What we know and what we (should) know that we don’t know about minimum wage increases

FROM a piece in the in the BDN regarding the minimum wage debate:

Democratic candidates for Maine governor and the U.S. Senate joined former Ohio governor and U.S. Rep. Ted Strickland and Portland Mayor Michael Brennan on Tuesday to call for an increase in the minimum wage, expansion of health care benefits and other steps they said would boost a shrinking middle class.

Further in the piece:

On Tuesday, David Sorensen, spokesman for the Maine Republican Party, said that while the Democratic candidates claim to be working in the best interests of the middle class, the measures they’re touting have unintended consequences that hurt the economy. An increase of the minimum wage to $10.10 per hour, as Obama has advocated for, would drive up payroll costs for employers nationwide and result in the elimination of 500,000 jobs, according to the nonpartisan Congressional Budget Office, Sorensen pointed out.

“I would warn Mainers against climbing aboard the Michaud-Bellows bus, because it’s headed straight for a fiscal and economic cliff where jobs are destroyed, debt is ignored, and big government is the solution to everything,” Sorensen said in a statement.

One of the great known-unknowns about minimum wage is the dis employment effects of raising it.  For starters, the CBO report Sorensen is referring to, published in February of this year, gave projections of the impact on the labor market of increasing the minimum wage to $9, and increasing it to $10.10:

The 500,000 figure cited by Sorensen is the central estimate, but the spread on those projections for both options, specifically the $10.10 option, is quite wide.  Why is it?  Because projecting the impact on the labor market is a bit like reading tea leaves; there’s a lot of other variables that impact the labor market outside of the m/w.  For instance, the m/w was increased in 1995 and 1996, and yet the labor market did not decline overall or for teens specifically (a group that opponents of increasing the m/w often claim will suffer the most):

The m/w was not increased again until 2006, 2007, and 2008, when we do see a decline in employment:

Why the difference?  Well, during the 1990s the m/w was increased during the tech-stock boom, and in the 2000s the m/w was increased on the eve of the 2008 recession.  As a result, it’s difficult to thresh out exactly what impact the m/w increase had on the labor market, if any.

To try to determine that impact, researchers conduct state and local level empirical studies in an attempt to tease out that economic noise.  This is often done by looking at differences in changes in employment at firms near state lines where one state is increasing its m/w while the other its not.  This helps create a clearer picture of that impact.

In 2012, economist John Schmitt reviewed several of those studies and from them drew a conclusion about the impact increasing the m/w has on the labor market:

Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers.  

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.

Subsequent to Schmitt’s paper, two economists, Jonathan Meer and Jeremy West, conducted a study and published a paper concluding that m/w increases had negative effects on the labor market, particularly for teenage workers.  Another economist, Arin Dube, responded to the Meer and West paper and rebutted the findings.  In short, Dube noted that the negative association between job growth and minimum wages did not show up in industries with high numbers of m/w workers, as would be expected.  Instead, negative associations occurred in industries with low concentrations of m/w workers.  Subsequent to the Dube criticisms, Meer and West published a response addressing those criticisms, which in turn drew another response, this time from John Schmitt.  Schmitt mostly supported Dube’s initial criticisms of the West and Meer paper that disemployment was not appearing in industries with a high concentration of m/w workers, noting that:

In the meantime, the evidence . . .  supports Dube’s view that something other than the minimum wage is driving Meer and West’s findings.

Which brings us back to my original point; there’s a lot of noise in an economy, and while state and local level studies help to tease out some of that noise, it’s imperfect.

What we do know about the impact of m/w increases on the labor market is that the net effect (changes in employment, wages, and hours worked, as well other elements) is more minimal than often portrayed, and specifically the negative impact is far less severe than opponents of m/w increases suggest.

As economist Paul Wolfson noted in an interview from July of this year:

First, our work: in our book, we surveyed more than 70 analyses of the effect of the minimum wage on employment.  By and large, the strongest studies in terms of statistical rigor reported an effect on employment that ranged between negligible and none.  In addition, we performed our own meta-analysis, a procedure that combines the results of different studies in a statistically rigorous way, and this confirmed the result of “negligible to none.”

That’s what we know; that, in general, m/w increases are not directly correlated with large negative impacts on employment.  However, that’s admittedly a bit general and a bit fuzzy.  What we don’t know are the exact contours of the impact of m/w increase on employment (and wages, and hours worked, etc.).  Again from Wolfson:

Despite the hundreds of studies in just the last 25 years, much remains unknown or known with insufficient certainty: the effect of the minimum wage on low incomes, on prices and output, on the different employment and unemployment experience of men and women, on the people’s choices to remain in or leave school, to name just a few.  Work has been done in each of these areas, but either too little to be yet confident of the results or too much of what exists turns out to be plagued by statistical problems of one sort or another.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.