The latest empirical research further underscores the harm of minimum wage laws

See BY RYAN BOURNE of Cato. Excerpts:

"David Card and Alan Krueger in 1994 seemed to find such a result. Using a telephone survey to analyze the response of fast-food restaurants in New Jersey to an increase in the state’s minimum wage relative to nearby Pennsylvania, Card and Krueger concluded that the higher minimum wage actually increased employment in New Jersey. However, David Neumark and William Wascher in 2004 reexamined the New Jersey increase using actual payroll data from the two neighboring states.

They found that a combination of measurement error in the Card and Krueger telephone survey and the fact that the wages of many of the workers were already above both the new and old minimum wage accounted for Card and Krueger’s findings, rather than a monopsony effect."

"Given sectors that include the overwhelming majority of workers earning at or below the minimum wage (e.g., food preparation and serving, sales, administrative support, transportation, and material moving) look fairly competitive, economists such as Alan Manning developed models that argued instead that all employment situ- ations have an element of monopsony. Imperfect information and the costs to an employee of switching jobs are thought to give the current employer some market power over workers. As a result, these economists argue, raising the minimum wage can raise employment."

In 2006, Neumark and Wascher undertook an exhaustive analysis of the minimum wage literature since Card and Kreuger. They argued that two-thirds of the papers they reviewed supported the traditional understanding. They concluded that minimum wages had very negative employment effects for minority teenagers, who were often replaced by older, lower-skilled women.

But two papers in 2010 and 2011, using alternative research designs and controls, found no employment effects from minimum wage increases, highlighting the back-and-forth nature of this debate. The 2010 paper, by Arindrajit Dube, William Lester, and Michael Reich, examined restau- rant and other low-wage employment in counties that bordered each other across state lines with different minimum wage laws. They found no effects on employment in counties in states that had increased their minimum wage. The 2011 paper, by Sylvia Allegretto, Dube, and Reich, examined all (not just low-wage) employment in states, but included state employment trends as a control variable. The authors again found no effect of the minimum wage increase on employment after con- trolling for the existing employment trends.

Neumark and Wascher responded in 2013 that the inclusion of the linear state-employment time trends would be appropriate if the early 1990s recession and the Great Recession had similar effects within states. But, for example, teenage employment was much higher than predicted by linear trends in California during the 1990s recession and much lower during the Great Recession. They found that the inclusion of nonlinear state time trends eliminated the systematic prediction errors over time and resulted in negative effects of minimum wages on teen employment—the same basic result found in their 2006 paper.

In a provocative 2016 paper, Johnathan Meer and Jeremy West argued that the inclusion of state employment trends is methodologically problematic for another reason. They argued that increased minimum wages do not prompt employers to reduce their employment levels in the short run, but rather reduce their hiring rates at the margin, resulting in lower employment in the long run. And states that enact minimum wage increases tend to have higher rates of employment growth than other states, which means that controlling for trend growth, as the 2010 and 2011 papers did, obscures the negative employment effect of a minimum wage increase. That is because the higher growth before the wage increase and lower growth after the increase averages out to a seemingly steady growth rate similar to what’s seen in the control state. Meer and West concluded that a real minimum wage increase of 10% reduced job growth by 0.3 percentage points annually—a hefty 15% of the baseline level."

"But states that are growing faster are more inclined to increase their minimum wage relative to states that are not growing as robustly, so there are likely important economic differences between them, and those differences distort statistical analysis of the effects of one state changing its minimum wage.

A 2014 study by Jeffrey Clemens and Michael Wither attempts to overcome this problem. Instead of examining a state-level change in the minimum wage, the two examine the effects of the federal minimum wage increase from $5.15 to $7.25 in the late 2000s. The nationwide change meant the researchers couldn’t look for differences by comparing workers in different states, so they instead compared groups of workers within each of the affected states. The treat- ment group included those who were paid the very lowest wage before the increase. The control group included workers earn- ing slightly above the new minimum. The researchers found that the number of workers in the treatment group declined relative to the control group once the new mini- mum wage took effect. They estimated that the new federal mini- mum eliminated about 800,000 jobs in the lowest paid group."

"A recent comprehensive literature review by Hristos Doucouliagos and T.D. Stanley of 1,424 estimates of elasticities from minimum wage studies found small disemployment effects overall, but that finding was heavily caveated, with the authors claiming that it probably stems from “publication bias” in favor of the traditional negative results."

"the majority of published papers found small but statistically significant disemployment effects from modest minimum wage increases, while most of the rest of the studies found neither positive nor negative employment effects."

"papers that used methodologies comparing areas experiencing wage hikes with close geographic control areas tended to find smaller disemployment effects, whereas those controlling for other state-specific shocks and using longer time periods or more advanced estimation methods tended to find larger negative effects."

"certain demographic groups, particularly the low-skilled and teenagers, absorbed the worst of the employment losses when minimum wages increased."

"[Seattle city council] voted to increase Seattle’s minimum wage in a series of steps, set to reach $15 per hour by 2022, with larger employers and employers not offering health benefits reaching that level earlier."

"Unlike previous studies, which examined sectors or groups known for low-wage work—such as restaurants, or retail, or teenagers—this study examined the effect of the minimum wage increases on all employees earning under $19 per hour in single-location employers in the state.

The study used synthetic rather than actual controls. That is, the control group is a weighted-average of census regions in Washington. This approach minimizes the differences in trends between Seattle and the other regions prior to the minimum wage ordinance, making the findings of the study more reliable. Differences in hours and employment after the ordinance passed in Seattle are then assumed to be the result of the policy change.

The University of Washington results are striking. The researchers found the first minimum wage increase from $9.47 to $11 in 2015 resulted in statistically insignificant reductions in hours worked and jobs. But the second increase to $13 had dramatic effects. Hours worked fell by between 8.7% and 10.6%, and the total number of low-wage jobs decreased by between 5.1% and 6.3%. Employers in Seattle cut back on both the number of low- wage employees and the hours that retained employees worked relative to the synthetic control of weighted counties in the rest of Washington. The result is that the average person affected by the law was $125 per month worse off because of the policy change."

"here were large negative effects when only low-wage restaurant employment was examined. In other words, Seattle’s minimum wage increase shifted income from lower-wage to higher-wage restaurant workers."

"there may be nonlinear employment effects from mini- mum wage increases, meaning that employment losses grow progressively worse as the minimum wage rises."

"multi-site employer exclusion by conducting survey work that suggests that multi-site businesses are in fact more likely to have laid off workers following the wage increase than single-site businesses."

"strong growth in Seattle relative to the synthetic control trend would suggest that the minimum wage had an even bigger negative effect. For the results to overstate the disemployment effects, the control group performance in the treatment period would have had to improve relative to the city of Seattle."