Do Minimum Wage Increases Kill Jobs?

One of the most famous lessons taught in introductory (micro) economics courses is that, according to economic theory, minimum wage increases have the unintended consequence of  increasing unemployment. Consequently, it is often argued that minimum wage increases actually end up hurting those (i.e. the working poor) whom such policies are supposed to help. As Congress considers increasing the federal minimum wage to $8.20 and certain major cities entertain mandating “living wages” as high as $15, it is worth considering the empirical, as opposed to merely theoretical, economic research on the affects of  minimum wage increases on employment.

Back in February, John Schmitt, Senior Economist at The Center for Economic and Policy Research, reported the following results of his meta-analysis (i.e. systematic analysis of published research findings) of research on this topic published since the year 2000:

… The weight of that evidence points to little or no employment response to modest increases in the minimum wage.

The report reviews evidence on eleven possible adjustments to minimum wage increases that may help to explain why the measured employment effects are so consistently small. 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.

Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low wage workers.

It would seem, then, that as with the Whack-a-Mole Theory of Consumer Credit Regulation, the predictions of this economic theory are currently not supported by empirical evidence. (See also here and here.)

Notice, however, that this research is about “modest increases in the minimum wage.” Thus, this evidence (on its own) does not speak to the question of whether a large increase, like that being considered in Seattle, will lead to an increase in unemployment.

Also, it is important to keep in mind that no empirical finding, no matter how solidly established, is sufficient in itself for settling policy questions. There is no escaping the need to make core value judgments on issues of public policy. For example, libertarians would object to a minimum wage increase out of principle (regardless of its consequences). That is, they would see such a regulation as an illegitimate government intrusion into the freedom of employers and employees to negotiate the terms of employment. On the other hand, progressives sometimes conclude that the benefits created for the employed by a higher minimum wage would outweigh the reduction in overall employment (if this were in fact the consequence of minimum wage increases). Still, the debate over these value questions should be kept separate from the empirical question about the actual effects of minimum wage increases. And the evidence presently suggests we do not face a significant tradeoff between (modestly) higher minimum wages and employment.

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