Minimum Wage and Low-Skill Employment: The Evidence

My friend Chris Smith recently authored a piece over at Approaching Justice on how minimum wage opponents get it wrong on economics. As I commented elsewhere, providing nuance to the discussion by pointing out some studies that find no effect on employment or by discussing trade-offs is important. But I think it is quite a stretch to say that minimum wage opponents believe in an “oversimplified economic theory that is not borne out by empirical research.” It’s not just that “many studies” show an increase in unemployment among the least skilled and least educated. That’s what most studies over the last couple decades have shown (as Neumark’s MIT-published book from a few years ago demonstrates as well as his literature reviews) along with plenty of recent research. There is also a difference between low-wage workers and low-income families. Many low-wage workers are not the primary breadwinners and are simply bringing in extra money for middle-class families.

Other studies show that an increased minimum wage causes firms to incrementally move toward automation. Now, this too could be seen as a trade-off: automation and technological progress tend to make processes more efficient and therefore increase productivity (and eventually wages), raising living standards for consumers (which include the poor). Nonetheless, the point is that while unemployment in the short-term may be insignificant, the long-term effects could be much bigger. For example, one study finds that minimum wage hikes lead to lower rates of job growth: about 0.05 percentage points a year. That’s not much in a single year, but it accumulates over time and largely impacts the young and uneducated.

Princeton’s Thomas Leonard has looked at Progressive Era policies and found that the minimum wage was wielded by progressive economists as a form of economic eugenics; a way of ridding the labor force of those considered “unemployable” or “unfit” such as women, immigrants, and blacks. It was a matter of social control rather than social justice, but now it is heralded as the latter.

I was reminded of all this when I read David Neumark’s (mentioned above) new Wall Street Journal article on this very subject. He explains, “Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired.” He cites some of the same research I mention above. He addresses some of the recent research showing no effect on low-skill employment:

But as Ian Salas of Johns Hopkins, William Wascher and I pointed out in a 2014 paper, there are serious problems with the research designs and control groups of the Dube et al. study. When we let the data determine the appropriate control states, rather than just assuming—as Dube et al. do—that the bordering states are the best controls, it leads to lower teen employment. A new study by David Powell of Rand, taking the same approach but with more elegant solutions to some of the statistical challenges, yields similar results.

Another recent study by Shanshan Liu and Thomas Hyclak of Lehigh University, and Krishna Regmi of Georgia College & State University most directly mimics the Dube et al. approach. But crucially it only uses as control areas parts of states that are classified by the Bureau of Economic Analysis as subject to the same economic shocks as the areas where minimum wages have increased. The resulting estimates point to job loss for the least-skilled workers studied, as do a number of other recent studies that address the Dube et al. criticisms.

Overall, I think all of this is good evidence for a healthy skepticism toward the minimum wage. Future evidence may convince me otherwise (I’ve been known to change my mind), but as of now, I think my position is as empirically grounded as any.


1 thought on “Minimum Wage and Low-Skill Employment: The Evidence”

  1. You suggest it’s likely or at least plausible that increasing minimum wage will reduce employment for the least skilled.

    I wonder whether that’s the right question. Perhaps a better question would be whether increasing minimum wage increases income on average for middle-class and lower workers in total.

    As a thought experiment, imagine we reduced the minimum wage to 50 cents an hour, so that homeless minimum wage workers could just barely afford a couple of decent meals at McDonalds with enough left over to buy a pair of shoes every year. I’m sure there would then be more jobs available fo the least-skilled workers. But is that the result we want? I would prefer that the 50 cent/hour jobs be automated. I have a prejudice that machines could do that work quicker, more precisely, cheaper, more reliably, and more cheerfully. I’d rather put those people on welfare than have them work for $3.50/day.

    Creating low-wage work for the maximum number of people is not what I prefer for a goal.

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