The city of Los Angeles is considering a proposal to increase the city’s minimum wage from its current $9 per hour to $13.25 per hour by 2017 and $15.25 by 2019. So far, that proposal has generated three studies of the impacts. As cynics might have expected, the three studies resulted in three different conclusions. But there is an explanation for the question of how three economists can look at a single question and have answers that are far apart. Cynics are always interested in the source of funding for research. The sources of funding for these studies, however, are not obvious by reading the studies. One, identified as a study backed by the Los Angeles Area Chamber of Commerce, was done by Beacon Economics. This 50-page study found that raising the minimum wage would cause significantly slower job growth for Los Angeles than the city could expect with no change. Another, identified as the labor-backed study, was done by a consortium including the Economic Roundtable, the UCLA Labor Center and the UCLA Institute for Research on Labor and Employment. This study found, in a 162-page avalanche of mind-numbingly dull prose, that the increased minimum wage would create something of an economic boom featuring “$5.9 billion in wages with a stimulus effect for the region.” Finally, the Los Angeles City Council commissioned the UC Berkeley Institute for Research on Labor and Employment. This 116-page study found a very small net gain in Los Angeles jobs if the proposal is adopted, a cumulative net increase of 3,666 jobs by 2017 and a cumulative net increase of 5,262 by 2019. How could these studies come up with such different results? The cynics’ reply: “follow the money.” But, that’s not the answer. I don’t think any of the research teams would publish an analysis that they did not believe true just for money. Rather, as an analyst once said, “the secret to life is to get paid for what you would otherwise say.” There are plenty of reasons for different results beyond prostitution. Every study requires researchers to choose methodology, models and assumptions. Differences here can lead to very different conclusions. This is especially true on the issue of a minimum wage. The economic theory of the minimum wage is clear: A minimum wage above the market wage will reduce employment, but those who retain their jobs will make more money. Furthermore, the increased wage attracts potential workers who weren’t interested in working under the pre-change minimum wage, increasing the number of people looking for a job. The unemployment rate will increase more than we would expect based on the number of people who lose their jobs. Verifying this theory presents its own problems. We have issues of methodology and data. There are lots of methods to statistically test data. These include cross-sectional analysis, time-series analysis, panel analysis and many more. Each is subject to limitations. Data also presents problems. Data are not collected in the way researchers would like. It turns out that empirical researchers aren’t all that different than the drunk looking for his keys under the light post, because that’s where he can see. Researchers are compelled to use the data they have, not the data they would like to have. It’s not surprising that empirically finding the impacts of a minimum wage is fiendishly difficult. Minimum wage increases are usually quite small, they tend to be implemented in periods of increasing employment and the percentage of the full-time workforce impacted is usually relatively small. The economic literature on the topic is fairly summarized as inconclusive. Results can be found to support almost any hypothesis, but there is no consensus that empirical research has confirmed or rejected any theory. That said, only two of the reports merit serious consideration. The folks who prepared the Economic Roundtable report did not bathe themselves with glory. Instead, they embraced the Money Fairy, who will provide the funds to pay for the proposal’s mandate of increased wages, relieving the economy, consumers, employers and everyone else of any costs of those wages. Bill Watkins is director of the Cal Lutheran Center for Economic Research and Forecasting.
