Minimum wage-unemployment studies

Economics Economics Questions
1

I just read this article:

http://www.seattlepi.com/local/opinion/article/High-minimum-wage-high-unemployment-1132951.php

While it provides evidence that I would like to believe, I am hesitant to use it in a debate because it is statistical evidence. Some of the evidence they claim also sounds like something statistics cannot likely determine as truth (“Research by Casey Mulligan of the University of Chicago found that for every extra year a mother spent on welfare, her child spent an additional 274 days on welfare as an adult”), especially with such a high amount of significant digits.

Thoughts? Any more solid research on the mnimum wage-unemployment link?

Furthermore, there is some research that claims to find no effect of a minimum wage policy:

https://udrive.oit.umass.edu/folbre/REST_a_00039-Dube_proof2.pdf

Do they not control for all possible variables?

2

And a suprising paper by the Economic Policy institute claiming that only 9% of low-wage employees actually head a poor household:

http://epionline.org/study_detail.cfm?sid=87

Again, even though this is sympathetic to the cause, can the data be trusted?

3

I’ve read Dube, Lester, and Reich’s study (“Minimum Wage Effects Across State Borders”). It’s interesting because they say that, historically, both studies that have shown disemployment effects from the minimum wage, and studies that have not, use methods with severe flaws. The former fails to take into account what they call “heterogeneity” in national unemployment statistics, and the latter, employing cross-state variations in minimum wage rates, fails to account for the possibility that minimum wage effects have a time-lag. They claim their method combines the different advantages of the two. I’m neither a professional economist nor a a statistician, so I couldn’t really evaluate it.

One could quarrel with the fact that, like Card and Krueger, they conveniently use data from a period of economic boom (around 1996-2005). But setting this aside, all they basically show is that when minimum wages are marginally increased (studied increases measure anywhere from 7 - 20%), almost nobody loses their job, a few people gain jobs, and reported incomes increase.

Needless to say, this doesn’t come within an inch of overturning basic economics. It’s perfectly understandable that an employer might not sack all of his existing employees when he is forced to give them a pay raise. Most minimum wage employers are small retail and restaurant outlets, for whom it such a tactic would be costly and damaging to employee morale. (Though the numbers do add up; employing 5 workers for $6/hour at 8 hours a day amounts to $240 a day.)

Yet it is undeniable that following a minimum wage hike, costs of production have been increased, particularly for the small businessman. Hiring low-skilled labour has been made more expensive relative to hiring highly-skilled members of wealthy, middle-class unions, automating, or shipping the job overseas (if possible). And a profit-maximizing employer will take this into account when he decides to expand, if he does at all. So you may not see a high rate of job losses, but neither will you see a high rate of job creation for for the unskilled, arguably those who need jobs the most.

Evidence for this abounds. The disparity between US black and white teenage unemployment rates was negligible before the first minimum wage increase in 1949. Sweden, though lacking an official minimum wage, has similar and quite strict labour requirements set by unions, and the youth unemployment stands at 29%. Australia is often cited as a case where the minimum wage is quite high - around was $15.15/hour as of July 1st, 2011 - and yet there is a low unemployment rate. However:

(Google “hidden unemployment australia” for some of those studies.)

Some of the pro-minimum wage studies which merely survey employers (Card & Krueger come to mind) claim to show an increase in employment after a minimum wage hike. As Thomas Sowell points out in Basic Economics, any such study can only survey the businesses that manage to survive such a hike. There will be fewer businesses afterwards that have access to a larger pool of workers, and so it may appear as though employment has risen because empoyment per firm has risen. But with such a method you could arguably prove that nobody died during WWII.

Most importantly, as Dube, Lester, and Reich acknowledge:

See Roger Garrison’s powerpoint presentation on this subject. Nobody has ever argued that if you pass a minimum wage increase, throngs of people will be thrown out of work onto the streets. Rather, what the minimum wage does is make low-skilled labour more expensive relative to other options. It decreases the demand for low-skilled labour and increases the demand for other kinds of labour or for labour-saving technology. The almost inevitable result will be a reduced rate of job creation for low-skilled or unskilled labour, and as a result a relatively high rate of joblessness among youth, minorities, the poor, etc. Simply demonstrating that more people may be hired or more income reported in the wake of a minimum wage increase does not even begin to address who is being hired and who isn’t, which constitutes the bulk of the case against the minimum wage to begin with. All that has been shown is what our side has argued all along: that most of its supposed benefits apply only to those who already have jobs or who already have vital work experience, those on the inside looking out. Things are very much different for those on the outside looking in.

And in any event, even if it could be shown that tiny increases in minimum wages have little to no unemployment effects as labour market oligopsony models predict (though such models are dubious, as Don Bellante points out), this wouldn’t much help the case of its advocates. They don’t want a 30 cent increase. They want a fullblown “living wage”, and have absolutely no evidence that such a thing wouldn’t do more harm than good. This is extraordinarily disingenous and hypocritical. If the minimum wage doesn’t affect the employment market, why don’t these people go ahead and call for a minimum wage that is ten times higher than what prevails? How about a milion dollars an hour? After all, it wouldn’t have any effect!

Here’s a cogent comment from Econlog on a related topic, “efficiency wages”:

4

And, according to the BLS in 2010, half of minimum wage workers in the US are no older than 25, with most working part-time, never married, and lacking a college or (in some cases) even a high-school diploma.

5

The efficiency wage theory is another attempt to highlight a so-called market failure. The theory states that all firms would pay a wage above the equilibrium level, which lead to an increase in unemployment. There are serious problems with the main assumption. First, firms have different size so that big industries can pay a higher wage than small industries can. Second, there is some evidence that firms can monitor the work effort of their workers. I wrote an article on the efficiency wage here (p.s. my english is not as good as yours, don’t hesitate to correct me).

6

I’ve seen a good chunk of studies posted on a certain imageboard about the effect of minimum wage but unfortunately I don’t think the citations include actual links, just references to journals or books. Still, I thought I’d post it here so you can see some of the research and anyone who’d like to track down some of these sources has a starting point.

A few of these (like Card and Kreuger) argue that the minimum wage didn’t have an effect on employment, but the vast majority conclude that a higher minimum wage resulted in lower employment along with various other effects (job turnover, on-the-job training, time spent on welfare, etc.)

Adams, F. Gerard. 1987. Increasing the Minimum Wage: The Macroeconomic Impacts. Briefing Paper, Economic Policy Institute (July).
Finds that an increase in the minimum wage from $3.35 to $4.65 over three years would increase the unemployment rate by less than 0.1% and the inflation rate by 0.2%.

Adie, Douglas K. 1973. Teen-Age Unemployment and Real Federal Minimum Wages. Journal of Political Economy, vol. 81 (March/April): 435-441.
Finds that the minimum wage is responsible for a considerable amount of teenage unemployment.

Al-Salam, Nabeel; Quester, Aline; and Welch, Finis. 1981. Some Determinants of the Level and Racial Composition of Teenage Employment. In Rottenberg (1981a): 124-154.
Notes that in 1954, black teenage males were more likely to be employed than white teenage males. Since that time, the proportion of black teenage males employed has fallen sharply, while employment for white teenage males has risen. Expansion of coverage of the minimum wage appears to be a major factor in this trend. Further notes that more than half of all teenagers would earn more in the absence of a minimum wage.

Bauer, P.T. 1959. Regulated Wages in Under-developed Countries. In The Public Stake in Union Power, ed. Philip D. Bradley. Charlottesville, VA: University of Virginia Press, 324-349.
Argues that the negative effects of minimum wage laws in LDCs is even greater than in industrialized countries, because there is greater diversity of supply and demand for labor in LDCs. Also points out that in South Africa minimum wages helped whites at the expense of blacks.

Behrman, Jere R.; Sickles, Robin C.; and Taubman, Paul. 1983. The Impact of Minimum Wages on the Distributions of Earnings for Major Race-Sex Groups: A Dynamic Analysis. American Economic Review, vol. 73 (September): 766-778.
Finds that the minimum wage has helped white males and females while hurting black males and females.

Bell, Carolyn Shaw. 1981. Minimum Wages and Personal Income. In Rottenberg (1981a): 429-458.
Finds that increases in the minimum wage would benefit few families with incomes below the poverty level. Much of the benefit would accrue to upper income families with secondary earners, such as wives and children.

Beranek, William. 1982. The Illegal Alien Work Force, Demand for Unskilled Labor, and the Minimum Wage. Journal of Labor Research, vol. 3 (Winter): 89-99.
Finds that the minimum wage increases the employment demand for illegal aliens, who are less likely than legal residents to report violations of the labor laws.

Betsey, Charles L., and Dunson, Bruce H. 1981. Federal Minimum Wage Laws and the Employment of Minority Youth. American Economic Review, vol. 71 (May): 379-384.
Argues that employment losses from higher minimum wages have been overstated and that much of the higher unemployment among minority youth has been due to cyclical factors.

Bonilla, Carlos E. 1992. Higher Wages, Greater Poverty. Washington: Employment Policies Institute.
Finds that the 1991 increase in the federal minimum wage actually reduced the income of some single parents, after welfare and taxes are taken into account.

Brandon, Peter D. 1995. Jobs Taken by Mothers Moving from Welfare to Work and the Effects of Minimum Wages on this Transition. Washington: Employment Policies Institute Foundation.
Finds a decrease in work by women on welfare in states raising their minimum wages and an increase in time on welfare in such states.

Brown, Charles. 1988. Minimum Wage Laws: Are They Overrated? Journal of Economic Perspectives, vol. 2 (Summer): 133-145.
Finds that the employment impact of the minimum wage and its impact on reducing poverty are both less than generally believed.

Brown, Charles; Gilroy, Curtis; and Kohen, Andrew. 1981a. Effects of the Minimum Wage on Youth Employment and Unemployment. In Minimum Wage Study Commission (1981), vol. 5, pp. 1-26.
Finds that a 10% increase in the minimum wage will reduce teenage employment by 1% to 3%.

Brown, Charles; Gilroy, Curtis; and Kohen, Andrew. 1981b. Time-Series Evidence of the Effect of the Minimum Wage on Teenage Employment and Unemployment. In Minimum Wage Study Commission (1981), vol. 5, pp. 103-127.
Finds that a 10% increase in the minimum wage will reduce teenage employment by 1%.

Brown, Charles; Gilroy, Curtis; and Kohen, Andrew. 1982. The Effect of the Minimum Wage on Employment and Unemployment. Journal of Economic Literature, vol. 20 (June): 487-528.
Summarizes a large volume of research on the minimum wage.

Brozen, Yale. 1962. Minimum Wage Rates and Household Workers. Journal of Law and Economics, vol. 5 (October): 103-109.
Found that increases in the minimum wage drove low-wage workers into uncovered occupations, such as household work. Predicts that broadening of coverage to such occupations will increase structural unemployment.

Brozen, Yale. 1966. Wage Rates, Minimum Wage Laws, and Unemploy-ment. New Individualist Re- view, vol. 4 (Spring): 24-33.
Points out a contradiction between the Johnson Administration’s desire to hold wage increases to the rate of productivity growth, in order to reduce inflationary pressures, and its support for a higher minimum wage.

Brozen, Yale. 1969. The Effect of Statutory Minimum Wage Increases on Teen-age Employment. Journal of Law and Economics, vol. 12 (April): 109-122.
Finds that increases in the minimum wage only speed up wage increases that would have occurred over time. However, in the interval between an increase and the time when productivity catches up to it results in higher unemployment and business failures. In the case of teenagers, many who are barred from jobs suffer long-term effects from the failure to gain job skills, thus injuring them permanently.

Card, David. 1992a. Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage. Industrial and Labor Relations Review, vol. 46 (October): 22-37.
Finds no evidence that the April, 1990 increase in the minimum wage reduced teenage employment, but does find evidence that it led to higher wages.

Card, David. 1992b. Do Minimum Wages Reduce Employment? A Case Study of California, 1987-89. Industrial and Labor Relations Review, vol. 46 (October): 38-54.
Finds no evidence that an increase in the California state minimum wage in July, 1988 led to any loss in teenage employment, but does find evidence of higher wages.

Card, David, and Krueger, Alan B. 1994. Minimum Wages and Employ-ment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. American Economic Review, vol. 84 (September): 772-793.
Finds no evidence of reduced employment from an increase in the New Jersey state minimum wage in April, 1992.

Colberg, Marshall R. 1960. Minimum Wage Effects on Florida’s Economic Development. Journal of Law and Economics, vol. 3 (October): 106-117.
Finds that after an increase in the minimum wage unemployment increased most in the areas where wages were lowest and least in areas where wages were highest beforehand.

Colberg, Marshall. 1981. Minimum Wages and the Distribution of Economic Activity. In Rottenberg (1981a): 247-263.
Examines votes on the minimum wage and finds heavy support for it in high wage states of the North and opposition from low wage states in the South. This suggests that the North was attempting to reduce the South’s competitive advantage in wages.

Corbo, Vittorio. 1981. The Impact of Minimum Wages on Industrial Employment in Chile. In Rottenberg (1981a): 340-356.
Finds substantial job losses from the minimum wage in Chile.

Cotterill, Philip. 1981. Differential Legal Minimum Wages. In Rottenberg (1981a): 296-316.
Favors differential minimum wages to reduce the impact of the minimum wage.

Cotterman, Robert F. 1981. The Effects of Federal Minimum Wages on the Industrial Distribution of Teenage Employment. In Rottenberg (1981a): 42-60.
Finds that minimum wages have altered the distribution of teenage employment. Teenagers are less likely to be employed in low wage industries, such as retailing, and increase employment in high wage industries, such as manufacturing.

Cox, James C., and Oaxaca, Ronald L. 1981. The Determinants of Minimum Wage Levels and Coverage in State Minimum Wage Laws. In Rottenberg (1981a): 403-428.
Finds that union support for the minimum wage is significant politically.

Cox, James C., and Oaxaca, Ronald L. 1982. The Political Economy of Minimum Wage Legislation. Economic Inquiry, vol. 20 (October): 533-555.
Explains why unions support minimum wages.

Cox, James C., and Oaxaca, Ronald L. 1986. Minimum Wage Effects With Output Stabilization. Economic Inquiry, vol. 24 (July): 443-453.
Finds that the minimum wage causes unskilled wages to be 15.7% higher than they otherwise would be, and that this causes employment to be 11.2% lower than it otherwise would be.

Cunningham, James. 1981. The Impact of Minimum Wages on Youth Employment, Hours of Work, and School Attendance: Cross-sectional Evidence from the 1960 and 1970 Censuses. In Rottenberg (1981a): 88-123.
Finds that minimum wages discourage part-time work and lowers school attendance.

Currie, Janet, and Fallick, Bruce. 1993. A Note on the New Minimum Wage Research. National Bureau of Economic Research Working Paper No. 4348 (April).
Finds that employed individuals affected by the increases in the minimum wage in 1979 and 1980 were 3% to 4% less likely to be employed a year later. Since the methodology employed is similar to that in Card (1992a and 1992b), it casts doubt on any generalization of his conclusions.

Datcher, Linda P., and Loury, Glenn C. 1981. The Effect of Minimum Wage Legislation on the Distribution of Family Earnings Among Blacks and Whites. In Minimum Wage Study Commission (1981), vol. 7, pp. 125-146.
Finds that an increase in the minimum wage increases white family incomes more than black family incomes. Also, middle- and high-income families benefit more than low-income families.

Douty, H.M. 1960. Some Effects of the $1.00 Minimum Wage in the United States. Economica, vol. 27 (May): 137-147.
Finds that the increase in the minimum wage from 75 cents to $1.00 in 1956 did lead to an increase in pay for many workers, but at the cost of jobs. Long-term employment losses by industry ranged from 3.2% to 15%.

Ehrenberg, Ronald G., and Schumann, Paul L. 1981. The Overtime Pay Provisions of the Fair Labor Standards Act. In Rottenberg (1981a): 264-295.
Opposes restrictions on mandatory overtime.

Employment Policies Institute. 1994. The Low-Wage Workforce. Washington: Employment Policies Institute.
Presents data on characteristics of workers earning the minimum wage.

Feldstein, Martin. 1973. The Economics of the New Unemployment. The Public Interest (Fall): 14-15.
Argues that the minimum wage prevents many young people from accepting jobs that would provide them with on-the-job training, thus contributing to long-term unemploy- ment.

Fleisher, Belton M. 1981. Minimum Wage Regulation in Retail Trade. Washington: American Enterprise Institute.
Extension of the minimum wage to retail trade lowered employment in that industry by as much as 500,000, with the main impact on teenagers. Also finds that higher minimum wages led to a scale-back of fringe benefits and training.

Forrest, David. 1982. Minimum Wages and Youth Unemployment: Will Britain Learn from Canada? Journal of Economic Affairs, vol. 2 (July): 247-250.
Estimates that 40% of the increase in teenage unemployment in Canada since the 1950s is due to higher minimum wages.

Freeman, Alida Castillo, and Freeman, Richard B. 1991. Minimum Wages in Puerto Rico: Textbook Case of a Wage Floor? National Bureau of Economic Research Working Paper No. 3759 (June).
Finds that the minimum wage has had a massive impact on the labor market in Puerto Rico.

Gallasch, H.F., Jr. 1975. Minimum Wages and the Farm Labor Market. Southern Economic Journal, vol. 41 (January): 480-491.
Finds that the 1967 extension of the minimum wage to the farm labor market, which had previously been uncovered, led to an increase in wages and a reduction in employment.

Gardner, Bruce. 1981. What Have Minimum Wages Done in Agriculture? In Rottenberg (1981a): 210-232.
Finds that extension of the minimum wage to farm workers has increased wages but reduced employment.

Gordon, Kenneth. 1981. The Impact of Minimum Wages on Private Household Workers. In Rottenberg (1981a): 191-209.
Finds that the minimum wage has led to a dramatic reduction in household workers. Also notes that the policy of enforcement of labor laws by complaint converts the minimum wage from an instrument of public policy to a tool of private disputes.

Gramlich, Edward M. 1976. Impact of Minimum Wages on Other Wages, Employment, and Family Incomes. Brookings Papers on Economic Activity (No. 2): 409-461.
Finds that raising the minimum wage above 40 to 50 percent of median wages leads to increased compliance costs, higher unemployment, workers forced to leave full-time work for part-time work, more benefits for high-income families, and inflationary effects on prices.

Gregory, Peter. 1981. Legal Minimum Wages as an Instrument of Social Policy in Less Developed Countries, with Special Reference to Costa Rica. In Rottenberg (1981a): 377-402.
Finds that the minimum wage has been ineffective in reducing income inequality.

Grossman, Jean B. 1983. The Impact of the Minimum Wage on Other Wages. Journal of Human Resources, vol. 18 (Summer): 359-378.
Finds that an increase in the minimum wage increases wages of those above the minimum wage for two reasons. First, workers above the minimum will want to restore their relative wage position, and second there will be increased demand for workers above the minimum to do the work previously done by those below the minimum.

Grossman, Jonathan. 1978. Fair Labor Standards Act of 1938: Maximum Struggle for a Minimum Wage. Monthly Labor Review, vol. 101 (June): 22-30.
Reviews the legislative history of passage of the first federal minimum wage law. Notes the limited coverage of the initial legislation.

Hall, Robert E. 1982. The Minimum Wage and Job Turnover in Markets for Young Workers. In The Youth Labor Market Problem: Its Nature, Causes, and Consequences, ed. Richard B. Freeman and David A. Wise, pp. 475-497. Chicago: University of Chicago Press.
Finds that the higher unemployment among youth resulting from the minimum wage is primarily due to higher job turnover.

Hammermesh, Daniel S. 1981. Employment Demand, the Minimum Wage and Labor Costs. In Minimum Wage Study Commission (1981), vol. 5, pp. 27-84.
Finds that a 10% increase in the minimum wage will reduce teenage employment by 1.2% overall, with smaller declines in services and retail trade and a higher impact in manufacturing.

Hammermesh, Daniel S. 1982. Minimum Wages and the Demand for Labor. Economic Inquiry, vol. 20 (July): 365-380.
Finds that a minimum wage reduces teenage employment.
Hashimoto, Masanori. 1981. Minimum Wages and On-the-Job Training. Washington: American Enterprise Institute.
Finds that minimum wage laws lead to a curtailment of training by employers.

Hashimoto, Masanori. 1982. Minimum Wage Effects on Training on the Job. American Economic Review, vol. 72 (December): 1070-1087.
Finds that minimum wages reduce training, first because workers lose job opportunities, and hence on the job training, and second because employers will no longer be able to afford to give such training.

Hashimoto, Masanori. 1987. The Minimum Wage Law and Youth Crimes: Time-Series Evidence. Journal of Law and Economics, vol. 30 (October): 443-464.
Suggests that increases in the minimum wage may be responsible for increases in teenage crime rates.

Haugen, Steven E., and Mellor, Earl F. 1990. Estimating the Number of Minimum Wage Workers. Monthly Labor Review, vol. 113 (January): 70-74.
Estimates that two-fifths of workers reporting wage rates at or below the minimum wage in 1988 had supplements raising their wage rates above the minimum. However, some 1.5 million salaried workers may also make the minimum wage or less on an hourly rate.

Holcombe, Randall G., and Metcalf, John G. 1977. The Appeal of Minimum Wage Laws: A Dynamic Analysis. Public Choice, vol. 29 (Spring): 139-141.
Explains the popularity of minimum wage laws even among those who lose their jobs as a result as stemming from the high turnover in the low-wage market. Although a worker may initially lose his job because of an increase in the minimum wage, he will expect to get other jobs in the future that will pay more.

Iden, George. 1980. The Labor Force Experience of Black Youth: A Review. Monthly Labor Review, vol. 103 (August): 10-16.
Concedes that the minimum wage has had a significant negative effect on teenage employment, especially for blacks.

Johnson, William R., and Browning, Edgar K. 1981. Minimum Wages and the Distribution of Income. In Minimum Wage Study Commission (1981), vol. 7, pp. 31-58.
Finds that much of the benefits of a higher minimum wage accrue to high-income families and that many low-income families benefit at the expense of other low-income families.

Johnson, William R., and Browning, Edgar K. 1983. The Distributional and Efficiency Effects of Increasing the Minimum
Wage: A Simulation. American Economic Review, vol. 73 (March): 204-211.
Finds that a 22% increase in the minimum wage in 1976 would have increased the incomes of the lowest 10% of households by just $200 million.

7

CernelJoson → “A few of these (like Card and Kreuger) argue that the minimum wage didn’t have an effect on employment”

Leftists claimed that the advantage of the minimum wage is to increase the negotiation power of workers (a marxist aim). But if minimum wage did not increase unemployment, there may be several reasons to this (see tunk’s comment). Also, employers may avoid the cost of a higher wage by degrading working conditions and other social advantages. A minimum wage policy necessarily implies offsets. (and thank you for the references)

8

Minimum wage may or may not decrease employment, but it’s bad for mom and pop shops and it’s bad for businesses just getting started. It’s bad for smaller businesses because it prevents them from accumulating capital.

It’s impossible to measure whether minimum wage affects unemployment because of all the variables including things like big business usually getting more subsidies than small ones.

9

My words in a debate No2statism. I pointed out that this would make business start-ups more difficult and discriminate against job-starters or otherwise handicapped people as well.

I also heard again the argument that “minimum wages don’t increase unemployment”. Here is the paper that was submitted in support:
http://tuvalu.santafe.edu/~bowles/minimum_wage.pdf

10

What I would like to see is how their supposed statistical data can disprove a theory deduced from logic. It’s really simple supply-and-demand. When you put a price floor, you will get an inventory.

As in where does the deduction of wage control inefficiencies break down?

11

What I can say is that with minimum wage remaining low along with all other salaries, everybody needs some assistance. It is impossible to cover anything and then additional emergencies when your checks are being limited so much. Fortunately, you can get a payday loans to help when the emergency situations come along. The payday cash advance will help you get through the problem.

12

Don’t use statistics. This is one issue where methodology really matters. By definition, minimum wage laws reduce employment. There was just a Mises daily on this where Rothbard just drives a home run. Never back down!

Clayton -