Wednesday, October 25, 2006

Changing the Minimum Wage: More Evidence

A few days ago, I argued that raising the minimum wage would have a negligible impact on employment. I showed you a few simple tables to illustrate my point, but now let me talk about the real, peer-reviewed econometric evidence that I was referring to. (Too bad we can't just rely on the simple, easy-to-understand evidence...)

To reiterate: my goal in this series of posts is to show you that the most frequent criticism of the minimum wage – that it costs low-income people jobs – has surprisingly little evidence to back it up. Luckily for me, that is a much more modest task than trying to prove that minimum wage is a good way to help low-income workers, or that it is the best way to help them. (Maybe if I'm feeling brave I will try to get to address those questions later.) But to start with, it is helpful to know whether the most common criticism of the minimum wage is borne out by the data.

So with that in mind, let’s take a look at some different types of statistical evidence about the effects of the minimum wage on employment levels.

The article that really started what’s now called “the new minimum wage research" (the research of the past 15 years or so that has called into question the classical prediction that raising the minimum wage will reduce employment) was the famous paper by David Card and Alan Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania”. From the paper’s abstract:
On April 1, 1992, New Jersey's minimum wage rose from $4.25 to $5.05 per hour. To evaluate the impact of the law, the authors surveyed 410 fast-food restaurants in New Jersey and eastern Pennsylvania before and after the rise. Comparisons of employment growth at stores in New Jersey and Pennsylvania (where the minimum wage was constant) provide simple estimates of the effect of the higher minimum wage. The authors also compare employment changes at stores in New Jersey that were initially paying high wages (above $5.00) to the changes at lower-wage stores. They find no indication that the rise in the minimum wage reduced employment.
Since that paper was published in 1994, there has been a host of new research trying to confirm or contradict Card and Krueger’s startling result that the rise in minimum wages, if anything, led to increased employment in the quintessential minimum wage industry, the fast food industry. (That's what econonomists do, after all - try to destroy each others' results. But at least it's all in good fun. Mostly.)

Lots of different strategies have been employed, from studies that look at national employment trends and how they respond to changes in the federal minimum wage, to other studies that look at state-wide or city-wide minimum wage laws. Several papers have found that raising the minimum wage actually had positive effects on employment, while a few (particularly those that focus only on teenage employment, such as this paper by Burkhauser, Couch, and Wittenburg) found that it had negative but generally small effects on employment.

To my knowledge, the most recent example of a rigorous paper trying to empirically estimate the effects of minimum wage on employment is “The Economic Impacts of a Citywide Minimum Wage” by Arindrajit Dube, Suresh Naidu, and Michael Reich, put out as a working paper just a couple of months ago. From the abstract:
We provide here the first study of the economic impacts of a citywide minimum wage – San Francisco’s adoption of a minimum wage of $8.50 in early 2004. The policy increased pay, compressed wages among restaurant workers and did not create any detectable employment loss among a ected restaurants. Our point estimates on employment are positive... and we reject some of the negative employment elasticity estimates of previous studies.
They use a lot of sophisticated econometric techniques to arrive at their result, but really the story can be summed up by just one chart from their paper, which shows how employment in the restaurant industry changed in San Francisco and in neighboring Alameda county after SF imposed its high minimum wage.

The picture doesn't really need a lot of sophisticated statistical interpretation to understand. The minimum wage goes up in one place, but doesn't change right next door. Employment in restaurants goes up in both places - if anything, by more in the place where the minimum wage went up. (Again, it's too bad that economists aren't convinced by a simple picture... but if you want all the gory statistical details where they control for other possible forces affecting restaurant employment, go ahead and take a look at the paper.)

Putting all of these different types of papers together, my conclusion is that the best evidence that labor economists can gather from US data seems to indicate that we need not fear major employment losses if we were to increase the minimum wage. The effects may be slightly negative for teenagers, but overall the effect on jobs may be zero to even slightly positive.

In my next installment in this series, I’ll take a look at the international evidence, and also try to explain why it could be that the minimum wage causes employment to actually rise, not fall.


  1. forrest curo1:24 PM

    The SF level dips abruptly before the change (restaurant owners anticipating increased cost-per-employee?-- the Alameda dips less so, suggesting other factors at work here, the SF curve looking more volatile in general), returns to normal and rises as the longer trend seems to have been going all along.

    A conjecture this neither confirms nor rules out: Better paid workers makes for more restaurant business?

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