The End of the Minimum Wage Debate?

Originally published in the Herald-Mail

Thomas A. Firey Mar 19, 2014

In Washington and Annapolis, lawmakers and policy researchers are debating the idea of raising the minimum wage. Supporters say an increase would help poor families; opponents worry that it would raise the cost of employment, reducing the number of jobs and hurting would-be workers.

The good news is that both the politicians and policy researchers seem to be reaching a consensus on the minimum wage. The bad news is that the politicians are reaching the exact opposite consensus of the researchers.

Social scientists have been studying the effects of the minimum wage for decades. A large majority of the empirical research indicates that raising the wage reduces employment[1]—as the Congressional Budget Office recently noted in a high-profile report.[2] However, a small number of studies found no effect on employment.[3] Why the difference? In a new paper that is the most important research on the minimum wage to come along in decades, two Texas A&M University economists appear to have found the explanation.[4]

Until now, researchers have tried to determine the job effects of the minimum wage by simply looking at the number of employed workers before and after an increase in the state or federal minimum wage. The studies typically found that the job numbers went down relative to some benchmark, leading them to conclude that a higher minimum wage hurts jobs. However, a minority of studies found the number stayed the same or went up, leading them to conclude there is no employment effect.

The Texas A&M study examines the rate of job growth before and after a minimum wage increase. There are a number of reasons why this is a better research method. One reason is that minimum wage increases usually happen during economic booms; an increase could (theoretically, at least) hurt job growth, yet the economy’s momentum would mean that some jobs would still be created. Another reason is that existing employers may be loathe to fire current workers following a minimum wage increase, but may slow their hiring of new workers, while new businesses—which are a significant part of job growth—may not hire at all. The old research method was likely to miss those effects, but the new method would see them.

When the Texas A&M economists used this method on employment data from 1975 to 2012, they found that minimum wage hikes had a dramatic negative effect on job growth. A mere 10 percent increase in the wage reduced job growth by around half a percentage point the following year. That may not sound like much, but job growth averaged about 2 percent annually over those decades, so the wage hike meant the loss of about a quarter of all new jobs. Given the longstanding consensus of the empirical research and the groundbreaking work from Texas A&M, it seems unreasonable to deny what should be common sense: forcing employers to pay higher wages means that those employers will hire less.

However, supporters of raising the minimum wage can still make some good arguments for their side. For instance, they can claim that it’s worthwhile to lose some jobs in exchange for raises for other low-wage workers. I appreciate that idea, but I’m unpersuaded by it. The data are clear that nearly two-thirds of minimum-wage and near-minimum-wage workers live in households with incomes at least double the poverty level.[5] Further, minimum wage workers typically are high school and college students who work part-time.[6] No doubt, those workers could use the extra $68 per week (before taxes) that the Annapolis and D.C. proposals would deliver to the average minimum wage worker. But I don’t think mandating that increase is worth the tradeoff of a large loss in job creation. In this miserable economy, the last thing we need is to further handicap job growth and business start-ups. Still, debating this tradeoff would be a thoughtful, meaningful discussion of minimum wage policy.

But that’s not what we’re getting from Washington and Annapolis. The politicians have their own consensus on raising the minimum wage: it’s a political winner. Who can be opposed to higher wages for low-income workers? Besides, how many voters will think through the consequences of minimum wage policy, let alone read the research? So there’s little doubt that we’ll see a minimum wage increase before November’s elections. After all, the jobs that politicians care about most are their own.

Thomas A. Firey is a senior fellow with the Maryland Public Policy Institute and a Washington County native. He is the author of the new paper, “Helping the Working Poor? A Primer on the Minimum Wage,” available on the institute’s website

[1] For an extensive review of the empirical literature up to the late 1970s, see Charles Brown, Curtis Gilroy, and Andrew Kohen, “The Effect of the Minimum Wage on Employment and Unemployment,” Journal of Economic Literature 20(2): 487–528 (June 1982). For a review of the later literature, see David Neumark and William Wascher, “Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research,” NBER Working Paper no. 12663, Cambridge, MA: National Bureau of Economic Research, November 2006.

[2] CBO, “The Effects of a Minimum Wage Increase on Employment and Family Income,” Washington, D.C.: Congressional Budget Office, February 2014.

[3] See, e.g., David Card and Alan B. Krueger, “Time-Series Minimum-Wage Studies: A Meta-analysis,” American Economic Review 8(2): 238–243 (May 1995); Arindrajit Dube, T. William Lester, and Michael Reich, “Minimum Wage Effects across State Borders: Estimates using Contiguous Counties,” Review of Economics and Statistics 92(4): 945–964 (November 2010).

[4] Jonathan Meer and Jeremy West, “Effects of the Minimum Wage on Employment Dynamics,” NBER Working Paper no. 19262, Cambridge, MA: National Bureau of Economic Research, December 2013.

[5] Joseph J. Sabia and Richard V. Burkhauser, “Minimum Wages, Cash Wages, and Poverty: New Evidence from the Great Recession Years,” Washington, D.C.: Employment Policies Institute, forthcoming.

[6] James Sherk, “Who Earns the Minimum Wage?” Washington, D.C.: Heritage Foundation Issue Brief #3866, March 1, 2013.