See
How much have minimum wage increases contributed to the US employment slump? by Jeffrey Clemens and Michael Wither, economists at UC-San Diego.
"The merit of a minimum wage is a classic issue of contention in
economics and is of particular interest during a contraction. This
column uses worker-level microdata to investigate the effect of a
federal policy change in the US that affected some states more than
others. The authors evaluate not only the proximate effects on
employment, but also follow workers for up to three years afterward to
track career trajectory following a minimum wage hike."
"The minimum wage
remains the focus of lively debate in both policy and academic circles.
In the 2014 US elections, four states passed referenda to increase
their statutory minimums. Earlier in the year, President Obama called
for increasing the federal minimum from $7.25 to $10.10 per hour. Among
economists, minimum wage research has readily filled volumes (Card and
Krueger 1995, Neumark and Wascher 2008). Recent analyses arrive at
disparate results, including work by Dube et al. (2010), Neumark et al.
(2013), and Meer and West (2013).
An analysis focused on the Great Recession and subsequent recovery
In
a new paper we explore the minimum wage’s contribution to labour market
struggles following the Great Recession (Clemens and Wither 2014a).
1 We
do so using data collected through the 2008 cycle of the Survey of
Income and Program Participation (SIPP). The 2008 SIPP panel allows us
to directly analyse
the most recent change in the federal minimum wage,
which occurred in July 2009. We assess the contribution of this
increase to the surrounding period’s sustained employment declines.
These declines included
an eight percentage point reduction in the
employment rate of young adults (ages 15 to 24), which remains far from
fully explained (Clemens and Wither 2014b).
In
July 2009 roughly half of US states were bound by the new federal
minimum to increase their minimum wage rates by 70 cents, from $6.55 to
$7.25 per hour. The remaining states’ minimum wage rates changed by an
average of roughly 10 cents. The first dimension of our analysis thus
compares changes in the employment of low-skilled workers in ‘bound’
relative to ‘unbound’ states.
Beyond
making comparisons across states, the data allow us to identify
targeted individuals with more precision than most past minimum wage
research. Specifically, we use 12 months of baseline data – from August
2008 through July 2009 – to identify workers earning wages in or near
the affected range. We similarly identify low-skilled workers with
wages moderately above the new federal minimum, who were not directly
affected. We use these samples of slightly higher-skilled workers to
bolster our confidence that our estimates disentangle the effects of
minimum wage increases from the forces underlying the Great Recession.
Within each state, comparisons between the directly affected and the
slightly higher-skilled workers help us to distinguish between trends
impacting all of a state’s low-skilled workers and changes specific to
those initially making below or near the new minimum.
Our
setting has additional advantages. Methodologically, our approach
enables transparent, graphical representations of the employment and
income trajectories underlying our estimates. Conceptually, it allows
us to directly analyse the outcomes at the heart of the minimum wage’s
intent. That is, it enables us to analyse the minimum wage’s effects on
the employment and income of low-skilled individuals.
The distinction between individuals and workplaces matters for two reasons.
- First,
workplaces have varying capacities to substitute between low-skilled
workers, higher-skilled workers, and capital. Analyses of industry- and
even firm-level data can thus have difficulty parsing out the minimum
wage’s effects. In such data, substitution between minimum wage workers
and higher-skilled workers cannot typically be distinguished from
increases in the earnings of the minimum wage workers themselves.
- Second,
the minimum wage’s effects on career trajectories are likely more
important for workers’ well-being than are its short-run effects on
wages and employment. Well known research by Murphy and Welch (1990),
for example, showed that early career experience has particularly high
returns. Similarly, Smith and Vavrichek (1992) found that most minimum
wage workers rise rapidly to employment at higher wage rates. Our
setting allows us to track workers’ outcomes for three years following
the minimum wage increases we analyse. We can thus provide evidence of
the minimum wage’s effects on upward economic mobility.
The minimum wage’s effects on employment and income trajectories
In
the context discussed above, we find that minimum wage increases
significantly reduced the employment of low-skilled workers. By the
second year following the $7.25 minimum's implementation, we estimate
that targeted workers' employment rates had fallen by 6 percentage
points (8%) more in ‘bound’ states than in ‘unbound’ states. In
addition to reducing employment, we find a 2 percentage point (12%)
increase in the likelihood that targeted individuals work without pay.
The latter effect is concentrated among early-career individuals who
obtain at least some college education. We interpret this as suggestive
evidence that many of these workers' entry-level jobs can be posted as
internships. For low-skilled, low-education workers, the entire change
in the probability of having no earnings comes through unemployment.
The
primary threat to our estimation framework is the possibility that the
low-skilled workers in the ‘bound’ and ‘unbound’ states were
differentially affected by the Great Recession. Aggregate data
characterising the Great Recession’s severity reveal that the housing
crisis was more severe in unbound states than in bound states.
Consequently, the recession would tend, if anything, to bias estimated
effects of the minimum wage on employment towards zero. We show that
our estimates are robust to taking a broad range of approaches to
controlling for macroeconomic conditions and the characteristics of the
individuals in our sample.
We
consider our estimates' implications for the effects of this period's
minimum wage increases on aggregate employment. While a variety of
caveats apply, our setting is reasonably well suited for this kind of
extrapolation. Our empirical approach allows us to estimate the minimum
wage’s effects on a relatively representative sample of the population
of targeted workers. This is preferable to, for example, conducting
such an exercise using estimates specific to selected demographic groups
such as teenagers or high school dropouts.
Over
the late 2000s the average effective minimum wage rate rose by nearly
30% across the United States. Our best estimate is that these minimum
wage increases reduced the employment of working-age adults by 0.7
percentage points. This accounts for 14% of the employment rate’s total
decline over this time period and amounts to 1.4 million workers. A
disproportionate 45% of the affected workers were young adults (aged 15
to 24).
We next
estimate the minimum wage increases’ effects on low-skilled workers’
incomes and income trajectories. We find that binding minimum wage
increases reduced low-skilled individuals’ average monthly incomes.
Targeted workers' average incomes fell by an average of $100 over the
first year and by an additional $50 over the following two years. While
surprising at first glance, we show that the short-run estimate follows
directly from our estimated effects on employment and the likelihood of
working without pay. The medium-run estimate reflects additional
contributions from lost wage growth associated with lost experience and
training.
Because
most minimum wage workers are at early stages of their careers, lost
opportunities for accumulating experience can be quite costly. We
provide direct evidence that such losses translate into meaningful
reductions in upward economic mobility. Two years following the minimum
wage increases we study, low-skilled workers had become significantly
less likely to transition into higher-wage employment in bound states
than in unbound states. Over this recent historical episode, the
minimum wage’s effects on career paths thus appear to be quite
important.
Concluding thoughts on directions for low-income support policy
As
documented by extensive research on income inequality, low-skilled
workers’ employment opportunities have declined in recent decades. Work
by Autor et al. (2008) and Autor et al. (2013) has identified
technological change and expanding trade as leading contributors. Our
findings suggest that, along with housing and financial market crises,
these forces have increased the sensitivity of low-skilled workers’
employment to increases in the minimum wage.
We
conclude by emphasising that the minimum wage is one among many
policies that seek to improve low-skilled workers’ incomes. Most
notably, the Earned Income Tax Credit (EITC) has been used for precisely
this purpose, and to great effect, for several decades. Research on
the EITC seemingly uniformly recommends it as a tool for increasing the
employment and incomes of low-skilled workers (Eissa and Liebman 1996,
Eissa and Hoynes 2006). By supplementing incomes without burdening
employers, it has meaningfully offset some of the inequality-inducing
trends discussed above (Liebman 1998). Our evidence augments the case
for shifting attention away from the minimum wage and towards the EITC
as a means of improving the well-being of low-income households."
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