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.

The New York Times reports:

When Neale Mahoney, an economist at the University of Chicago’s Booth School of Business, set out to evaluate the effect of [the 2009 Credit Card Accountability Responsibility and Disclosure Act], he was confident he knew what he and his colleagues would find: It didn’t work.

“I went into the project with this sort of conventional wisdom that well-intentioned regulators would force down fees and that other fees and charges would increase in response,” he told me this week, comparing hapless rule makers to the carnival visitors playing the game known as Whac-a-Mole, where a mole springs up somewhere else as soon as one is knocked down.

But his expectation was wrong. The study came to a conclusion that surprised Mr. Mahoney and his colleagues: The regulation worked. It cut down the costs of credit cards, particularly for borrowers with poor credit. And, the researchers concluded, “we find no evidence of an increase in interest charges or a reduction to access to credit.”

… “Looking at the data forced us to rethink our understanding of the effects of regulating consumer financial products,” Mr. Mahoney told me. “The data changed our view of the world. That is what’s so exciting about being an empirical economist.” [Keep reading]

This is not only “exciting.” It also demonstrates the social importance of empirical social science. It is all too common, sometimes based on mathematically or logically sound (but empirically untested) models, sometimes based on dogmatic acceptance of “laws,” to either overestimate or underestimate what can actually be achieved by politics or public policy. The first principle of empirical social science is that beliefs need to be tested against reality. In this case, it turns-out, contrary to common belief, regulation in the public interest was possible. There are, of course, plenty of cases where empiricism will lead to the opposite conclusion, and that this will challenge or refute widely held optimistic beliefs. Since erring on either side–overestimating or underestimating what can be accomplished–is costly, it is of supreme importance that beliefs be constantly tested against reality.