Yes, minimum wage hikes cost jobsJan 23, 2015
As the slow economic recovery continues, there are renewed calls to raise the minimum wage. While the goal may be to raise the income of certain workers, the consequence is to price some workers out of the labor market and reduce their opportunities. Recent scholarship from the nonpartisan National Bureau of Economic Research confirms that this exact flaw has undermined the effectiveness of federal minimum wage laws, which suggests calls for new laws in the same vein be met with skepticism.
The upswing in minimum wage activism likely owes some of its vigor to recent studies that attempted to challenge the well-established relationship between raising minimum wages and increases in unemployment. Studies performed in 2010 and 2011 argued that minimum wage increases do not increase unemployment, but a recent response to these studies points to the studies’ fatal flaws. In attempting to “correct” for regional biases in the existing scholarship, the 2010 and 2011 studies relied on new methodologies limiting their analyses to states neighboring each other. The response illustrates that the suggested regional biases did not exist, and demonstrates that such a confined analysis produces results that understate the employment effect of minimum wage increases. After correcting for these errors, the new study shows that employment does decrease after minimum wages increase as previous economic studies have shown.
Another recent study, written by Jeffery Clemens and also published by the NBER, has reaffirmed the long-standing wisdom surrounding minimum wage increases. Dr. Clemens tracked specific workers over periods of time surrounding minimum wage increases, and found that in the long run these workers experienced a decrease in net income. In the case of younger, college-educated workers, this lost income was manifested in the form of an “internship effect;” entry-jobs that would have been paid were converted to unpaid internships. In other industries, specifically food service, the lost wages were manifested in the traditional form of lost employment. Over time these un-worked hours lead to further lost wages, as compensation in this sector of the labor market is highly tuned to experience.
A minimum wage increase means two things for unskilled workers: they will be replaced by workers with more experience, and it becomes harder for them to accrue the experience needed to secure a job. The downside of all this is that there is a decrease not just in employment, but also in workers’ total earned income. Perhaps the most salient statistic emerging from this analysis is that minimum wage increases have been associated with a 5% reduction in the likelihood that a worker will earn more than $1,500 per month. More than any other observable statistic, this very clearly illustrates the utter uselessness of minimum wage increases as a tool to improve the lives of low-income workers.
1. Dube, Arindrajit, T. William Lester, and Michael Reich. 2010. “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties.” Review of Economics and Statistics, Vol. 92, No. 4, pp. 945-64.
2. Allegretto, Sylvia A., Arindrajit Dube, and Michael Reich. 2011. “Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data.” Industrial Relations, Vol. 50, No. 2, pp. 205-40.