Monday, January 5, 2015

How does raising the minimum wage affect employment levels?

A large literature has examined the effects on employment of raising the minimum wage, with different researchers arriving at conflicting conclusions. The core reason that economists can’t answer questions like this better is that we usually can’t run controlled experiments. There is always some reason that the legislators chose to raise the minimum wage, often related to prevailing economic conditions. We can never be sure if changes in employment that followed the legislation were the result of those motivating conditions or the result of the legislation itself. For example, if Congress only raises the minimum wage when the economy is on the rebound and all wages are about to rise anyway, we’d usually observe a rise in employment following a hike in the minimum wage that is not caused by the legislation itself. UCSD Ph.D. candidate Michael Wither and his adviser Professor Jeffrey Clemens have some interesting new research that sheds some more light on this question. . . .

Clemens and Wither found that the federal minimum wage hike resulted in about a 6% decrease in the probability that low-wage individuals would have a job based on this comparison of states in which the minimum wage hike would have been binding and those for which it would not. The hike in the minimum wage thus appears to have raised the wage for low-skilled workers but made it harder for them to find jobs.

Two things to remember to keep this in perspective:

1. Reducing employment is just one of many ways workers can be hurt by raising the minimum wage. It can also cause employers to avoid giving raises to higher-level employees, cut benefits, offer less hours, raise prices (paid by low-wage workers who are also customers at their own companies or other companies), etc.

2. Unemployment is a particularly bad problem for a person to have — it's a far worse problem than not being paid quite enough. So even a small disemployment effect could be good reason to oppose raising the minimum wage.