of people who were previously making less. That makes that input, call it low-skilled labor, relatively more expensive compared to the other inputs firms use, which can be materials, physical capital, and perhaps most importantly, more skilled labor. Labor whose price isn't affected directly by the minimum wage. So that leads firms to substitute away from what the labor that's now got more expensive, just like if we tax cigarettes, you know, people smoke less, right? Same idea. That inevitably raises the cost of production for firms, which raises prices. And it's that effect, prices go up, consumers demand less, that leads to an additional source of employment reduction. So the fundamental downside is, you know, we have a type of worker, namely the low-skilled labor, the ones who are affected by minimum wage laws. And we are trying to help them, although I would argue we should be trying to help more families, and some will have low wage work, some won't. But we're trying to help low wage workers. What a minimum wage does is tax the use of low-skilled labor. That's all, that's, you know, from the point of view of business, for a business, it's no different if I say, you know, Killy, you've got to pay that guy $7 more, or you've got to pay me $7 tax when you hire that guy. Absolutely no different, right? And we know taxes tend to discourage the use of the things you're taxing, unless it's something you absolutely can't do without. So as long as there are substitutes for lower-skilled workers, a higher minimum wage effectively will, you know, the fundamental source of the downside is, it makes using that labor more expensive. And that's what creates the trade off of you. That makes sense, David. We're going to take a quick break right now, and I say to our viewers, we will be right back, so don't go away. We're with David Newark, we're talking about minimum wage. We're on the Hawaii Together program on the Think Tech Hawaii broadcast network. We'll be right back. On April 1st, at 10 a.m. Hawaii time, Think Tech will be presenting a 90-minute webinar panel program called Burning Global Issues. This will be an examination of six continents by thought and community leaders living in or expert in those continents, discussing burning issues affecting each of them, how they relate to the prospects for functioning democracy, and what we can learn from all of that. The moderator for the program is Pamela Spratland, a 30-year Foreign Service Veteran who has served as U.S. Ambassador and Consular Official in a number of overseas posts. The panel is comprised of Carl Baker, Senior Advisor of Pacific Forum on China and Asia, Rupamati Khandekar, Director of Global Relations Forum on India, Elsa Jhark Hadyan, a consultant with Project Expedite Justice on the Middle East, Ilbert Nuagira, an Economist in Kampala, Uganda, on East Africa, Carl Akrami, of the Social Studies Faculty at Punahou School on Eastern Europe, and Juan Telo, a Business Attorney in Bogota, Colombia, on Latin America. The program is sponsored by Project Expedite Justice. We hope you will attend, and that this program will help you better understand these important global issues. Please go to our website, thinktechhawaii.com, and register. Mahalo. Thanks for coming back. I'm Kili Akina on Hawaii Together, on the ThinkTech Hawaii Broadcast Network. My guest, David Newmark, is the co-author of Minimum Wage, as published by MIT Press. We're talking about some of his findings he has produced in the last several years on Minimum Wage. We're going to go right back to it. David, I've got a question for you about one of the major studies that used to be cited all the time. It was produced in the 1990s by David Card and Alan Kruger, and it supposedly showed that the Minimum Wage doesn't always cause job loss. What has your research found about this quite often cited study? Well, first of all, it is often cited, and it's not just that it used to be cited. It's still cited a lot. It was written in 1992, so it's not as old as me, but it's getting old. I want to say a couple of things. First of all, what people often forget, and I'm not always sure it's unintentional on the part of advocates, is the study didn't just show that the Minimum Wage didn't reduce employment. It actually found whopping large positive effects on employment. People often forget that, but I'm not cherry-picking here. Go back to the paper. We argue in the literature about disemployment effects, about what we call elasticities of around 0.2, let's say, minus 0.2, which means that the Minimum Wage goes up by 10 percent, low-skilled employment falls by 2 percent. They had elasticities of about positive 0.7, which means you raise the Minimum Wage 10 percent, you raise employment, in their case, fast food restaurants they were studying, by 7 percent, which let me not mince words, patently absurd, it's not possible. There's essentially no research that finds positive. That was written in 1992. It sort of took labor economics and the policy world by storm. I never quite understood why, without regard to the quality, it was a study of one Minimum Wage increase in one industry, fast food, in one pair of states, New Jersey, Pennsylvania. It was never clear to me why you would draw really strong policy conclusions from one paper, especially when there's lots of other papers. You might have had differing opinions on their quality, but there are lots of other good papers that found very different effects. That doesn't mean we should ignore new studies. It doesn't mean we should ignore new evidence, but we should proceed slowly. When a study is surprising, there's often a reason it's surprising. Sometimes it's right and we were all wrong before, but we should always give some weight to the alternative that it's surprising because it's wrong. In this case, Washer and I went back to not the data because we wanted to collect better data. They had surveyed managers at restaurants and asked them a very vague question, which literally, I don't know the exact quote, but pretty close, was how many people work in your store? And they did that twice before and after the increase in the same period in the state, Pennsylvania, where the minimum wage didn't increase. That's a really strange question to ask the fast food restaurant manager. You know, at the New Jersey Turnpike where McDonald's opened 24 hours a day, seven days a week, and I asked you how many people work in your store? Do you say, oh, there's 130 workers on the payroll to cover our 24-7 shifts? Or do you say, eight, because there's eight people here right now? I have no idea. And then you come back eight months later and ask a different manager, whoever answers the phone, the same question, and who knows what they tell you that time. So we actually went back and got the payroll records from the restaurants back in the day of computer paper printout. You'll remember this, you know, with the holes down on the side and they mailed it all to us. I actually have it in my file cabinet, believe it or not. Went through the data and found modest small effects, which is kind of what you get in most of the research literature. So the study was based on flawed data. And I think most researchers, if they find a really surprising result that really overturns a lot or may overturn a lot of other studies, they sort of say, this is really interesting. We should think a lot more about that. I think the problem with this study was, and it wasn't so much the authors, but others, you know, with skin in the game, just said, this is the be all and end all. And forget everything that came before it. And frankly, everything that came after it. And that's really why your approach works so well in terms of doing a comprehensive review of the studies that are out there. Let me bring this home to us here in Hawaii. Our legislature is in session now. It's looking at a couple bills. HB 2510 would increase our minimum wage in Hawaii to $12 per hour this year and gradually increase it to $18 by 2026. So what do you think the downsides are that could occur with such a policy? And do you think that delaying the $18 amount until 2026 reduces the harm that could be caused, particularly due to inflation? Okay, a lot of questions. I want to come back. One thing is just before you ask a question, you know, you talked about me doing reviews of the evidence. I mean, most of my work is original papers on minimum wage effects. The book has a lot of review and course. And my studies, they don't all find strong evidence of negative effects. Sometimes they do different approaches weaker, stronger. You know, I think the consensus, the evidence is is you reduce jobs. So to the to the Hawaii question, first caveat is I've been to Hawaii and I love it. I don't know much about its economy other than whatever is true of other economies. So I don't have any strong reason to think that minimum wage effects are very different in Hawaii than elsewhere. I will say, you know, I think there's one potential qualification of that. And that is remember what I said before that that kind of what gets the ball rolling on the job loss is that the higher minimum wage pushes up prices and that reduces demand. And that's one of the reasons employers use less labor. The other is you can substitute away from low skilled labor, right? Now, so what that means, there's two implications that one is one implication to two questions. If minimum wage effects will be less severe in terms of job loss for the low skilled, where two things are true, one is there's not as much scope to substitute towards low skilled labor. And the other is where consumers are not sensitive to prices. Okay, so it's conceivable. I'm just just to raise the possibility that that, you know, I know the tourism industry, I know that's not the whole Hawaiian economy, but I know it's a it's obviously disproportionate share road for other places, for obvious reasons, right? It's beautiful. You know, the tourism industry may be an industry where there's fewer substitution possibilities where I can walk you to a McDonald's, there's a lot of capital back there that has replaced workers, a very capital intensive production of food. It's not clear, you know, you can reduce service, the worst industry, right? But you can't reduce it, maybe you can't reduce it nearly as much, you know, you can't automate. Yeah, you can have self check in and this that and the other, but there may be, you know, some limited scope for that. The other is people may be somewhat insensitive to the price for the same reason that I'll pay a lot more for a beer and an airport than I will anywhere else because I'm in the airport, I'm stuck, I can't go anywhere. You know, to the extent that Hawaii has a unique idiosyncratic product, which to some extent it does, there aren't a lot of great substitutes. You know, demand may be somewhat less sensitive tourism industry is one where one might expect somewhat weaker effect, the direction is the same. I'm just saying there they may not be as pronounced as they are for all the other parts of the economy. And obviously, there's a lot of other people in Hawaii doing a lot of things other than tourism. And I think those sectors of the economy are probably no different from anywhere else. If I'm running a restaurant, you know, for locals, I might try to economize. If I'm running a Starbucks, I might make the line longer, I might automate. If I'm running a factory, obviously, more scope for it. David, many people point to the fact that employment in Hawaii increased, or so they say, after the state minimum wage was increased in 2015. What are your thoughts about that? Well, I don't know the facts. I'm not sure why I mean, I don't we probably don't need to so they say on whether employment increased or not. We must know that. So let's take it as true. That's not how you estimate the effects of policy. I actually, I have a question like that on my Labor demand midterm of a month. An example like you cite and, you know, and somebody says, ah, that proves the minimum wage doesn't reduce employment, good or bad argument. And the reason it's a bad argument and bad evidence is kind of let's go back to the card and Kruger paper. The premise of the card and Kruger paper, the idea was a good one, right? If you just look at one economy, call it Hawaii or call it New Jersey's fast food industry, and just see the minimum wage change and say, ah, what happened to employment, you don't learn anything because a lot of other stuff happens to the economy. The minimum wage is not the cause of the business cycle. There are far, far bigger influences on the economy than the minimum wage. So if Hawaii was booming in 2015 and a lot of states were booming, why also was, and we happen to raise minimum wage, then you might have seen employment go up. The question is, what would happen absent the minimum wage? Now, of course, I can't see Hawaii in 2015 within, without the minimum wage. I can only observe one, whatever, whatever was actually the case. So the beauty of the card and Kruger paper, it's not just on people have been doing this for decades before they wrote their paper, is to compare two economies where we think developments are similar, right? One in which the minimum wage goes up and one in which it doesn't. So card and Kruger did New Jersey and kind of Eastern Pennsylvania that bought it. There may not be a good, we call this the counterfactual, right? What would have happened absent the policy change? We can only estimate that in a real experiment, you know, a vaccine experiment, I can have a treatment and a program. So I, you know, and there I know exactly what would happen if you got the vaccine and if you didn't. In social science, we don't have that. So one would have to find a comparable economy to Hawaii exist and say what would have happened otherwise. So I think you're stuck with the evidence from the other states, which are a lot more similar. Yeah, David, we've got just a quick minute. So I want to come up for air and go back to the original question about helping the poor. What's a better way to help the poor than raising minimum wages? I'd say two things. One is actually create a program that targets benefits based on being poor or low income. You might have someone who's your definition then or the second is, and this is my own perspective, and maybe it's more partly philosophical, partly economic, think about something that actually encourages work rather than discourages work because we know that people's earnings and wages grow with labor market experience. I am a huge fan of the Earned Income Tax Credit. We have a federal Earned Income Tax Credit. Many states do, I think Hawaii does, but I should have looked that up before this interview. Well, on that note, it subsidizes work and it targets benefits very well. Okay, very good. And on that note, maybe we'll have you back some day and talk about earning income tax credit. But thank you, David, for being on the program today. Appreciate it. Everyone you've been watching Hawaii Together on the Think Tech Hawaii Broadcast Network. I'm Kaley Ikeena with the Grassroot Institute. Until next time, we bid you all aloha.