Raising the Minimum Wage: Evidence from Empirical Research
With the Biden administration looking to deliver on its campaign promises and ease the country’s political tension, the minimum wage debate has resurfaced with more potency than ever before. The issue is largely partisan and is often divided into two sides: advocates for a higher minimum wage argue that workers would benefit from having more of a living wage and that they are entitled to such pay, while opponents argue that paying higher wages will cause businesses to pass expenses onto consumers via inflation, lay off workers, cut hours, and shut down entirely. While this simplification doesn’t capture all of the arguments’ nuances, it gives the main strife: will people be better or worse off?
Economic literature on the subject has been cited on both sides, with no clear consensus from economists. It is not uncommon to find competing papers that seem to entirely contradict one another, and searching for answers can result in being more conflicted than before. However, there are some robust empirical studies that have been able to find statistically significant results, shedding light on the muddled topic. As examined below, certain papers from the National Bureau of Economic Research (NBER) and other economic publications have examined both common and oft-neglected issues within the minimum wage debate, with conclusions leaning towards the finding that increasing the minimum wage has more negative than positive effects.
As a common understanding of how labor markets function, employers pay more for higher-skilled workers. People with advanced degrees, unique skill sets, and relevant experience are attractive to businesses because they are more productive and save the company money. Thus, employers are willing to pay more for a seemingly-more competent worker. Jobs that don’t require a robust skill set are more easily replaceable if a worker quits, and these jobs are known to be low-paying; common examples include jobs in food service, manual labor, and retail. Therefore, the question arises of whether or not companies will have stricter hiring requirements if the minimum wage rises. Clemens, Kahn, & Meer seeks to answer this question by analyzing employment data from before and after states had minimum wage increases. Their findings from the study indicate that when minimum wage increases occur, businesses then add more educational requirements to job vacancy posting (Clemens et al., 2021). Consequently, the average age of low-wage workers goes up, as those with the required educational minimum are more likely to be older. This effect of the wage policy change hurts those who were meant to benefit from the policy; workers without a high school or college education are effectively iced out of the job market. The disadvantaged groups are put at even more of a disadvantage from the minimum wage increase (Clemens et al., 2021).
In a famous instance of minimum wage policy change, Seattle raised its minimum from $9.47 to as much as $13 over the course of two years in the mid-2010s (Jardim et al., 2017). The subsequent employment data has been studied and analyzed by economists for years, yielding dozens of academic papers with various conclusions about the situation. In a particularly robust paper from Jardim et al., the impact of the minimum wage increase was studied to find that overall, low-wage workers were hurt more by the policy than they benefitted. The demand elasticity for low-wage labor is estimated to be -2.6, which is much greater than previous studies’ estimates (Jardim et al., 2017). This value is significant because its absolute value is greater than one. It is interpreted as meaning that a 1% increase in the price of labor (wage) leads to a 2.6% decrease in the demand for labor, meaning employers are more sensitive to wage changes and change their hiring levels substantially. Jardim et al. analyzes the given employment data to determine a net wage gain of 3.2%, which occurs to low-wage workers’ benefit. However, the wage hike brings employers to make changes, namely finding ways to cover the added wage expense (Jardim et al., 2017). Firms conclude that the work done by the lowest-paid employees isn’t critically important to carry on in the same manner, and changes are made. Businesses can pass the burden onto customers, automate the work, lay-off employees, or cut hours. In the case of Seattle, the decision to cut hours was so popular amongst firms that the total number of hours worked in low-wage jobs fell by 6.9%. The benefit of the higher wage was overshadowed over twofold by the drawback of hours being cut and jobs being terminated (Jardim et al., 2017). While some workers were able to enjoy higher wages and benefit overall, many others were left with reduced hours that offset the higher pay or lost jobs entirely; the minimum wage increase did more harm than good. With this study being isolated to Seattle, its conclusions aren’t applicable to entire states or the nation, but it can be used to estimate policy effects for other large metropolitan areas that have high minimum wages to begin with.
In the minimum wage debate, there often lacks a consideration for the possible effects towards discouraged workers, those with unemployment (UI) benefits, and those already searching for jobs. The conversation largely centers on current low-wage workers with little analysis for these other groups. UI benefits are often cited as an expensive government burden, especially when resources are being diverted to discouraged workers rather than those who are entirely unable to work. With regards to a minimum wage increase, initial thought may be to assume that the allure of more income will attract discouraged workers/UI beneficiaries to re-enter the job market. Adams, Meer, & Sloan examines this idea using data from the Current Population Survey and the Bureau of Labor Statistics. The findings echo those of prior studies—those actively looking for a job may heighten their efforts during the month of the minimum wage increase, but search efforts return to previous levels soon after (Adams et al., 2018). In the month directly after the wage hike, minutes spent each day job-searching increased by about 55%, but after this first month, the effects essentially vanished; the subsequent five months show no significant increase (Adams et al., 2018). This is similar to UI beneficiaries also heightening their job search efforts by over 350% in the month before benefits expire, but regressing back to prior levels once the time passes (Krueger & Mueller, 2010). Adams, Meer, & Sloan also finds that minimum wage increases do not draw discouraged workers to reenter the job market, despite hopeful expectations. While the findings of this study do not indicate negative effects of minimum wage increases, they do disband notions that long-term effects will exist for and benefit discouraged workers and those already in search of jobs.
Countless economic studies attempt to solve the minimum wage debacle, but often cloud the problem even further. Studies using the same data can reach different conclusions that compete with one another, because the minimum wage issue has so many small moving parts that make finding the one true answer difficult. Generalizing the issue and attempting to solve it on a national scale is misguided and ignores the breadth of complex literature that seeks to understand the problem. As discussed, some research examines more nuanced aspects of the debate that are frequently neglected or written off as being certain for either side. Despite continued uncertainty and noise, the research presents significant evidence that highlights the disadvantages and problems associated with raising the minimum wage.
References
Adams, C., Meer, J., & Sloan, C. (2018). The minimum wage and search effort (No. w25128). National Bureau of Economic Research.
Clemens, J., Kahn, L. B., & Meer, J. (2021). Dropouts need not apply? the minimum wage and skill upgrading. Journal of Labor Economics, 39(S1), S107-S149.
Jardim, E., Long, M. C., Plotnick, R., Van Inwegen, E., Vigdor, J., & Wething, H. (2017). Minimum wage increases, wages, and low-wage employment: Evidence from Seattle (No. w23532). National Bureau of Economic Research.
Krueger, A. B., & Mueller, A. (2010). Job search and unemployment insurance: New evidence from time use data. Journal of Public Economics, 94(3-4), 298-307.
