Epistemic status: Super casual
Raising minimum wages is supposed to reduce employment, right? If you make something more expensive, people buy less of it.
So, if you ran a study, you’d think you’d actually see that. If one state or city raises the minimum wage, employment should drop.
But the evidence actually seems pretty equivocal.
In 1994, the famous Card and Krueger study came out. New Jersey’s minimum wage rose; neighboring Pennsylvania’s didn’t. Yet, over a period of 8 months after the wage hike, full-time employment increased in New Jersey relative to Pennsylvania. Instead, the fast-food employers passed on the extra costs to customers in the form of higher prices of meals.
This study is controversial and its results have been directly challenged, though even that challenge is itself controversial:
Because of concerns about the Card and Krueger data, the Employment Policies Institute examined payroll records for 71 fast-food restaurants and found significant discrepancies between the Card and Krueger data and payroll records for these firms. They found significantly different results when their revised data was used for estimation purposes. Critics of the EPI study argue that the selection process used to generate the Employment Policies Institute sample appears not to be random (all Pennsylvania observations are Burger King restaurants owned by a single franchise owner).
There are more recent studies finding that minimum wage increases do reduce employment, like a study of Seattle’s 2015 minimum-wage hike, which has found that (compared to economically-similar counties without the wage increase) Seattle saw low-wage employment drop slightly and wages rise slightly, for a net decrease in low-wage workers’ earnings.
The results seem to depend a lot on how the studies are conducted. The Economic Policy Institute observes that fixed-effects regression studies tend to show that minimum wage increases have negative employment effects, while matching locations with minimum wage increases with similar locations without them finds that minimum wages don’t harm employment. The former is a more rigorous methodology (since minimum wage hikes may be correlated with economic downturns in some way.)
However, economist David Neumark writing for the WSJ claims that it matters how you match test and control jurisdictions; if you match geographically nearby locations, you find that minimum wage increases don’t cause reduced employment, but if you match locations which are subject to the same economic shocks, you do find a negative employment effect of minimum wage hikes.
This is all very confusing. Even if minimum wages do indeed reduce employment, if it were a huge and unequivocal effect, we wouldn’t find that it was so sensitive to statistical methodology.
What could be going on?
- Employment is sticky. When workers get more expensive, employers don’t fire them now, because high capital costs mean you still need about the same number of people to run your store/restaurant. Instead, what might happen is:
- People’s demand for goods produced by low-wage workers isn’t very elastic; we’ll still eat a sandwich even if it’s more expensive, so most of the cost of minimum wages gets passed on to consumers.
- There’s massive data falsification in some direction
- Economics is fake: people don’t really always try to get more stuff for less money
I don’t have a great way to find out what’s actually going on. I’d really appreciate more information if anyone has it!