By Adam Nowakowski
Increasing economic inequality and lack of social mobility in our society has lead to political debate over raising the federal minimum wage. The minimum wage is essentially a government intervention into the labor market to set a wage floor, in an effort to fight poverty and inequality. Whether or not setting a minimum wage is an effective way to decrease poverty and inequality is a contentious issue. Opponents of minimum wage laws often criticize the wage floors for having a negative impact on the number of jobs available to poor people, which means they may do more harm than good. I am going to dispute that criticism, framing my response using a 2013 paper by John Schmitt for the Center for Economic and Policy Research.
The classical model of labor markets (Econ 101) suggests that an increase in the cost of production (implementing a minimum wage) should lead to a decrease in employment. The effect of the minimum wage on the labor market is one of the more studied topics in economics. In his paper, John Schmitt analyzes the history of the research done on the minimum wage, focusing mostly on the work done since the year 2000.
Through the 1970s and 1980s, the "disemployment" effects of the minimum wage were thought to be small and limited to younger workers. In the 1990s, the field of economics started using natural experiments to measure the impact of minimum wage policy changes on workers. Two competing camps emerged. Economists David Carr and Alan Krueger found "no evidence" that the minimum wage reduced employment. Economists David Neumark and William Wascher found different results, claiming "...the preponderance of evidence supports the view that minimum wages reduce employment of low-wage workers."
Since the year 2000, economists have developed new statistical techniques to measure the effects of minimum wages on employment, which can adjust for independent trends in employment unrelated to the price floor. Schmitt uses weather as an example in his paper, explaining that good weather may effect employment positively in warmer states that have low minimum wages. There are many similar variables that were unmeasured in the research through the 1990s, which unavoidably biased the results. The most recent studies show the impact of minimum wages on employment to be nearly zero, with results from various studies landing slightly above and slightly below zero. John Schmitt uses a graphic (shown below) in his paper to show data from a meta-study conducted by Hristos Doucouliagos and T.D. Stanley. Their research analyzed 64 minimum wage-studies, and concluded that the minimum wage effect on employment is near zero.
The classical model of labor markets (Econ 101) suggests that an increase in the cost of production (implementing a minimum wage) should lead to a decrease in employment. The effect of the minimum wage on the labor market is one of the more studied topics in economics. In his paper, John Schmitt analyzes the history of the research done on the minimum wage, focusing mostly on the work done since the year 2000.
Through the 1970s and 1980s, the "disemployment" effects of the minimum wage were thought to be small and limited to younger workers. In the 1990s, the field of economics started using natural experiments to measure the impact of minimum wage policy changes on workers. Two competing camps emerged. Economists David Carr and Alan Krueger found "no evidence" that the minimum wage reduced employment. Economists David Neumark and William Wascher found different results, claiming "...the preponderance of evidence supports the view that minimum wages reduce employment of low-wage workers."
Since the year 2000, economists have developed new statistical techniques to measure the effects of minimum wages on employment, which can adjust for independent trends in employment unrelated to the price floor. Schmitt uses weather as an example in his paper, explaining that good weather may effect employment positively in warmer states that have low minimum wages. There are many similar variables that were unmeasured in the research through the 1990s, which unavoidably biased the results. The most recent studies show the impact of minimum wages on employment to be nearly zero, with results from various studies landing slightly above and slightly below zero. John Schmitt uses a graphic (shown below) in his paper to show data from a meta-study conducted by Hristos Doucouliagos and T.D. Stanley. Their research analyzed 64 minimum wage-studies, and concluded that the minimum wage effect on employment is near zero.
Schmitt's paper summarizes the two main recent meta-studies on the topic, and takes a detailed look several of the most influential studies in his review of the research since the year 2000. He finds, "the weight of that evidence points to little or no employment response to modest increases in the minimum wage."
Much of the current research John Schmit reviews in his paper was done by leading labor economist Arindrajit Dube. Dube wrote a recent column for the New York Times that gives a good overview of his work, and the implications of his findings. It is helpful in understanding the social benefits of the minimum wage, and provides historical and international comparisons of wage levels. He also reinforces the conclusions in the Schmitt's analysis: "In my work with T. William Lester and Michael Reich, we use nearly two decades’ worth of data and compare all bordering areas in the United States to show that while higher minimum wages raise earnings of low-wage workers, they do not have a detectable impact on employment."
As John Schmitt discusses in his paper, the reason for the lack of impact on employment by minimum wages laws is because of alternate "channels of adjustment." Schmitt includes (1) reduction in hours worked, (2) reductions in non-wage benefits, (3) reductions in training, (4) changes in employment composition, (5) higher prices, (6) improvements in efficiency, (7) "efficient wage" responses from workers, (8) wage compression, (9) reduction in profits, (10) increases in demand, and (11) reduced turnover as possible explanations for adjustments. Schmitt concludes, "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." Instead of an increase in the cost of production lowering employment, the evidence shows the effects are spread across several different market adjustments. Dylan Matthews has a good post about these "channels of adjustment" in WonkBlog.
Whether or not increasing the minimum wage is a good policy decision can be debated. However, the most recent research on the topic shows modest increases in the minimum wage do not have a statistically significant impact on employment.
Much of the current research John Schmit reviews in his paper was done by leading labor economist Arindrajit Dube. Dube wrote a recent column for the New York Times that gives a good overview of his work, and the implications of his findings. It is helpful in understanding the social benefits of the minimum wage, and provides historical and international comparisons of wage levels. He also reinforces the conclusions in the Schmitt's analysis: "In my work with T. William Lester and Michael Reich, we use nearly two decades’ worth of data and compare all bordering areas in the United States to show that while higher minimum wages raise earnings of low-wage workers, they do not have a detectable impact on employment."
As John Schmitt discusses in his paper, the reason for the lack of impact on employment by minimum wages laws is because of alternate "channels of adjustment." Schmitt includes (1) reduction in hours worked, (2) reductions in non-wage benefits, (3) reductions in training, (4) changes in employment composition, (5) higher prices, (6) improvements in efficiency, (7) "efficient wage" responses from workers, (8) wage compression, (9) reduction in profits, (10) increases in demand, and (11) reduced turnover as possible explanations for adjustments. Schmitt concludes, "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." Instead of an increase in the cost of production lowering employment, the evidence shows the effects are spread across several different market adjustments. Dylan Matthews has a good post about these "channels of adjustment" in WonkBlog.
Whether or not increasing the minimum wage is a good policy decision can be debated. However, the most recent research on the topic shows modest increases in the minimum wage do not have a statistically significant impact on employment.