Senator Edward M. Kennedy called an increase in the $4.25 minimum hourly wage “the overarching issue of our time and the election.” The Republican House Majority Leader, Richard K. Armey . . . vowed to fight an increase “with every fiber of my being.”
– The New York Times, April 6, 1997
In his 2013 State of the Union address, President Obama called for an increase in the minimum wage. “[T]oday, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong . . . Tonight, let’s declare that, in the wealthiest nation on Earth, no one who works full-time should have to live in poverty – and raise the federal minimum wage [from $7.25] to $9 an hour.”
Opponents of increasing the federal minimum wage quickly responded with a familiar retort: raising the minimum wage leads perfectly competitive employers to cut employment. “I’ve been dealing with the minimum wage issue for the last 28 years that I’ve been in elected office,” House Speaker John Boehner (R-OH) told reporters. “When you raise the price of employment, guess what happens? You get less of it.” Similarly, Senate Minority Leader Mitch McConnell (R-KY) called Obama’s overall speech “pedestrian, liberal boilerplate.” “He spoke of workers’ minimum wages, instead of their maximum potential,” McConnell said.
The argument fueling opposition to increasing the minimum wage follows the following logic, illustrated by Peter Roff in his op-ed, entitled The Cost of a Minimum Wage Hike, for U.S. News:
If he [Obama] gets his way, and the federal minimum wage is increased . . . it will raise the cost of labor in an economy that is hovering just above recession levels. Higher labor costs mean fewer people get hired. Employers have to find ways to do more with less and look for other ways to economize. Unskilled workers get laid off, replaced by machines and higher-skill workers who are more valuable. Self-checkout lines appear in grocery stores. Credit card machines take the place of the fellow who used to take the money in the parking lot. You have to bag your own groceries at the store. Raising the minimum wage is a bad deal for employers and, believe it or not, also for employees, especially the ones who end up being let go in order to keep a business from going permanently in the red and having to close its doors.
These statements, however, can be empirically tested. And in fact, they frequently have been. The employment effects of the minimum wage are one of the most studied topics in all of economics. And when economists estimate the impact of increases in the minimum wage on the employment prospects of low-wage workers, the weight of the evidence points to the following conclusion: Modest increases in the minimum wage leads to little or no employment response.
Into the Weeds: Taking a Closer Look at the Data
In 1977, the Minimum Wage Study Commission (MWSC) conducted a review of the existing literature on the minimum wage in the United States and Canada. After four years and $17 million, the MWSC published a 250-page summary report. In that report, the MWSC concluded that “it is not clear whether one should expect the minimum wage to reduce adult employment, and if it does, the amount may be so small that it will not be detected with precision.” While the MWSC report is oft-cited by opponents of the minimum wage, the preceding passage is often ignored.
This view remained the dominant view in the economics profession until the 1990s when economists began to re-examine the minimum wage. Dubbed the “New Minimum Wage” research, these economists sought to conduct “natural experiments,” which typically meant measuring the employment impact of a single instance of a policy change by comparing a group of workers affected by the change with a similar group that was not affected.
The most influential of these studies was David Card and Alan Krueger’s (1994) paper on the impact of the 1992 increase in the New Jersey state minimum wage (from $4.25 to $5.05 per hour) on fast-food employment. The results of the study were consistent with previous research. After analyzing the experiences of 410 fast-food restaurants in New Jersey and Pennsylvania, Card and Krueger found “no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.” In fact, the study actually found positive employment effects.
The problem with any one study, however, is simply that: it is only one study. Regardless of whether the effects of the minimum wage are positive (increases employment) or negative (decreases employment), we should expect the empirical research to vary. Some studies may find small statistically significant positive employment effects (Clark & Krueger (1994)), others may find zero effects (Dube, Lester, and Reich (2010)), and still others may find small statistically significant negative employment effects (Neumark and Wascher (2006)). What is important is where these studies, in the aggregate, tend to cluster. And since the early 2000s, the data has clustered around zero employment effects.
The following list is not a complete account of the empirical data, but it does include two meta-studies (studies of studies), a review, and four of the most influential studies published within the last three years. The debate over the minimum wage often devolves into “this economic study concluded this,” followed by the inevitable objection, “well . . . this study found this.” Vary rarely, however, does the commentary arm its readers with the actual data. Here is that data:
- Hristos Doucouliagos and T.D. Stanley (2009). Meta-study of 64 minimum-wage studies published between 1972 and 2007. The authors graphed every employment estimate contained in these studies (over 1,000 in total), weighted the estimates according to their statistical precision, and found that the most precise estimates were heavily clustered at or near zero employment effects. Doucouliagos and Stanly concluded that their results “corroborate [Card and Krueger’s] overall finding of an insignificant employment effect (both practically and statistically from minimum-wage raises.”
- Paul Wolfson and Dale Belman (forthcoming). Meta-study of 27 minimum wage studies published since 2000, selected because of their necessary elasticity estimates and corresponding standard errors. Wolfson and Belman concluded that there are no statistically significant negative employment effects of the minimum wage: “The largest in magnitude are . . . positive [and] statistically significant . . . Several are economically irrelevant though statistically significant and several others [are] slightly larger but . . . statistically insignificant.”
- Neumark and Wascher (2006, 2007). Conducted a qualitative review of the research since the early 1990s. Their research included data from the United States, other OECD countries, several Latin America countries, and Indonesia. By Neumark and Wascher’s calculations, only 33 of the 102 studies reviewed “provided the most credible evidence.” And of those studies, “28 (85 percent) . . . point to negative employment effects.” Aside from the subjectivity of their review, it should be noted that only 52 of the 102 studies, and only 19 of the 33 deemed “most credible” (which included five of their own studies), analyzed U.S. data. The Neumark and Wascher review is thus arguably less relevant to the United States.
- Dube, Lester, and Reich (2010). This study essentially replicated Card and Krueger’s New Jersey-Pennsylvania experiment thousands of times by comparing employment differences across contiguous U.S. counties with different levels of the minimum wage. Dube, Lester, and Reich followed 1,361 counties in the United States for which data were available continuously between 1990 and 2006. They found that employment trends vary substantially across region, but that there is “strong earnings effects and no employment effects of minimum wage increases.”
- Allegretto, Dube, and Reich (2011). Applied the methodology of Dube, Lester, and Reich (2010) to teen employment (rather than industry employment) over the period 1990 to 2009 using a state-level analysis (rather than a county-level analysis). Allegretto, Dube, and Reich found that, consistent with earlier research, a 10 percent increase in the minimum wage reduces teen employment slightly more than 1 percent. Once regional trends are controlled (employment generally grows rapidly in parts of the country where minimum wages are low, such as the South, and more slowly in parts of the country where minimum wages tend to be higher, such as the Northeast), however, the estimated employment effects of the minimum wage are not statistically significant from zero.
- Hirsch, Kaufman, and Zelenska (2011). Studied the impact of the 2007-2009 increases in the federal minimum wage on 81 fast-food restaurants in Georgia and Alabama. The concluded, “in line with other recent studies, that the measured employment impact is variable across establishments, but overall not statistically distinguishable from zero. The same absence of a significant negative effect is found for employee hours, even when examined over a three-year period.”
- Sabia, Burkhauser, and Hansen (2012). Analyzed the effects of a three-step increase in the New York state minimum wage from $5.15 per hour in 2004 to $7.15 per hour in 2007. They compared the employment of less-educated 16-to-29 year olds in New York with similar workers in Pennsylvania, Ohio, and New Hampshire who experienced no increase in the minimum wage. Sabia, Burkhauser, and Hansen found “robust evidence that raising the New York minimum . . . significantly reduced employment rates of less-skilled, less-educated New Yorkers.”
It is worth emphasizing, and repeating, that the takeaway from this research should not be that increasing the minimum wage has absolutely no effect on employment. After all, “little to no effect” still does contemplate some effect. What the research does demonstrate, however, is that while there may be no consensus whether the employment impact is positive or negative, there is consensus that the impact (whatever it may be) is small. Moreover, it exposes the familiar doomsday scenario that increasing the minimum wage is a “job-killer,” or that it would “unemploy about 5 percent” of low-wage workers, as a false narrative. These claims are simply not supported by the facts.
Cost-Benefit Analysis: Who Benefits From the Minimum Wage?
Even if the impact of increasing the minimum wage is, in truth, negative, the benefits far outweigh the costs.
For a moment, put yourself in the position of one of the 22.9 million Americans who would be affected by an increase in the minimum wage. From this fact alone we can make predictions about who you are. It is commonly believed that minimum wage workers are young, work part-time, or come from a non-poor family. However, as noted by the Economic Policy Institute, this view is wrong. In fact, as a worker who will be affected by an increase in the minimum wage, you are likely to possess the following characteristics:
- You are an adult (83.4% are at least 20 years old; only 6.4% are teenagers who work less than 20 hours per week);
- You are female (while women make up 48.3% of the workforce, they make up 58.4% of the workers making the minimum wage);
- You are a member of a minority group (42.9% of the affected workers are members of racial and ethnic minority groups, even though they comprise roughly a third, 32.1%, of the total workforce; Hispanics make up 21.7% of this group, African Americans comprise 15.4%);
- You have a high-school degree, and possibly some secondary education, but no higher degree (52.9% of affected workers);
- You have a total family income of less than $25,000 (31.9% of affected workers, whereas only 13.4% of the total workforce live in families with income this low; 53.2% have incomes less than $40,000; 62.6% have incomes less than $50,000; only 10.3% live in families with incomes exceeding $100,000); and
- You rely on the minimum wage to provide material support for family (wages earned by affected workers make up 45.9% of the total family income; 26.0% have no other source of income).
The narrative that most minimum wage workers are teenage part-timers is plainly inaccurate. The gains from an increase in the minimum wage will go primarily to low-income families who greatly depend on the earnings to make ends meet.
As for the costs of increasing the minimum wage, a 10% increase is estimated by economists to lead anywhere from a 3% decrease in employment to a 1% increase in employment. However, even if we assume the worst (i.e., that a 10% increase will lead to a 3.0% decrease in employment), the benefits outweigh the costs to the affected workers. Before the increase, the total wages earned by workers making 50% of average wages or less is $187 billion. After the increase, the total wages earned by directly affected workers would rise to $203 billion (an 8.3% increase in the total wages going to these low-wage workers as a group). Furthermore, relative to the entire economy, the wage costs of recent minimum wage increases are very small (1990-91, from $3.35 to $4.25; 1996-97, from $4.25 to $5.15; 2007-2009, from $5.15 to $7.25). And relative to the total wage bill paid by employers, the total direct wage cost of each of these minimum wage increases was tiny – consistently less than 0.1 percent of total wages paid.
It is precisely because the benefits outweigh the costs why more than 650 economists, including five Nobel laureates, called for an increase in the minimum wage in 2006. And it is for many of these same reasons why at least 67 Republicans who are still in Congress today, including Sen. Mitch McConnell (R-KY) and Rep. Paul Ryan (R-WI), backed that same call to increase the minimum wage when it was supported by Republican President George W. Bush.
The Bottom Line: A Modest Increase in the Minimum Wage Will Not Cost Jobs
When John Boehner explained to reporters that “[w]hen you raise the price of employment . . . [y]ou get less of it,” he said it with such certainty and conviction that it was difficult not to take him at his word. But that was precisely the point.
Every economist agrees that businesses will make changes to adapt to the higher labor costs after a minimum wage increase. There are many ways a business could adjust, including, among other things, reducing the hours worked, reducing non-wage benefits, reducing training, instituting higher prices, and yes, reducing employment. But it is a myth that increasing the minimum wage irrefutably kills jobs.
Over time, the minimum wage has lagged inflation, leaving minimum wage earners with far less purchasing power than in previous decades. As Bloomberg noted in 2011, “after adjusting for inflation, the federal minimum wage dropped 20 percent from 1967 to 2010, even as the nominal figure climbed to $7.25 an hour from $1.40, a 418 percent gain.” In addition, the minimum wage lags far behind what it should be after accounting for productivity increases. According to a March 2012 study by the Center for Economic and Policy Research, the minimum wage should have reached $21.72 an hour in 2012 if it had kept up with increases in worker productivity.
Perhaps this is why 71% of Americans, and 50% of Republicans, favor increasing the minimum wage to $9.00 an hour.
Boehner, and his colleagues lining up in opposition to Obama’s proposal, are counting on you not to know the facts. Boehner is counting on you to rely on his experience during his “last 28 years” in office and accept his version of reality. But do not fall for the rhetoric from conservatives or business lobbyists. While much of the data is inconclusive, one thing is certain: that rhetoric is false.