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Raising the Minimum Wage WouldHelp, Not Hurt, Our Economy
SOURCE: AP/Sam Hodgson
A Carl's Jr. employee gives a customer their change through a drive-through window in San Diego on Friday, September 13, 2013.
By T. William Lester, David Madland, and Jackie Odum | December 3,
2013
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Updated January 2, 2014: This column has been revised to include two
new paragraphs that clarify the differences between the methodology
used for this analysis and the methodologies employed by the academic
papers cited and other similar academic analyses.
Raising the minimum wage would be good for our economy. A higher
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minimum wage not only increases workers’ incomes—which is sorely
needed to boost demand and get the economy going—but it also reduces
turnover, cuts the costs that low-road employers impose on taxpayers,
and pushes businesses toward a high-road, high-human-capital model.
Despite these positive benefits, and the sad fact that the minimum wage
is worth far less today than it was in the late 1960s, with the Senate set
to vote to raise the federal minimum wage from $7.25 to $10.10 per hour,
opponents will likely trot out the same unfounded argument that the
minimum wage reduces employment. And with today’s unemployment
rate stuck above 7 percent, we anticipate these types of arguments to
reach a fevered pitch.
The evidence, however, is clear: Raising the minimum wage does not
have the harmful effects that critics claim.
A significant body of academic research finds that raising the minimum
wage does not result in job losses, even during periods when the
unemployment rate is high. Critics of the minimum wage, however, often
hold on to the claim that raising the minimum wage will lead to job
losses and ultimately hurt the overall economy, exacerbating the problem
of high unemployment. The argument that raising the minimum wage will
increase unemployment is somewhat far-fetched, since the minimum
wage impacts a relatively small share of the overall workforce, which is
itself concentrated in certain industries such as restaurants and
demographic groups such as teenagers.
Nevertheless, we analyzed more than two decades’ worth of minimum-
wage increases in U.S. states and found no clear evidence that the
minimum wage impacts aggregate job creation during periods of high
unemployment.
Our analysis includes every state that saw its effective minimum wage
increase from 1987 through 2012, when the state’s unemployment rate
was at or above the current rate of 7 percent. We then studied changes
in employment in these states over the next year.* We include minimum-
wage increases that occur because of either state or federal action,
though we disaggregate results later.
According to our analysis, the majority of states that raised the minimum
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wage saw a decrease in their unemployment rate over the next year.
There were a total of 91 cases where a state minimum-wage increase
occurred during a period of high unemployment over the past two and a
half decades. In 47 of these cases, the unemployment rate decreased
over the next 12 months, and in 4 other cases the unemployment rate
remained unchanged. In contrast, there were only 40 occurrences where
the unemployment rate increased. That means when a minimum-wage
increase occurred during a period of high unemployment, unemployment
rates actually declined 52 percent of the time. (see Table 1)
Comparisons to national averages produce similar results. Of the 91
cases of minimum-wage increases during high unemployment, states
saw their unemployment rate fare better than the national unemployment
rate 51 times over the subsequent 12 months. A few states, including
Alabama and Tennessee in 2009, saw their unemployment decrease
much more than the national average. Following the minimum-wage
increase that year, Alabama and Tennessee’s unemployment rates fell by
1.6 percentage points and 1.4 percentage points, respectively, compared
to a decline in the national unemployment rate of only 0.1 percentage
points. To be fair, some states, such as Michigan in 2008, had
significantly worse outcomes than the national average. However, a
majority of states that raised their minimum wage did slightly better than
the national average. Comparing state employment growth to the
national average produced similar results.
Furthermore, a separate analysis of minimum-wage increases that
occurred as a result of federal action versus increases coming from state
action yields nearly identical results. No matter what caused the
increase, more than half of the states that increased their minimum wage
saw their unemployment rates decline or remain unchanged. Ultimately,
from a look at the aggregate data, there is not clear correlation that
minimum-wage increases are associated with harmful changes in
unemployment or job growth.
This basic state-by-state comparison of what happens to unemployment
and/or aggregate employment one year after a minimum-wage increase
—rather than providing conclusive evidence on its own—suggests
instead that one must dig deeper to look for the real causal effects of the
minimum wage. As the data above suggest, there are wide regional
variations in economic trends across states, for example, Michigan
versus Alabama. These regional growth differentials are unrelated to
minimum-wage policy and are driven rather by deeper structural forces
including decades-long industrial restructuring processes and divergent
population trends, to name a few—all of which may obscure the impact
of minimum-wage changes. Fortunately, there are at least five different
academic papers that utilize a research design that controls for precisely
such regional trends. Specifically, these papers collectively find that an
increase in the minimum wage has no significant effect on employment
levels. Critically, these papers all include in their samples periods of high
unemployment, with unemployment rates ranging from 7 percent to 12.3
percent. These five academic studies also cover different geographical
areas and different time periods, and use a range of methodologies—
from small case studies to large econometric analysis—lending great
credibility to their findings. In addition, they focus on highly impacted
groups such as restaurant workers and/or teenagers, where minimum-
wage increases actually result in wage increases (i.e., they are binding).
(see Figure 1)
Furthermore, the most recent studies are considered significant
improvements over previous studies because of the methodologies
employed. Specifically, these studies accurately control for confounding
regional trends by either controlling for heterogeneous trends across
Census divisions, or by examining all U.S. counties along state borders
that had different minimum wages. This research design combines the
detailed analysis possible in case studies with the generalizability of a
nationally representative sample. All of the studies came to the same
conclusion: Raising the minimum wage had no effect on employment
levels.
Contrary to most of the rhetoric, the results of these studies are not
surprising because research indicates that raising the minimum wage
boosts demand, increases worker effort, and reduces turnover,
counteracting the higher wage costs.
What’s more, there may be another factor that comes into play even
more during hard times: economic power. Low-wage workers have very
little of it, particularly during periods of high unemployment.
When the economy is doing poorly, employers have less incentive to
raise wages, while workers, especially those making near minimum
wage, have little ability to demand a raise because there is a ready
supply of unemployed labor available to take their job. Even though these
workers likely become more productive—labor productivity has generally
increased over time, and productivity growth during the past two
recessions was especially strong—they have less economic power to
share the gains of their increased productivity. This suggests that during
hard economic times, there is a critical role for government to raise the
minimum wage to ensure that workers are being paid for their economic
contributions.
In short, policymakers should feel confident that raising the minimum
wage would not hurt employment. Instead, it would provide the kind of
boost in consumer demand that our economy sorely needs.
T. William Lester is an assistant professor in the department of city and
regional planning at the University of North Carolina, Chapel Hill. David
Madland is Director of the American Worker Project at the Center for
American Progress Action Fund. Jackie Odum is a Special Assistant at the
Action Fund.
* Note: Analysis presented in this column is based on changes from the
quarter that the minimum wage occurred to the similar quarter the
following year. Analysis based on the quarter after the minimum wage
occurred produces similar results.
Full citations for academic papers in Figure 1:
Arindrajit Dube, T. William Lester, and Michael Reich, “Minimum Wage
Effects Across State Borders: Estimates Using Contiguous Counties,” The
Review of Economics and Statistics 92 (4) (2010): 945–964.
Arindrajit Dube, T. William Lester, and Michael Reich, “Do Frictions in the
Labor Market? Accessions, Separations and Minimum Wage Effects.”
Working Paper 5811 (IZA Discussion Paper Series, 2011).
David Card and Alan B. Krueger, “Minimum Wages and Employment: A
Case Study of the Fast-Food Industry in New Jersey and Pennsylvania:
Reply,” American Economic Review 90 (5) (2000): 1397–1420.
Lawrence F. Katz and Alan B. Krueger, “The Effect of the Minimum Wage
on the Fast-Food Industry,” Industrial and Labor Relations Review 46 (1)
(1992): 6–21.
Sylvia A. Allegretto, Arindrajit Dube, and Michael Reich, “Do Minimum
Wages Really Reduce Teen Employment? Accounting for Heterogeneity
and Selectivity in State Panel Data,” Industrial Relations 50 (2) (2011):
205–240.
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