In an op-ed in the Wall Street Journal economist David Neumark provides strong evidence for the adverse consequences a $15/hour national minimum wage:
A recent Congressional Budget Office report estimated that 1.4 million jobs would be lost if a new $15 federal minimum wage is signed into law. Advocates were quick to dismiss the CBO’s conclusion. “It is not a stretch to say that a new consensus has emerged among economists that minimum wage increases have raised wages without substantial job loss,†said Heidi Shierholz of the Economic Policy Institute, which has also circulated a letter signed by economics Nobel laureates and others making the same claim.
As I show in a recent extensive survey of research on minimum wages and job loss in the U.S., this is simply not true. Most studies find that a minimum wage reduces employment of low-skilled workers, especially the lowest earners most directly affected by raising the minimum wage.
There are conflicting individual studies of the effects of minimum wages on employment. That there is disagreement shouldn’t be surprising. Economics is a social science, not a natural one. Studies of minimum wages and job loss are not laboratory experiments. They can’t be replicated and so can’t be expected to yield exactly the same results.
He further explains his literature review:
To provide an accurate reading of the research, Peter Shirley and I surveyed the authors of nearly all U.S. studies estimating the effects of minimum wages on employment published in the past 30 years. We asked them to report to us their best estimate of the employment effect, measured as the “elasticity,†or the percent change in employment for each 1% change in the minimum wage. Most authors responded, and in the few cases in which they did not, we pulled this estimate from their study.
The results are stark. Across all studies, 79% report that minimum wages reduced employment. In 46% of studies the negative effect was statistically significant. In contrast, only 21% of studies found small positive effects of minimum wages on employment, and in only a minuscule percentage (4%) was the evidence statistically significant. A simplistic but useful calculation shows that the odds of nearly 80% of studies finding negative employment effects if the true effect is zero is less than one in a million.
Across all the studies, the average employment elasticity is about minus-0.15, which means, for example, that a 10% increase in the minimum wage reduces employment of the low-skilled by 1.5%. Extrapolating this to a $15 minimum wage, this 107% increase in the states where the federal minimum wage of $7.25 now prevails would imply a 16% decline in low-skilled employment (broadly consistent with the recent CBO study). That sounds like a substantial job loss.
It’s true that some workers would experience higher incomes, and that, on net, incomes of low-wage workers would probably rise. But that doesn’t mean the minimum wage is the best way to help low-wage workers or low-income families, as research clearly demonstrates that a large share of income gains from a higher minimum wage flows to families with higher incomes. An alternative policy—the Earned Income Tax Credit—targets benefits to lower-income families far more effectively, is proven to reduce poverty, and creates rather than destroys jobs.
Other observation include that more recent studies do not show better outcomes, as has sometimes been claimed.
He concludes:
The consensus of economic research on the effects of minimum wages points clearly to job loss, and policy makers should consider this job loss in weighing the potential costs and benefits of a sharp increase in the minimum wage.
Not addressed in the studies or by the advocates of a sharply higher minimum wage are the indirect effects, for example the effect of minimum wage multiple contracts. “Definitely” is a pretty strong word. My conclusion from all of this is that the path we’ve been on, in which state and local minimum wages are being set significantly above the national minimum wage, is the right course.
Calling applied mathematics science does not make it so. Malthusian logic is the result of confusing statistics with science. Predicting the future based upon the present or past requires unchanging conditions. Otherwise, feedback loops cause those conditions to change.
Many of today’s products and services have reduced quality and/or quantity in lieu of price increases. Has anybody noticed that duct tape and toilet paper are not as wide or that cereal boxes are made out of construction paper.
While I do not favor increasing the minimum wage, it is possible that one unpredictable outcome of establishing a minimum wage was the iPhone.
Neumark has probably been the leading exponent of the minimum wage as harmful in the economic literature. He writes with bias so one needs to look pretty carefully at what studies he chooses to include and what to leave out. Also, the following bothers me.
“79% report that minimum wages reduced employment. In 46% of studies the negative effect was statistically significant. In contrast, only 21% of studies found small positive effects of minimum wages on employment, and in only a minuscule percentage (4%) was the evidence statistically significant. ”
The 79% number is pretty meaningless. No idea if the results were just random. The 46% and 4% would be meaningful, though you would need to look at how they determined significance. Older studies tended to rely solely upon P values and the P values chosen just weren’t that good. You would also want to know how much the study showed employment was reduced or increased. Having read Neumark’s earlier meta-analysis stuff and that of others I tend to think of this as there is no clear evidence that minimum wages increase or decrease employment. There is a trend towards decrease but it is small. It is likely that with larger increases you will see employment effects.
“My conclusion from all of this is that the path we’ve been on, in which state and local minimum wages are being set significantly above the national minimum wage, is the right course.”
Think I pretty much agree with this.
Steve
“Has anybody noticed that duct tape and toilet paper are not as wide or that cereal boxes are made out of construction paper.”
Its a longstanding and widely observed phenomenon. They try to adjust inflation indexes for quality and size sleight of hand, but I doubt they do very well.
As far as minwage goes. I don’t suppose anyone would care to do their own primary research – like ask, you know, actual employers – or observe employers behavior. Nah. Better to debate competing “studies” filled with sampling errors, poor design, non-existent variable control, and intentional or unintentional measurement error. But if you are hell bent on screwing low skilled employees, at least have local control to somewhat account for local conditions. But whatever you do, don’t limit immigration………..
At least I learned one thing today. Neumark is biased but the Economic Policy Institute isn’t…………..snicker.
You may recall that some time ago I posted a fast food franchise balance sheet along with quotes from franchisees. The conclusion is clear—an increased minimum wage will have a strongly adverse effect on that sector.