Does Raising the Minimum Wage Cause Job Loss?

Does raising the minimum wage cause job loss?  It's a complicated issue, with such factors as economic growth, economic justice, income, the deficit, fairness, inflation, poverty, inequality, the work ethic, and eligibility for benefits thrown in to cloud the picture.

As Jack Kelly wrote, it is an issue fraught with unintended consequences.  He cited a 2019 study by the Congressional Budget Office:

"Increasing the federal minimum wage would have two principal effects on low-wage workers.  For most low-wage workers, earnings and family income would increase, which would lift some families out of poverty.  But other low-wage workers would become jobless, and their family income would fall -- in some cases, below the poverty threshold."

Similarly, J.B. Maverick at Investopedia says:

"Raising the federal minimum wage to $15 an hour is a policy goal for many lawmakers.  Increasing the minimum wage is expected to lift individuals out of poverty and improve work ethic, however, it also comes with many possible negative implications, such as inflation and a loss of jobs."

What does the research say?  Results are all over the place.  As Dee Gill wrote, "...the research evidence of what actual minimum wage requirements do to job numbers goes both ways; many studies find that minimum wage laws reduce employment, and many other studies on the exact same laws find they have little or no effect on jobs.  Some 60 years and hundreds of research papers from prestigious universities, government agencies, and private organizations have created little consensus on the subject, academic or otherwise."

Early studies compared the number of jobs from a state that raised minimum wages to a nearby state that didn't.  But that caused problems because of differences in state economies.  For example, is the economy of California comparable to Nevada or Oregon?  Employment varies by state for reasons that have nothing to do with the minimum wage.

So, which is it?  The answer is, "It depends."  The obvious question is, "Why?"  To answer that I consulted Dr. Ed Leamer, Professor of Economics and Professor of Statistics at UCLA, who says:

"Ninety-nine percent of what economists believe is the theories they put forward.  That's what leads most of them to ignore evidence.  I'm a believer in evidence, not theory."

Leamer then said, "There's no piece of work that can't be criticized."

Much of the criticism comes from disagreements over any research project's study design, particularly its control group selection.  No matter how defined, the control group initiates debate about what method researchers used to define it.  A control group should have the same characteristics as the group being researched in every way except for the factors being measured and studied.  The control group provides a basis for comparison.

Ideally, empirical economics studies examine the number of jobs before and after a minimum wage hike, then compare those figures to the control group.  In a perfect world, only the minimum wage hike could lead to differences in the number of jobs.  But, in the real world, defining a before/after control group isn't clean and neat because "... no two geographic locations have identical employers or workers or economies, and each of those factors affects jobs regardless of minimum wages."  The result is that researchers compare apples to oranges, producing uninterpretable, often invalid results.

For example, consider this study by the New York Fed.

"We use minimum-wage policy differences along the New York-Pennsylvania border to identify the effect of New York's minimum-wage increases. This strategy relies on the idea that contiguous counties share a lot of features that are important determinants of wages and employment, but differ in terms of wage policies as they are located in different states...  Specifically, we evaluate the effects on both employment and average weekly earnings in two industries with lots of lower-wage workers: retail trade and leisure & hospitality."

Is the interpretation (minimum-wage increases had the intended effect of boosting worker pay in low-wage industries without negatively affecting jobs) correct?  Are New York and Pennsylvania (control group) economically the same?  What are “a lot of features?”  Is what may be true for retail trade and leisure & hospitality workers in New York and Pennsylvania applicable to all lower-wage workers across the country?  That's Patriotic Millionaires' interpretation.  

Researchers manipulate control groups to include and/or exclude factors that don't equally affect employment in the researched or control group locations.  That's where problems begin.  There are differences among researchers over how including and excluding factors (and what factors) can be justified.  For example, in this Harvard Business Review study, what factors were included/excluded "…for statewide economic and employment differences between California and Texas in order to isolate just the impact of increasing the minimum wage[?]"

In an effort to overcome the control group problem, researchers create "synthetic" control groups.   When they studied the Seattle minimum wage hike, University of California Berkeley researchers created a "synthetic" control group comprised of 45 counties located throughout the country (many in Florida).  The theory was the combined counties' economies were the same as Seattle's would have been without minimum wage hikes to $13 an hour.  The study concluded that Seattle's minimum-wage hike did not lead to job losses.

Another "synthetic" control group (described on pages 10-12) definition for a study of Seattle by the University of Washington found the opposite.

Of course, research studies that utilize synthetic control groups also have their critics.

Why don't minimum wage hikes kill jobs as the classical labor curve predicts?  Monopsony, a situation in which there is only one buyer (the minimum wage law).  Economists agree that a monopsony can significantly reduce minimum wages because most people who make minimum wage aren't mobile, can't easily move to a state with a higher minimum wage.

Regardless of employers' unnatural wage-setting power, most economists say the law of supply and demand takes over at some point.  The ideal minimum wage counters monopsony, leaves prices and profits relatively stable, and doesn't affect the number of jobs. But what is that amount?

As Dr. Leamer says,

"The fundamental question is how much is too much?  I think there would be agreement that some minimum wage is good social policy, but that too much is adverse.  I think we should be worried about $15 an hour…  When you raise minimum wage, somebody pays.  Maybe employers cut jobs to cover the added costs.  Or they pass on those costs to their customers.  Or maybe it just comes out of profits.  But that money doesn't just appear out of thin air."

Image: Titsor8976

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