Hi r/neoliberal. Do whatever you want when it comes to talking macro or whatever, but when it comes to the minimum wage and the earned income tax credit -- when it comes to labor economics -- I can't have you scoring all these own goals. So I thin we need to have a word.

To start, I just want to express how dissapointed I am by all of this. I take it we've forgotten about the whole monopsony power thing? Swept DLR 2010 under the rug? The bunching one too? And the one where we put to bed the whole "minimum wage workers aren't really from poor families" thing? I thought you were better than that. But there you are, citing that Seattle paper, arguing that it's totally reasonable to estimate the employment effects of minimum wages just by asking firms in a survey, slinging around blog posts by best selling textbook authors (not by labor economists!), and then telling weird stories about how really the minimum wage discussion is all about how the marginal propensity to consume varies by income group.

I'd school y'all on this but my hourly rate ain't 0 for material already in the r/badeconomics textbook. (That's right Mankiw, we're coming for you.)

So instead, let's talk about your reasoning about the minimum wage wouldn't be entirely straight even if labor markets were perfectly competitive.

It seems to me there's this idea floating out there that without monopsony power, the minimum wage is a clear no. Price floors cause unemployment cause the minimum wage to be a bad policy. So instead we should do the EITC, which is soooo much better than the minimum wage that it's an indictment of democracy itself that we don't discuss it more.

Let's start with the minimum wage and then move to the EITC. The point of the minimum wage, presumably, is to increase the welfare of low wage workers by raising their income. To make them earn more. So, why this sudden big interest in unemployment? So what if people spend a little more time unemployed each year if they earn more overall? You'd have to have some pretty funny elasticities in mind to make a minimum wage hike reduce average earnings, even with unemployment hikes.

Not following? Did you have in mind that one model, that supply and demand cross thing -- the one in 101 textbooks? Yeah, I thought so. That one usually goes wrong in labor markets. I mean, good grief, you can't even guarantee that labor supply curves are upward sloping!

But the other thing it does is it makes a lot of people think of "employment" and "unemployment" as static bins that people go into and then stay in. The trouble is, that's just not a good way of thinking about the labor market. When people lose their jobs, they look for new ones. Eventually, they get a new one. Unemployment isn't a bin you stay in forever, becoming the permanent "loser" from the new policy -- you can climb your way out of it.

So, when it comes to the minimum wage, whether or not it increases unemployment isn't the only question you should ask. You should ask how that unemployment is distributed across the population of low wage workers. If a minimum wage hike raises unemployment, causing someone to lose their job and not get a new one for a whole year -- that's a big deal. But let's say instead low wage workers have really high churn rates and maybe work several different jobs over the course of the year, with the unemployment hike boiling down to everyone more or less spending an extra week or two between jobs. Well, in that later case, the unemployment probably isn't a big deal -- you spent a little extra time out of work but the increased wages more than make up for it overall.

Which case is more realistic? It turns out it's later. Low wage workers exhibit pretty high turnover rates in general and easily exhibit median employment spell lengths < 1 year in the SIPP, along with fairly brief unemployment spells as well. This also shouldn't be too shocking. In general, there are huge flows into and out of employment that regularly dwarf any net changes in employment -- this is actually a huge part of why labor search models have grown in prominence. For further details on this, you can look into Henry Farber's research, which broadly looks at related topics and has quite a bit to say related to unemployment spells. Now, in general, for providing empirical backing to these claims, I would caution that people don't publish papers just giving descriptive statistics. But I can link you to some papers intimately working with related topics that include the desired figures in their tables and discussion. This paper for example discusses the dynamics of poverty (and links to a bajillion papers on the topic) and how people transition into and out of it pretty rapidly. This paper looks at the effect of the minimum wage on labor market flows, finding that minimum wage hikes don't particularly affect the amount of time spent outside of employment (cheating to cite it hear though because, of course, it comes from outside our hypothetical, where there is lots of monopsony power).

So where does this get us? Well, before, in our no-monopsony-power analysis we thought minimum wages were bad because the severe utility losses associated with getting stuck in unemployment maybe outweighed the gains experienced by others due to wage hikes. But now we're not so sure. Minimum wages can cause unemployment to go up without anyone seeing their compensation over, say, a 2 year period fall. Throw in minimum wages raising wages all the way throughout the bottom quarter of the wage distribution^12, and thinks are looking good

But maybe you're not convinced. Sure, you say, maybe some people who spend more time in unemployment really are better off. But maybe some people really do get shipped into long term unemployment. The long run trends in the labor market are, after all, pointing toward reduced dynamism, lower churn rates, and higher long term unemployment rates. That's why we need to switch to a policy like the EITC -- something that helps all low wage workers at no cost. It's just a better policy.

Well, I want to start by pointing out that all policies include tradeoffs. When it comes to the minimum wage in a no monopsony power environment, there is a risk that some people will lose out in terms of unemployment. But if some do, that's not the end of the story. You have to weigh those losses against the gains. No purely redistributive policy, after all, is going to be free. Even the EITC generates distortions and requires a financing mechanism.

But let's focus a bit on this EITC thing. Y'all seem to be deifying it a bit in r/neoliberal land. Now, I'm not saying it's a bad policy, but it's not exactly all that you crack it up to be. Let's ask a question that often gets passed over in EITC discussions: what is the incidence of the EITC?

Get ready for some disappointment. Rothstein has low-skill single moms keeping only 70 cents per dollar of EITC spending. Their employers, meanwhile, get 72 cents on the dollar. Wait, shouldn't that add up to a dollar? Oh don't worry, it does. The EITC depresses wages for recipients and non-recipients alike. The non-recipients? They lose 43 cents per EITC dollar. Meaning each dollar of EITC spending raises wages for low-skill workers in general by just, drum roll please, 28 cents. That's a pretty costly way to raise earnings for low-skill workers. And if you wanted to go after the minimum wage for generating winners and losers...

But, what if there was some sort of way I could change the incidence of the EITC? To make more of the benefits fall on workers by preventing those benefits from leaking out to employers through wage reductions?

Well, Lee and Saez would like you to know that the minimum wage would do that for us! By preventing wages from falling, the minimum wage can increase the efficacy of transfer programs like the EITC. So, the minimum wage and the EITC aren't substitutes, they're complements. By the way, some other neat points in that paper -- they show that minimum wages are welfare improving under perfect competition in general, provided that there is efficient job rationing (meaning that it is marginal workers that get laid off first). And check out the optimal tax / optimal minimum wage estimates in this older version of their paper! Turns out you can get to $15 being optimal, at least in some labor markets.

So let's wrap up:

• There's monopsony power in the labor market
• Non-crazy oversized minimum wage hikes don't cause unemployment as a result, with the non-crazy range including $15/hour in some jurisdictions
• Minimum wage hikes raise wages for more than just the very bottom of the wage distribution
• Even if minimum wages cause unemployment to go up, they need not lower total annual earnings for anyone (though it probably will for at least some)
• Even if some people see annual earnings go down, it's probably a good idea anyway provided it's marginal workers who lose their jobs
• The EITC's welfare math is a bit more complicated than you'd think because of incidence issues
• The minimum wage and the EITC are complements because the minimum wage can shift the incidence of the EITC away from firms and on to workers

PS - I saw some posts complaining about how the EITC comes as a lumpsum and how that's a really bad thing or something. I don't want to do a whole RI about this, but just a heads up, turns out that's super NBD. People consumption smooth their EITC check over the year by spending it on durable goods. Namely cars, which also are basically an investment vehicle (hehe) for them since cars enable them to get to work.