The Effects of Minimum Wages on Employment

David Neumark writing in the Federal Reserve Bank of San Francisco FRBSF Economic Letter. David Neumark is Chancellor’s Professor of Economics and Director of the Center for Economics & Public Policy at the University of California, Irvine, and a visiting scholar at the Federal Reserve Bank of San Francisco. Excerpts:

"Some recent studies even suggest overall employment could be harmed."

"a higher minimum wage will lead employers to hire fewer low-skilled workers and more high-skilled workers. This “labor-labor” substitution may not show up as job losses unless researchers focus on the least-skilled workers"

"“monopsony” models...models may be less applicable to labor markets for unskilled workers most affected by the minimum wage; these markets typically have many similar employers in close proximity to each other"

"Newer research used data from an increasing number of states raising their minimum wages above the federal minimum. The across-state variation allowed comparisons of changes in youth employment between states that did and did not raise their minimum wage."

"An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers."

"meta-analyses do not assign more weight to the most compelling evidence. Indeed, they often downweight less precise estimates, even though the lower precision may be attributable to more compelling research strategies that ask more of the data."

"limiting comparisons to geographically proximate areas generates misleading evidence of no job loss effects from minimum wages. Pointing to evidence that minimum wages tend to be raised when labor markets are tight, this research suggests that, among nearby states that are similar in other respects, minimum wage increases are more likely to be associated with positive shocks, obscuring the actual negative effects of minimum wages. Using better methods to pick appropriate comparison states, this research finds negative elasticities in the range of −0.1 to −0.2 for teenagers"

"Other analyses that try to choose valid geographic comparisons estimate employment responses from as low as zero to as high as −0.50"

"Some new strategies in recent studies have also found generally stronger evidence of job loss for low-skilled workers. For example, Clemens and Wither (2014) compare job changes within states between workers who received federal minimum wage increases because of lower state minimums and others whose wages were low but not low enough to be directly affected. Meer and West (2015) found longer-term dynamic effects of minimum wages on job growth; they suggest these longer-term effects arise because new firms are more able to choose labor-saving technology after a minimum wage increase than existing firms whose capital was “baked in.”"

"Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss."

"the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers"

"minimum wages were roughly 20.6% higher in 2014 than in 2007, compared with a 16.5% increase in average hourly earnings over the same period. Thus, between the federal increases in 2007–09 and recent state increases, the minimum wage has grown only slightly faster than average wages in the economy—around 4.1% over the entire seven-year period."

"Using a −0.1 elasticity and applying it only to teenagers implies that higher minimum wages have reduced employment opportunities by about 18,600 jobs. An elasticity of −0.2 doubles this number to around 37,300. If we instead use the larger 16–24 age group and apply the smaller elasticity to reflect that a smaller share of this group is affected, the crude estimate of missing jobs rises to about 75,600."

"Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession."