Obama’s claim that there is ‘no solid evidence’ that boosting the minimum wage harms jobs

https://www.washingtonpost.com/news/fact-checker/wp/2013/12/05/obamas-claim-that-there-is-no-solid-evidence-that-boosting-the-minimum-wage-harms-jobs/

“We all know the arguments that have been used against a higher minimum wage.  Some say it actually hurts low-wage workers — businesses will be less likely to hire them.  But there’s no solid evidence that a higher minimum wage costs jobs.”

–President Obama, remarks on economic mobility, Dec. 4, 2013

The Fact Checker generally hesitates to wade into messy economic debates. As the Atlantic memorably noted earlier this year, “If a meteor ever smashes into the earth, leaving the planet a dark lifeless wreck, there will still be two economists walking down a desolate post-apocalyptic Connecticut Avenue arguing about whether minimum wage laws kill jobs.”

But here’s the president of the United States, essentially saying that the debate has been settled. Is that really the case?

The Facts

The president’s comments are striking because, as any student of Economics 101 can tell you, it flies in the face of basic economic theories about the impact of higher costs on employment. Here’s how economist Paul Krugman, a fan of the president’s proposal to boost the minimum wage, put it in 1998:

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces.

In a more recent column on the minimum wage, Krugman again referred to basic economic principles:

Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook — mine included — lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, $20 an hour would create a lot of problems.

The White House, in support of the president’s comment, pointed to a section of the 2013 Economic Report of the President (pages 120-121). The report noted that most economists had once believed an increase in the minimum wage would reduce employment but that “the consensus view among economists has since shifted as more evidence has accumulated.”  It also cited a 2009 meta-analysis of 64 studies of the minimum wage that found “no evidence of a meaningful adverse employment effect” of the minimum wage.

The problem is that while there may be a new consensus emerging on the left-leaning side of economic theory, there is an equally fierce response from other economists.

In 2006, economists David Neumark and William Wascher published a survey of more than 100 studies, and came to an opposite conclusion, directly contradicting the results of the so-called New Minimum Wage Research. They found that the majority of the studies showed that “raising the minimum wage leads to economic distortions and often has unintended adverse consequences for the employment opportunities of low-skilled workers.”

The Fact Checker obviously is not going to take a stand on this debate, only to note that it exists. Each side can find fault with the methods of the other. Neumark and Wascher were faulted for making judgments about different studies, while the meta-analysis was criticized for treating each study as equal in quality.

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Economist Arindrajit Dube and others came up with a new approach in 2010, looking at the impact in counties adjacent at different states, that bolstered the findings of the new minimum wage forces. But economists Jonathan Meer and Jeremy West this year fired back with a study that found that minimum wage hikes reduce net job growth because of the effect on expanding companies. (In October, Dube responded that their supposed job losses were occurring in the sectors without minimum wage workers, which in turn prompted this rebuttalby Meer and West.) And a 2011 study from economists at the London School of Economics and the Central Bank of Turkey found higher minimum wages increased unemployment.

In any case, it’s wrong to suggest the debate is settled. Economists remain sharply divided about the issue. Daniel S. Hamermesh, an economist at the University of Texas at Austin who supports indexing the minimum wage to inflation, said the president is making a sharp distinction when the real question is whether the impact will be large or small:

The statement is absolutely incorrect.   There is substantial evidence that jobs are lost.  The relevant question is how many:  And that depends on how high you push the minimum wage.  An increase from the current low level (low compared to other rich countries) will cost a few jobs, but not very many.  An increase to $15, a la living wage proponents, would either cause very large job losses or lead to substantial price inflation.

Update, Feb. 18: The Congressional Budget Office analyzed the proposal to increase the minimum wage to $10.10 and concluded that, under a mid-range estimate, it would lead to a loss of 500,000 jobs because of two key reasons: consumers buy fewer goods because of higher prices resulting from a minimum wage and because employers hire fewer workers because the cost of labor has increased.  This is not an exact science, and CBO said the full range of the  impact on employment was a very slight decrease in jobs to as many as 1 million fewer jobs.

The Pinocchio Test

The president is making a bit of a judgment call when he uses a phrase such as “no solid evidence.” But at the same time he appears to be dismissing the research and findings of a significant part of the economic academy.

A few tweaks to his sentence would have made it more accurate. He could have referred to “mixed evidence.” Or he could have said that increasingly economists are turning up evidence that, especially if the minimum wage just keeps up with inflation, the impact on jobs likely is negligible.

But to flatly declare the debate is over is misleading.  He did not quite say there was no evidence–but he came close.

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The Truth About Jobs in India

Politicians can debate endlessly about whether employment numbers are rising or falling. The data we do have tells a more interesting story.

As nearly a billion Indians go to the polls this month and next, no one doubts jobs will be central to their vote. We just can’t agree on whether the employment picture is rosy or dark. While the government cites payroll data to claim significant job creation, the opposition holds up a leaked preliminary report that pegged unemployment in 2017 at 6.1 percent, which if true would be the highest rate in 45 years.

It might be more useful instead to concentrate on the most recent numbers we can all agree on, which come from a government survey of over 150,000 households across India between April and December of 2015. Although dated — it was conducted before demonetization and the introduction of a nationwide goods-and-services tax — the survey reveals several interesting things about employment in India, including one trend of particular relevance to policymakers and another to jobseekers.

The data suggest that, at least in 2016, unemployment hovered around 5 percent. More worryingly, the labor force participation rate stood at an unusually low 50 percent, meaning only half the working-age population was actively working or seeking employment. By comparison, China’s labor participation rate averaged 75 percent from 1990 to 2017. Rates in other emerging Asian economies such as Vietnam (77 percent), Indonesia (70 percent), Thailand (69 percent) and Bangladesh (57 percent) are typically much higher as well.

Among those who are participating, the situation varies greatly depending on where they live. Dynamic states which are actively improving their ease of doing business — including Chhattisgarh (1.9 percent), Karnataka (1.5 percent) and Gujarat (0.9 percent) — recorded the lowest unemployment rates. By contrast, progressive states that have scored well on human-development indicators such as literacy and maternal health don’t seem to be great job-creators: Unemployment in Kerala came in at 12.5 percent, while in Tripura and Himachal Pradesh it stood at 19.7 percent and 10.6 percent respectively. Not surprisingly, these states have lagged in improving their business environment.

The Disunited States of India

The trend holds true when one drills down into specific categories of workers as well. It’s remarkable that states that have generally fared well on social indicators nevertheless register alarmingly high levels of female unemployment — as high as 30 percent in Kerala. By contrast, the states generating most jobs have spread the wealth to women as well as men: Karnataka, Chhattisgarh and Gujarat have female unemployment rates as low as 2 percent, 1.8 percent, and 1.1 percent respectively. (Even there, however, the rates of female labor force participation remain disturbingly low, as they do across the country.)

Similarly, while unemployment is higher among youth in India (13.5 percent) than those over 30 years of age (1.5 percent), as it is in much of the world, economically dynamic states have also found jobs for younger workers. Gujarat (2.7 percent) and Karnataka (4.4 percent) have the least youth unemployment, while states which rank low on the ease of doing business, including Kerala (29.7 percent), Himachal Pradesh (32 percent) and Tripura (36.7 percent) report particularly high levels of youth unemployment.

No Country for Young Men

If all that should persuade politicians from all parties of the need to focus on eliminating red tape and promoting investment-friendly policies, the numbers also contain sobering lessons for new job-seekers. What stands out is how concentrated unemployment is among the most-educated young Indians. Unlike in developed economies, where jobs increasingly flow to the better-educated, in India the trend is the opposite. Nearly 35 percent of Indian youth who possess graduate degrees and above are unemployed, while relatively uneducated young workers (6.2 percent unemployment) are doing much better. A highly educated Indian youth is more than five times as likely to be unemployed as an uneducated one.

A Matter of Degree

Why might this be? The gap probably says something about the quality of the jobs being created, with most involving mundane or repetitive tasks. It also says something about the quality of Indian education: Too many engineers and other professionals are waving around degrees that are relatively worthless.

The latter raise expectations without providing necessary skills, so graduates prefer to remain unemployed rather than accept work that seems beneath their station. Some believe their time is better spent preparing for further tests and qualifications so they can, for instance, win particularly prized positions such as those in the government.

Leaders certainly have a responsibility to improve education and to generate more high-quality jobs. Until they do, however, at least some Indian youth need to think harder about whether a vocational education would serve them better than a fine-sounding degree. A little realism might brighten the jobs picture just a bit.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Shamika Ravi at shamika.ravi@brookingsindia.org

To contact the editor responsible for this story:
Nisid Hajari at nhajari@bloomberg.net

Shamika Ravi is Director of Research at Brookings India and a member of the Prime Minister’s Economic Advisory Council.

 

The economics of Ambedkar

https://www.livemint.com/Sundayapp/lzpPlO5wsmQENPeXNWvwcK/The-economics-of-Ambedkar.html

After long years of neglect, the ideas of B.R. Ambedkar seem to be gaining currency. While his thoughts on Indian society and politics have garnered more attention, some of his economic ideas too deserve greater attention.

Known largely as the father of the Indian Constitution and a leader of Dalits, Ambedkar began his career as an economist, making important contributions to the major economic debates of the day. He was, in fact, among the best educated economists of his generation in India, having earned a doctorate in economics from Columbia University in the US and another from the London School of Economics.

Ambedkar’s London doctoral thesis, later published as a book, was on the management of the rupee. At that time, there was a big debate on the relative merits of the gold standard vis-à-vis the gold exchange standard.

The gold standard refers to a convertible currency in which gold coins are issued, and may be complemented with paper money, which is pledged to be fully redeemable in gold. In contrast, under the gold exchange standard, only paper money is issued, which is kept exchangeable at fixed rates with gold and authorities back it up with foreign currency reserves of such countries as are on the gold standard.

Ambedkar argued in favour of a gold standard as opposed to the suggestion by John Maynard Keynes that India should embrace a gold exchange standard. He argued that a gold exchange standard allowed the issuer greater freedom to manipulate the supply of money, jeopardizing the stability of the monetary unit.

Ambedkar’s Columbia dissertation was on the state-centre financial relations under the guidance of Edwin Seligman, one of the foremost authorities on public finance in the world. Ambedkar argued that under a sound administrative system, each political unit should be able to finance its expenditure by raising its own resources, without having to depend too heavily on another.

Ambedkar’s views on the rupee and on public finance were responses to the raging economic problems of the day and not all of his analysis may be relevant today. But some of the principles he enunciated such as that of price stability and of fiscal responsibility remain relevant even today.

Of all his academic publications, the one that has aged best and has great relevance for contemporary economic debates is a 1918 essay on farming and farm holdings published in the journal of the Indian Economic Society.

In that essay, Ambedkar considered the problem of small landholdings in India and their fragmentation. After examining various proposals to consolidate and enlarge such landholdings that were being debated in those days, Ambedkar came to the conclusion that such proposals were fundamentally flawed.

Ambedkar argued that land was only one of the factors of production required to produce crops, and unless it was used in an optimal proportion with other factors of production, it would be inefficient. Landholdings should, therefore, not be fixed but should ideally vary with the availability of other factors of production: increasing with the availability of farm equipment and shrinking if the latter shrank.

Any proposal to enlarge holdings can be entertained only if it can be shown that the availability of farm implements has grown considerably in the country, argued Ambedkar. And he then marshalled data to demolish that argument by showing that capital stock had, in fact, declined.

Ambedkar argued that the real challenge lay in raising the stock of capital and that will be possible only if there is greater savings in the economy. This was not possible as long as a great mass of people depended on land for their livelihoods, he reasoned. Therefore, he posited industrialization as the answer to India’s agricultural problem.

“In short, strange though it may seem, industrialization of India is the soundest remedy for the agricultural problems of India,” Ambedkar concluded. “The cumulative effects of industrialization, namely a lessening pressure (on land) and an increasing amount of capital and capital goods will forcibly create the economic necessity of enlarging the holding. Not only this, industrialization by destroying the premium on land will give rise to few occasions for its sub-division and fragmentation.”

What is most remarkable about Ambedkar’s analysis is that he was able to conceive of the notion of “disguised unemployment” much before it came into vogue in development economics, and that he was able to anticipate one of the key insights of Nobel Prize-winning economist Arthur Lewis three decades before Lewis formulated his famous two-sector model of the economy.

Lewis presumed that developing economies had surplus and idle labour in the farm sector, and showed how transferring labour from farms to factories would raise savings and productivity levels in both sectors, leading to overall growth. The model Lewis formulated in 1954 was far more elaborate than what Ambedkar outlined in his essay, but there are striking similarities in the way both framed the issue.

Ambedkar returned to this theme in a 1927 speech made on the floor of the Bombay legislative assembly (as it was then called), which was debating a proposal for regulating landholdings.

Ambedkar warned of the folly of such regulation, reiterating his arguments made in the 1918 essay. He argued that the enlargement of landholdings by controlling the partition of immovable property and sale of consolidated holdings would create a small crust of wealthy landowners and a large mass of landless “paupers”.

Despite his objections to many social customs sanctioned by Hindu scriptures, Ambedkar voiced his approval of the Hindu law of inheritance, which, according to him, prevented the creation of plutocracy, which primogeniture (the right of succession belonging to the firstborn child) would surely have created. A better way of addressing the problem of fragmentation was to introduce cooperative farming, and “to compel owners of small strips included therein to join in cultivation without destroying private ownership”.

In later years, Ambedkar’s energies were devoted more to politics and social change rather than economic analysis, but even his writings and speeches on politics reflected a deep engagement with economic issues and questions of political economy.

Just as his politics are today being appropriated by politicians of all hues, his economics today has become a battleground between the left and the right, with both sides claiming that he was actually on their side. But a careful reading of Ambedkar’s writings dispels the view that he was either a champion of a laissez-faire economy or a revolutionary socialist.

Ambedkar’s views on economics were as complex as his views on politics and it is likely that one shaped the other. As his views on India’s agrarian problems indicate, he saw no contradiction between advocating for industrialization on the one hand and cooperative farming on the other. And in both cases, he supported his arguments with examples of countries in other parts of the world which had adopted the solutions he was advocating. More than doctrine, empirical evidence seems to have guided many of his policy positions.

Although Ambedkar spoke out in favour of industrialization and urbanization, he also warned of the ills of capitalism, arguing that unfettered capitalism could turn into a force of oppression and exploitation.

It was Ambedkar who proposed to the Constituent Assembly that the chapter on fundamental rights in the Constitution should include both negative rights (relating to civil liberties) as well as positive rights (relating to social and economic justice). In a memorandum on this subject, Ambedkar outlined his vision of the rights of citizenship in a free India, and explained why it would entail extensive state control over the economy.

Ambedkar included a section on remedies against “economic exploitation”, which proposed, among other things, that key industries should be owned and run by the state and that agriculture should be a state industry. Ambedkar argued that a modified form of state socialism in industry was necessary for rapid industrialization, and that collective farming was the only salvation for landless labourers belonging to the “untouchable” castes.

Anticipating the objections of “constitutional lawyers” who may think that Ambedkar’s formulation went beyond the scope of the usual kind of fundamental rights, Ambedkar argued that such a view would be based on a very narrow understanding of fundamental rights. If the objective of such rights was to protect individual liberty, his proposals did the same, Ambekar argued.

Ambedkar argued that an economy based purely on the profit motive violated two tenets of political democracy: one, it allowed private employers, rather than the state, to govern the lives of individuals, and two, it may force an individual to give up his constitutional rights to gain a living.

“If a person who is unemployed is offered a choice between a job of some sort, with some sort of wages, with no fixed hours of labour and with an interdict on joining a union and the exercise of his right to freedom of speech, association, religion, etc., can there be any doubt as to what his choice will be?” Ambedkar wrote. “The fear of starvation, the fear of losing a house, the fear of losing savings if any… are factors too strong to permit a man to stand out for his Fundamental Rights.”

Responding to libertarian lawyers who argued for minimum state intervention to protect liberty, Ambedkar argued that withdrawal of the state may lead to liberty but that liberty is “liberty to the landlords to increase rents, for capitalists to increase hours of work and reduce rate of wages”.

“In an economic system employing armies of workers, producing goods en masse at regular intervals, someone must make rules so that workers will work and the wheels of industry run on,” he wrote. “If the state does not do it, the private employer will. Life otherwise will become impossible. In other words, what is called liberty from the control of the state is another name for the dictatorship of the private employer.”

Both the political and economic structure should be defined by law to translate the rule of one man, one vote to the doctrine of one man, one value, Ambedkar argued. Countries such as India should profit from the experiences of other countries and define the shape and structure of the economy in the Constitution itself, he felt.

Yet, Ambedkar’s radical proposals did not win the support of the Constituent Assembly. Instead, many of the provisions outlined in his memorandum found place in the Directive Principles of State Policy, which, though important, are not justiciable in a court of law.

Ambedkar seemed to have accepted that compromise with equanimity when the chapter on directive principles was finalized in late 1948, even though just a year earlier (in 1947), he had made an impassioned plea for making socioeconomic rights justiciable. “How and why Ambedkar’s position on social and economic rights changed remains a puzzle,” writes political scientist Niraja Gopal Jayal in her 2013 book, Citizenship and Its Discontents.

Although Ambedkar resented Jawaharlal Nehru for, among other things, not including him in the cabinet committee on economic affairs (and cited that as one of the reasons for his resignation from the cabinet), his views on the economy and the role of the state mirrored those of Nehru.

Both Nehru and Ambedkar advocated state ownership of key industries to drive rapid industrial growth without closing avenues for private enterprise in the country. Like Nehru, Ambedkar was influenced by the dominant intellectual paradigm of the day, which emphasized a large role of the state in economic affairs.

Both men were also likely influenced by the ideas of Fabian socialists, and their social democrat counterparts in the US. One of the biggest influences on Ambedkar was American educationist and philosopher John Dewey, who became the president of the League of Industrial Democracy in 1939, and who subscribed to a broad conception of social democracy.

Despite accepting certain insights from Marxism, particularly the concept of exploitation in society by one group against another, Ambedkar differed with Marxists in many respects. In an essay titled Buddha or Karl Marx, written a few weeks before his death, he analysed the similarities and differences between the ideas of Buddha and those of Marx, and argued that the ideas of the former were more appealing.

Ambedkar pointed out that even Buddha had spoken about the evils of exploitation in society, even if he did not use the Marxist parlance of class conflict, and had warned that private property brought sorrow and suffering to the world. According to him, both Buddhism and Marxism aimed to root out exploitation and suffering, but the means were different.

While one appealed to the conscience of man to change himself, the other relied on violence and the dictatorship of the proletariat to achieve it. The latter was unacceptable to him because it did not recognize the value of human life. To him, the three ideals of liberty, fraternity and equality were compatible only with Buddhism.

Ambedkar was also critical of Indian socialists who failed to take into account caste while planning for class struggle. In that brilliant but undelivered speech written in 1935, The Annihilation of Caste, Ambedkar argued that it was impossible for the poor to form a common front against the rich as long as they maintained caste distinctions.

Ambedkar argued that it was not enough for the socialist to say that he himself did not believe in caste; if he wanted to be taken seriously, he would have to undertake a vigorous programme of social reform to remove caste distinctions in society.

“That the social order prevalent in India is a matter which a socialist must deal with; that unless he does so, he cannot achieve his revolution; and that if he does achieve it as a result of good fortune, he will have to grapple with the social order if he wishes to realize his ideal—is a proposition which in my opinion is incontrovertible,” wrote Ambedkar. “He will be compelled to take account of caste after the revolution if he does not take account of it before the revolution.”

Despite his disagreements with Marxist methods, and his resentment against socialists for not taking caste seriously, Ambedkar shared their concerns about economic inequality in the country. In his concluding speech to the Constituent Assembly, he warned that without economic and social equality, political equality will eventually be jeopardized. Political democracy will last only if we make it a social democracy as well, he said.

“On the 26th of January 1950, we are going to enter into a life of contradictions,” said Ambedkar. “In politics, we will have equality, and in social and economic life, we will have inequality. In politics, we will be recognizing the principle of one man, one vote and one vote, one value. In our social and economic life, we shall, by reason of our social and economic structure, continue to deny the principle of one man, one value. How long shall we continue to live this life of contradictions? How long shall we continue to deny equality in our social and economic life? If we continue to deny it for long, we will do so only by putting our political democracy in peril. We must remove this contradiction at the earliest possible moment or else those who suffer from inequality will blow up the structure of political democracy which this Assembly has so laboriously built up.”

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A study indicates raising minimum wage by 1% leads to a 1 % decline in the employment of low-skilled workers

Abstract

Often, minimum wage laws are decided at the state or regional level, and even when not, federal level
increases are only binding in certain states. This has been used in previous literature to evaluate the
effects of minimum wages on earnings and employment levels. This paper introduces a spatial equilibrium
model to think about the seemingly conflicting findings of this previous literature. The model shows that
the introduction of minimum wages can lead to an increase or a decrease in population depending on
the local labor demand elasticity and on how unemployment benefits are financed. The paper provides
empirical evidence consistent with the model. On average, increases in minimum wages lead to increases
in average wages and decreases in employment. The low-skilled local labor demand elasticity is estimated
to be above 1, which in the model is a necessary condition for the migration responses found in the data.
Low-skilled workers, who are presumably the target of the policy, tend to leave or avoid moving to the
regions that increase minimum wages.

The Impact of Soda Taxes: Pass-Through, Tax Avoidance, and Nutritional Effects

Abstract

We analyze the impact of a tax on sweetened beverages, often referred to as a “soda tax,” using a unique dataset of prices, quantities sold, and nutritional information across several thousand taxed and untaxed beverages for a large set of stores in Philadelphia and its surrounding area. We find the tax is passed through at an average rate of 97%, leading to a 34% price increase. Demand in the taxed area decreases by 46% in response to the tax. We find no significant substitution to bottled water and modest substitution to (untaxed) natural juices. A large amount of cross-shopping to stores outside of Philadelphia offsets more than half of the reduction in sales in the city and reduces the net decrease in sales of taxed beverages to only 22%. Among taxed beverages, demand decreases more strongly for relatively healthier products. Due to cross-shopping and compositional changes in demand, we do not detect a significant reduction in calorie and sugar intake. Based on these findings, we discuss implications for tax policy design.