One last note on minimum wage. The other line of attack against it is that it’s mostly going to benefit kids who work part time. Jared Bernstein pulls together the numbers that say it ain’t so.

From new analysis by the Economic Policy Institute of the President’s proposal:*

–84% of total affected workers are at least 20 years old.

–73% of the benefits of the increase go to those in the bottom half of the workforce by income level.

–47% of affected workers are full-timers, 83% work at least 20 hours per week.

–The average worker in the sweep brought home 46% of her household’s earnings in 2011 (from the White House fact sheet).

As the last post showed, most of the data shows that hiking the minimum wage doesn’t kill jobs. But why? Researcher Jon Schmitt has a great little report that lays out what we know. The bottom line:

The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (“wage compression”); and small price increases.

This isn’t too surprising. When folks usually talk about the minimum-wage, they’ve got a simpleminded Econ 101 way of thinking about it: the cost of labor goes up, so employers hire fewer workers. But in the real world, it’s a different story.

The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms’ overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment. Employers can reduce hours, non-wage benefits, or training. Employers can also shift the composition toward higher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity (from reorganizing production to increasing training), increase prices to consumers, or simply accept a smaller profit margin. Workers may also respond to the higher wage by working harder on the job. But, probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers.

What I found most interesting about his summary of the evidence is that there just isn’t a whole lot of it. Researchers haven’t dug deep to get hard data on what’s happening. An example from Schmitt:

Little direct evidence exists on operational and human resource efficiencies as a channel of adjustment. Hirsch, Kaufman, and Zelenska’s study of the impact of the federal minimum-wage increase on 81 fast-food restaurants in Georgia and Alabama, however, asked fast-food managers specifically about scope for efficiency improvements in response to the minimum-wage rise. About 90 percent of managers indicated that they planned to respond to the minimum-wage increase with increased performance standards such as “requiring a better attendance and on-time record, faster and more proficient performance of job duties, taking on additional tasks, and faster termination of poor performers.”68 Roughly the same share of managers said that they sought to “boost morale” by presenting the minimum-wage increase as a “challenge to the store” and using this as a way “to energize employees to improve productivity” Based on their interviews with store managers, Hirsch, Kaufman, and Zelenska suggest that a minimum-wage increase may function as a “catalyst or shock that forces managers to step out of the daily routine and think about where cost savings can occur.”

This example also reminds us of just how fragile the Econ 101 way of looking at the world is. In Econ 101, everyone is rational, has infinite knowledge, and is always doing everything they can to cut costs. In the real world, most managers are just trying to keep their heads above water, so raising the minimum wage may end up getting them to find new ways to reduce costs that they otherwise wouldn’t have taken the time to explore. But how much is this actually happening? We need more work to come up with real answers.

Now that President Obama has called for raising the minimum wage, you’re gonna be hearing a lot of arguments about how raising the minimum wage actually hurts the working poor because it did job killer. Here’s a helpful roundup of the data you’ll need to fight back.

If raising the minimum wage did destroy some jobs, it still might make a lot of sense to do it anyways. Think of it this way. If a new technology came out that was going to mean the elimination of some jobs but would end up increasing the pay of millions of people living in poverty, unless it destroyed lots & lots of jobs most folks would consider it a sign of progress. This is especially true for folks at the bottom of the economic ladder, many of whom have to work two or three jobs just to make enough to survive. If raising the minimum wage meant they could cut back on the number of jobs they had to hold, fewer jobs would again be a net plus. It all depends on how many jobs were destroyed.

But it turns out that we don’t have to worry about these kind of trade-offs. After a couple of decades of study, the answers are then: it may or may not make a difference in employment, but if it does most studies stay it’s a small one. Or as CEPR’s Jon Schmitt wrote in a summary of the research,

Across all of the empirical research that has investigated the issue, minimum-wage increases are consistently associated with statistically significant and economically meaningful increases in the wages of affected workers. At the same time, what is striking about the preceding review of possible channels of adjustment – including employment – is how often the weight of the empirical evidence is either inconclusive (statistically insignificant or positive in some cases and negative in others) or suggestive of only small economic effects.

One of the more recent, ingenious studies took advantage of the fact that because the minimum wage hasn’t gone up for a long time, some states have been taking action on their own.

Conservative economists, most notably David Neumark and William Wascher, have used this to compare all states against each other to show that states that raised their minimum wage often lost more jobs than states that didn’t. There’s only one teeny tiny problem with that approach. As researcher Arindrajit Dube explains, these studies assume

that we can find enough control variables to include in our regression that will make Texas look like Massachusetts. As it turns out, this is a heroic assumption that badly biases the results.…

Similarly, the growth rate in low-wage jobs has been quite different in states like Texas, North Dakota, and Indiana even thought these states have had the same binding minimum wage (i.e., the federal) over the past two decades. Unless one controls for the “unobserved” (or more accurately “not directly observed”) sources of heterogeneity in the growth prospects across areas, conclusions may be badly flawed. A telltale sign of this flaw that our studies revealed is that in the state panel model, the job losses occur substantially prior to the actual change in policy.

How to get around this problem? Dube and his compatriots took a trip from earlier research by Card and Krueger, by comparing areas that were right across a state border. Trying to uncover all of the differences between Texas and Massachusetts is pretty tricky, but if there are 2 districts on the border between 2 states where the main difference is that one of them has a higher minimum wage, odds are you can get a pretty clean comparison.

When comparing places directly across a border, many other (potentially unobservable) confounding factors are roughly similar. We implemented this strategy in numerous papers using a variety of data sets (QCEW, QWI, CPS, Census). The results were unambiguous: whatever group we considered — restaurant workers, teenagers, teenagers of disadvantaged backgrounds — the state panel approach always produced an erroneous negative estimate when it came to employment. Once we accounted for the regional heterogeneity, there was no employment loss to speak of. Other authors who have accounted for such heterogeneity largely confirm that employment effects from minimum wage increases in the US have been close to zero or even positive .

Up next: why hiking the minimum wage doesn’t kill lots of jobs.