Tag Archives: Peter Diamond

The minimum wage and slower job growth

In my December post on Willie Lyons I linked to a new article on the minimum wage by Jonathan Meer and Jeremy West, both of Texas A&M.

The paper merits a closer look as it points to a more nuanced minimum wage / unemployment relationship than you typically see in public policy debates. Namely, the authors find that a minimum wage reduces employment growth rather than employment levels.

This insight is inspired by the work of Nobel laureate Peter Diamond who analyzed employment as a searching and matching-type game between employers and employees (Diamond argued that unemployment insurance can make workers more selective in the jobs that they take, improving the “match” between employer and employee). As a number of subsequent authors have emphasized, this means that the transition to a new employment equilibrium can take time. “In this case,” Meer and West write, “the effects of the policy [minimum wage] may be more evident in net job creation.” (7)

The theoretical prediction, however, is ambiguous. On the one hand, a minimum wage reduces employer demand for labor by raising the cost of employment. On the other, it induces greater search effort among potential employees.

To resolve this theoretical ambiguity the authors consult the data. They study the problem by looking at three different datasets that encompass all fifty states, plus DC and cover the years 1975-2012. What did they find? First:

Our findings are consistent across all three data sets, indicating that job growth declines significantly in response to increases in the minimum wage. (2)

To be precise, they find:

a ten percent increase in the minimum wage results in a reduction of approximately one-quarter of the net job growth rate. (19)

To gain a better understanding of whether this happens because a minimum wage retards job creation or because it accelerates job destruction, the authors then look at each of these factors separately and conclude that the minimum wage mostly seems to retard creation of new jobs in expanding firms.

Lastly, they find that “the effect on job growth is concentrated in lower-wage industries and among younger workers.”

Not so incidentally, my colleague Keith Hall (a former Bureau of Labor Statistics commissioner) calculates that the latest seasonally-adjusted unemployment rate among the 18-24 age group is 12.4 percent. This is nearly twice the national average.

Unemployment Insurance and Unemployment Spells

There was an odd article about the latest Nobelists in the Washington Post today. Jeannine Aversa, Louise Nordstrom and Karl Ritter write:

Some Republicans argue that extending unemployment benefits – as Congress has done on multiple occasions since the recession – can actually make unemployment worse by taking away the incentives to finding work. Liberal economists dismiss that.

The article goes on to rightly take Senator Richard Shelby (R-AL) to task for claiming that one of the Nobelists, Peter Diamond, is unqualified to serve on the Federal Reserve.

Then, a few paragraphs from the end, we learn:

Taken together, [the Nobelists’] work has suggested, for instance, that unemployment benefits can have the unintended consequences of prolonging unemployment. That’s because the aid can make it less costly to be out of work – even as it improves employers’ chances of finding the right workers, as Diamond’s research concluded.

Diamond wrote that workers “become more selective in the jobs they accept” because of the employment aid. In the long run, he found, that makes for better matches and increases the economy’s efficiency because companies and workers are better suited to one another.

But I thought only Republicans believed that unemployment benefits prolong periods of unemployment?

Here is how I might have characterized it:

Some Republicans argue that extending unemployment benefits – as Congress has done on multiple occasions since the recession – can actually make unemployment worse by taking away the incentives to finding work. This is a standard result in labor economics, one that is supported by the left-leaning economists who won the Nobel Prize on Monday. But not everyone thinks this is a bad thing. Diamond, for one, has argued that while unemployment benefits may extend the period of unemployment, they may result in better matches, increasing the economy’s efficiency.