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Q & A: “The economy needs to serve us and not the other way around”

From Peter Costantini On December 18, 2014 · 2 Comments

Economist John Schmitt interviewed by Peter Costantini

John Schmitt. Credit: Dean Manis

Third article in a series on minimum wages. This is an expanded version of the interview published by Inter Press Service.

Seattle, December 18, 2014

Since his college days, John Schmitt says, he’s been “very interested in questions of economic justice, economic inequality.” He served a nuts-and-bolts apprenticeship in the engine room of the labor movement, doing research for several unions in support of organizing campaigns, negotiations and collective bargaining agreements. Now a broad-ranging theoretician with degrees from Princeton and the London School of Economics, his work continues to privilege
the needs and aspirations of working people. He’s an influential proponent of new approaches to research on low-wage work that have reoriented how much of the “dismal profession” and many policy-makers understand the issue.

Currently, Schmitt is a Senior Economist at the Center for Economic and Policy Research in Washington, DC. He also serves as visiting professor at the Pompeu Fabra University in Barcelona, and was a Fulbright scholar at the Universidad Centroamericana "Jose Simeon Cañas" in San Salvador, El Salvador.

Inter Press Service interviewed him by telephone and e-mail between August and December 2014.

Minimum wages

IPS: Among policy prescriptions for reducing income inequality and lifting the floor of the labor market, where do you see minimum wages fitting in?

JS: I think the minimum wage is very important. It concretely raises wages for a lot of low and middle-income workers, but it also establishes the principle that we as a society can demand that the economy be responsive to social needs.

And that belief is really important. It’s just a legal, almost palpable statement that we have the right to demand of the economy that it serve us and not that we serve the economy.

So I think it’s very useful. It’s not the solution, in and of itself, to economic inequality. But it’s an important first step.

And it’s an easy first step. It’s something that we’ve had in this country since the 1930s. It’s something that has broad political support. It regularly polls way above 50 percent, even among Republicans. And in the population as a whole, the minimum wage is the kind of issue that 65 to 75 percent of voters support.

Of the last 3 increases in the [Federal] minimum wage, in 1990 – 91, in 1996 – 97, and then 2007 – 9, two were signed by Republican presidents, President Bush the First and President Bush the Second, with substantial support in all cases among Republicans in the House and Senate. So it’s a very American institution that has had a long history of bipartisan support.

And it’s effective in doing what it’s supposed to do, which is raise wages of workers at the bottom. One reason why it’s so heavily supported is because it does exactly what a lot of people think our social policy should do, which is reward people who work.

I think our social policy should go further than that. But almost everybody agrees that if you’re working hard, you should get paid a decent amount of money for that. And I think that’s why it enjoys such heavy support among Republicans as well.

Also, it doesn’t involve any government bureaucracy other than a relatively minor enforcement mechanism. Because everybody knows what the minimum wage is. There’s a social norm and a social expectation that people who work should get at least the minimum wage.

Therefore, it’s not quite self-enforcing, we definitely need enforcement and there are employers who violate the law. But it’s one of the easier social policies to enforce and to make sure it’s happening uniformly across the country.

Employment

IPS: One of main objections raised by opponents of minimum wage increases is that they reduce employment among low-wage workers. But beginning in the early 1990s, a new approach surfaced that challenged that contention.

JS: I was in graduate school then, right at beginning of what’s called the New Minimum Wage research. Basically, a lot of economists at the time were looking at the experience of states that had increased the minimum wage and were finding that state increases seemed to have little or no effect on employment.

Which ran in the face of both economic theory at the time, but also of some of the earlier empirical economic research that was not, I think, at the same standard of quality as subsequent research.

It caused a lot of controversy, and controversy is still raging. I think the profession has moved a lot towards the belief that moderate increases in the minimum wage, like the ones that we historically have done, have little or no impact on employment.

There was a big poll by the University of Chicago Business School in 2013 of 40 top economists who are regularly asked to comment on economic policy matters. They were asked about the minimum wage, and it was really striking to me.

They asked them two questions: one, would raising the wage to $9 an hour [which the President had recently proposed] significantly reduce the chances of less skilled workers and young people finding work? About a third of the respondents said they agreed, that it would reduce their chances of finding work, a third said they disagreed, and the rest had no opinion or weren’t sure. If you had done the same poll with the lead economists 30 years before, it probably would have been 2 to 1 saying that it would have a negative effect, or even more potentially.

But even more interesting was the second question: Given whatever you think about the employment effects, do you still think it would be a good idea to raise the minimum wage to $9 an hour? And there it was something like 5 to 1 in favor of increasing the minimum wage.

So I think that there’s a recognition within the economics profession that, even if there are job losses associated with moderate increases in the minimum wage, that they’re very small relative to the wage increases for the vast majority of people who will keep their jobs. I think that’s increasingly the standard view within the profession.

Now, that doesn’t mean that the bulk of the economics profession thinks that the minimum wage should be $15 an hour or $25 an hour. But it does suggest that even the economics profession is seeing this issue in I think a more realistic way.

The textbook model for how the labor market works is just a vast oversimplification. It can be useful in some contexts, but it’s just not useful to understand a pretty complicated thing, which is what happens when the minimum wage goes up.

Data and models

IPS: Is this mainly a new economic model replacing old ones, or is it just looking more accurately at the actual statistics from what’s happened.

JS: I think it’s some sort of combination of both things.

I think the first thing is that what most economists are persuaded by is just that the empirical evidence is not that supportive of large job losses. And whatever the theoretical explanation, we can put that aside for a second. There’s just a lot of good research out there that consistently finds little or no negative employment effects. And when that just happens again and again in the research, I think that wears away economists’ views about a particular result, in the textbook competitive model.

We have 25 years of people who have very high standing in the profession, who have PhD’s from prestigious programs and they teach at prestigious places and publish in prestigious journals. And they’re consistently finding with very good research, very little effect [on employment]. I think that changes the way people think about this issue.

And then the question is: Why is that? And there has been a lot of research and thinking about the labor market and the way it works that is consistent with the results they’re finding.

For example, a recent Nobel Prize was given for 3 economists who had worked heavily in an area called “search models” of the labor market.

And one of the fundamental issues of search models is that, unlike the competitive model, where firms and employers and workers can very easily match and find each other, that in fact, search is costly, that it’s hard for firms, even when labor markets are working fairly well, to find employees, it’s hard for employees to find the right match, that people receive offers and reject them and that things go back and forth. Firms have workers that could work for them, but they don’t hire them for whatever reason.

So that’s one set of issues. The other area that has also been recognized with Nobel Prizes has to do with information problems within markets. That employers don’t know exactly how an employee is going to perform until they hire them, how well their skills match their resume. They don’t know their work attitude. And employees have information that employers don’t know about how hard they’re willing to work. And it can be hard to persuade people until you actually show up that you really are going to work as hard as you say.

So that’s another issue with information, it’s a crucial part of the whole rethinking of the labor market. And that’s a key issue within what’s happening with the minimum wage.

Not all workers or potential workers know of every job they can see that’s in the area, and not all employers know of every single person that’s looking for a job. So the matching can be slow and painful and costly. And one of the key insights [is] that employers aren’t operating in a competitive labor market nor are employees.

But I think within the mainstream economics profession there are a lot of other potential explanations that also fit. There’s the possibility that employers make adjustments in other dimensions besides laying workers off: they raise their prices somewhat, or they cut back on hours but don’t lay off workers.

And from a worker’s point of view, if they raise your salary by 20 percent and they cut your hours by 5 or 10 percent you’re still better off, right? Because you’re getting paid more money and you’re working fewer hours.

That might not be the employers’ favorite thing to do, but it certainly works well for workers. So there are a lot of ways that firms can adjust to minimum wage increases other than laying people off.

Turnover

IPS: So from a worker’s point of view, even if there were a reduction in hours or more unemployment, I still come out ahead. Low-income work is already very unstable. Hours are variable and often part-time, and there are a lot of layoffs, firings and quitting.

JS: Some of the best research is on the simple question of turnover – which is an important ingredient here, labor turnover. There’s a new paper by Arin Dube, Bill Lester and Michael Reich [three U.S. economists]. Basically, they look very carefully at what happens to labor turnover rates before and after minimum wage increases, and find substantial declines in turnover for different kinds of workers.

One concrete example from a different study: there was a living wage law that was passed at the San Francisco airport a few years back, and they did an analysis of what happened to the workers that were affected. And they found something like an 80 percent decline in turnover of the baggage handlers after the minimum wage went up, the living wage. And there were substantial increases in wages for those workers.

I think that’s probably on the high end of what you could expect. But even reductions of 20, 25, 30 percent in a high-turnover industry, it makes a big difference.

Something that I think people who don’t work in business don’t fully appreciate is that turnover is extremely expensive, even for low-wage workers. Filling a vacancy for a low-wage job can be 15, up to 20 percent, of the annual cost of that job. That sounds a little bit high, but if you stop to think about it, it makes a lot of sense.

One issue is that when you have a vacancy, the people who have to fill it are managers. So they have to use their time, which bills much more expensively than low-wage workers, to fill that. They need to post an ad, they need to review the resumes that are handed in, then they need to interview people, then they need to spend time training that person and integrating them into the company. That can take weeks of time to do, and it’s weeks of time at a manager’s billing rate, not at the low-wage worker’s billing rate.

And meanwhile, while the vacancy is there, you’re losing customers, because people come in and they see that there’s a long line, so they go next door.

And then the other thing is once you have a new worker, even if it’s a fast food worker that has experience working at McDonald’s, now they’re working at a Burger King, and they do the systems differently. You have to learn the new way to do that. Even if you’re at a slightly differentMcDonald’s, the one you worked at was a suburban McDonald’s that had a drive-through, now you’re working at a downtown McDonald’s and they have a different way of doing things. You’re not going to be as efficient, you’re not going to be as integrated into the team for a while.

So there’s a lot of cost of turnover. And if the minimum wage reduces turnover, which there seems to be an increasing amount of evidence that that’s the case, then it can go a long way towards explaining why we see so little employment impact of minimum wage increases. And I think that’s what’s going on.

Mitigation

IPS: What other factors mitigate the employment effects of minimum wage increases in different localities?

JS: It’s hard to compare. It’s not just the size of the increase; it’s how many workers are affected by that increase, and how much is average increase is relative to how much they’re getting paid right now.

So at the Federal level, when the minimum wage goes up by say 15 percent in a year, the average wage increase for workers who are affected by that is much less than 15 percent. It’s half of that. And for some increases it could be even less than that, because not everyone gets the full increase. It also depends on where the starting wage is.

And keep in mind also, every single business that’s operating in Seattle, or Santa Fe, or the State of California, or wherever they’re going to do an increase, is operating under same rules.

And for the most part, businesses that are involved heavily in the low-wage labor market and are affected by the minimum wage are ones that are competing very much at a local level. It’s retail, it’s fast-food restaurants, it’s full-service restaurants, dry cleaners, and the low-wage service sector, that’s really what we’re talking about here. So you’re not putting any company at any competitive disadvantage relative to the vast majority of their competitors.

Part of what‘s going to happen is that there will be efficiency gains. The best companies, the best managed companies, the ones who know how to operate effectively with higher wages, are going to take over the market share.

So it might be that some business goes out of business, but the people who eat sandwiches there are now going to be buying sandwiches from the same shop under a different name, or they’re going to be buying from the shop next door where the manager knows how to get workers to be productive and effective at the new wage, relative to the other manager who wasn’t able to do that.

Velocity

IPS: What about the velocity of adjustment?

JS: A lot of initial studies, especially the early studies from the New Minimum Wage Research, looked at relatively short periods of time, 6 months or a year after the minimum wage. And so they were criticized for not looking long enough. And now I’d say most their research looks for a year, and then two and even three years.

My view is that to the extent that these are going to have impacts on prices or employment, you’re going to see them pretty quickly. And the reason why you’d see them quickly in employment is because it’s a very high turnover area.

So say you have a fast food restaurant and you have 30 employees, 30 openings where you have workers. In the course of a year, you might have 60 workers who fill those 30 slots. And imagine that the critics of the minimum wage are right, and instead of having 30 employees, now because of the minimum wage increase now you’re only going to have 28.

Well, basically, in a month, two people are going to leave and you’re just not going to fill those slots. So it’s just going to come up very quickly. If you really can’t afford to pay 30 workers, two of them are going to leave because they go to college, because one of them has a baby and decides to stay home, because their spouse moved to another state and they’re following their spouse. Any number of things happen. They hate the job so they quit. And it’s very much more likely to happen in low-wage jobs.

So you immediately adjust at 28, assuming that that’s correct.

Similarly, it’s not that hard to change prices. If this means you’re going to have to raise your prices by 3 percent or 4 percent, you change the prices. It’s not like it takes 6 months to change a price. I mean, you basically change your menu and then you’re done. It just doesn’t take too long for the adjustments to take place.

Teenagers

IPS: Some of the earlier minimum-wage research seems to have focused mainly on teenagers. But teenagers are 12% now of the total low-wage workers. And even in 1979 they were only 26%.

JS: I think that there’s a longstanding focus on teenagers that goes back 50, 60 years, possibly longer, in research on the minimum wage.

And the reason is because economists want to see if they can find negative results. You want to look for the canary in the coal mine; you want to look for the most sensitive group that you can identify. And if you find negative results there, you can say “Look, we found negative results. And we have reason to believe that the same kind of dynamic, less intensely, is going to be operating on slightly older workers and on adult workers.”

The flip side of it is, if you look at teenagers and you don’t find any employment loss among teenagers, who ought to be the most sensitive to rate increases in the minimum wage, it seems very unlikely that you’re going to find them anywhere else.

And then of course another area where people look a lot is not at workers themselves, but at employment in other industries such as fast food and retail where there are a lot of low-wage workers.

I think we now have a lot of evidence, looking at a lot of ways to cut the data, that all point towards little to no employment losses for moderate increases.

The thing about it is, even though most of the workers who earn at or near the minimum wage are not teenagers, you’re looking for a group that is very heavily concentrated in the low-wage sector. So it’s just easier to find an effect.

From my point of view, I’m fine with the framing of looking at teenagers or looking at fast food. Because what consistently is the case is that they’re not finding any negative results even there.

So if it were the case that they were finding employment losses for teenagers, then I think we could have an argument about whether or not that was generalizable to the rest of the population. But I think at this point we’re not having even that argument particularly strongly.

The thing that’s interesting to me is that it’s often framed that, “This is going to hurt African-American and Latino kids, young teenagers.” And what’s striking to me is that the implied impacts on African-American and Latino teenagers, even if you belief the harshest critics of the minimum wage, are tiny compared with the permanent gaps in employment between African-American and Latino teenagers on the one hand and white teenagers on the other hand.

And yet, when we’re not talking about the minimum wage, the same people who are crying tears about black teens are doing absolutely nothing to address the permanent long-term gap in employment between black teens and white teens, whenever the minimum wage isn’t on the table. It’s always there and it’s not related to the minimum wage in any way. And there’s no concern about “Let’s address this tragedy”, except in the context of preventing the minimum wage from going up.

Earned Income Tax Credit

IPS: What about the Earned Income-Tax Credit? [A provision of the U.S. income tax code that subsidizes lower-income working families according to the number of their children] It seems that some mainly conservative commentators have opposed that to the minimum wage.

JS: The Earned Income Tax Credit and the minimum wage I think are strongly complementary policies. And to suggest that one is a substitute for the other is to miss the way that they both work.

I am always concerned when I hear conservatives criticizing the min wage, and offering the EITC instead. Because that’s used to beat down the minimum wage. But when the tough vote then comes to increase the EITC, because that’s what we should be doing, they’re suddenly concerned that, well, this is a tax increase, it increases the size and role of the federal government in the economy, and therefore we shouldn’t do it. So all of these other ideological reasons to oppose the EITC come to the fore when the minimum wage isn’t on the table.

But basically, the way the EITC is structured, it lowers wages for employers, and in fact what that means is that they capture some important part of the tax dollars that are used to expand the EITC.

Which is not the intention: the intention is that the money go to low-wage workers themselves, not their employers. And because of the way the EITC is structured, it lowers wages and the employers actually capture an important part of the benefits.

There’s a very good study by an economist at Berkeley, Jesse Rothstein, who estimates that about 27 cents of every dollar that we spend on the EITC actually goes to benefit employers rather than the workers who are supposed to be getting it.

Because basically, the EITC raises the after-EITC wage of many workers who get it, but that increases the supply of workers to the labor market. And that in turn reduces the market wage of workers, because there are more workers out there.

If you get the EITC, you’re still coming out ahead. But the point is the market wage has fallen, which from the employers’ point of view means they’re paying less for the workers that they get. And they actually therefore capture a part of the increase, and it’s not a small part, it’s about a fourth of the total expenditure.

Now what the minimum wage can do is it can limit the ability of employers to capture that because it puts a floor on the wage. And it prevents the wage from falling too low and it prevents employers from capturing the EITC in the form of lower wages. So they work well together as policies.

Democracy

IPS: What about Santa Fe? [A city in New Mexico that raised its minimum wage 65% in 2004, the biggest recent local increase] You’ve done a study on it.

JS: I would not want to make too much of any one case, whether it’s New Jersey versus Pennsylvania back in the early 90s that led to the David Card and Alan Krueger study [that began the New Minimum Wage research], or a specific issue of Santa Fe or
Albuquerque more recently or San Francisco.

No two cities are exactly alike. But I think the evidence is mounting up that a lot of different cities or states in a lot of different contexts raise the minimum wage and we don’t see big effects.

When Santa Fe decided to raise the minimum wage, it was a very big increase. But I have a lot of faith in the democratic process. So when you have a city that’s focused on where should we set the wage, a lot of people weigh in: business people in the community weigh in, workers in the community, unions in the community, community organizations dealing with social service questions. and low wage workers who are struggling to make ends meet, academics from local universities who know the economy and the social situation well.

There’s a city-wide or a state-wide conversation. And that process – and I think this is one reason why we consistently don’t see big employment effects – usually arrives at some wage that is a vast improvement over what we currently have and within the realm of what the local economy can afford.

An important reason why we don’t see job losses is because the people who have the biggest voice in this are business. They understand politically that they have to get in, but they’re going to push back as hard as they can. I think we probably consistently err on the side of caution rather than on the side of going too far.

So what’s interesting about Santa Fe – or we just passed a minimum wage bill here in the City Council in Washington, DC – is that a lot of people weighed in. I was one of well over 100 people who testified before the City Council with their opinion. There were people from National Restaurant Association and the Chamber of Commerce, unions, small business organizations, academics, policy people.

And the City Council heard, and they were choosing between a bunch of different proposals, and they hammered out a proposal that worked.

It sounds like in Seattle there was a very similar process. It was shooting towards 15 dollars, but then there was a consideration of how we get there exactly, how fast we get there, who gets there how fast, are there any exemptions. I have a lot of confidence that what happened in Seattle will work well, because so many factors were taken into consideration in the process of setting those wages.

Labor

IPS: How do you see the 15Now movement, the fast-food workers movement, changing the labor movement?

JS: I think it’s very encouraging. There’s a lot of dynamism behind the fast food and 15 folks and what’s happening in Seattle, a lot of city and state campaigns to increase the minimum wage. They’re putting a lot of focus on wages and wage inequality, and the need to reward people for working hard.

They’re also focusing attention on a couple of other issues that are going to be really important in the future, I think they’re going to be increasingly a part of the public debate: for example, around scheduling questions. One of the recurring problems for fast-food workers and retail workers is not just that their wages are so low, but also that they have little or no control over their schedules. And that’s an issue that goes way above people who are making $7.25 or $10 or $15 an hour.

And in particular, in the absence of private sector unions that can help protect workers against scheduling problems, that’s going to be an increasing concern to have legislation, but also to have some kind of worker voice on the job that can help address those things.

I think any time you have people agitating for economic and social justice and getting national attention while they’re doing that, it’s encouraging for the possibility of turning around 3 going on 4 decades of rising economic inequality.

I’m encouraged by the moment that we’re living right now on this front. The single most important thing is to keep some oxygen flowing here so that this conversation can continue to happen: the media cover it, people talk about it when they’re having a beer with their friends, or when they’re walking around downtown at noon and they see a bunch of McDonald’s workers out making noise. That’s not something we’ve seen a lot of in the last 35 years.

[Edited for length and clarity. See newswire article on Inter Press Service – link]

More on John Schmitt

Publications

“Why Does the Minimum Wage Have No Discernible Effect on Employment?” Washington, DC: Center for Economic and Policy Research, February 2013. http://www.cepr.net/documents/publications/min-wage-2013-02.pdf

“The Minimum Wage Is Too Damn Low”. Washington, DC: Center for Economic and Policy Research, March 2012. http://www.cepr.net/documents/publications/min-wage1-2012-03.pdf

With Janelle Jones. “The Wage and Employment Impact of Minimum-Wage Laws in Three Cities”. Washington, DC: Center for Economic and Policy Research, March 2011. http://www.cepr.net/documents/publications/min-wage-2011-03.pdf

With David Rosnick. “Low-wage Workers Are Older and Better Educated than Ever”. Washington, DC: Center for Economic and Policy Research, April 2012. http://www.cepr.net/documents/publications/min-wage3-2012-04.pdf

Full list: http://www.cepr.net/index.php/clips/john-schmitts-publications