A Higher Minimum Wage Reduces Job Growth
The question of how the minimum wage affects employment remains one of the most widely studied—and most controversial—topics in labor economics. During the recent recession, the employment rate
for younger or low-skilled workers (who are more likely to be paid wages at or close to the minimum) worsened disproportionately. Following the recession the unemployment gap based on education remains large.
Nearly all studies of the minimum wage and employment focus on how wage floors affect employment levels, either for the entire labor force or a specific employee subgroup (such as teenagers or food service workers). In a new paper, we argue that effects of the minimum wage should be more apparent in employment dynamics—in actual new job creation by expanding establishments and in destruction of existing jobs by contracting establishments. It often takes time for effects of minimum wage policy to be visible in employment levels since these transitions are often slow.
In addition to this theoretical foundation, there are several empirical reasons why effects of the minimum wage are more clearly detectable in job growth rather than employment levels. The identifying variation for statistical studies on the minimum wage consists of relatively small and temporary changes in a state’s real minimum wage level, which are soon dissipated by inflation and increases by other states. As a result, there is often insufficient time for even sizable effects on the rate of job growth to be reflected in the level of employment.
To implement our analysis, we use an approach which allows for state fixed effects, region-by-time period effects, and state-specific time trends. We examine effects of the minimum wage on employment dynamics and levels using three administrative data sets: the Business Dynamics Statistics (BDS), the Quarterly Census of Employment and Wages (QCEW), and the Quarterly Workforce Indicators (QWI). These data sets vary in their strengths and weaknesses, but together they encompass a long (1975-2012) panel of aggregate employment metrics for U.S. employers.
Our findings are consistent across all three data sets, indicating job growth declines significantly in response to increases in the minimum wage. However, we do not find corresponding reductions in employment levels. We view this null effect on employment levels as neither surprising nor as an accurate reflection of the effects of the minimum wage.
Additionally, the negative net effect on job growth is primarily driven by reductions in job creation by expanding establishments, rather than by increases in job destruction by contracting establishments. These are among the more policy-relevant outcomes related to employment: the change in the number of jobs in the economy, rather than the turnover of individuals within existing jobs.
Predictably, we find that the negative effect on job growth is concentrated in lower-wage industries and among younger workers. These are the very people an increased minimum wage is supposed to help.
The primary implication of our study is that the minimum wage does affect employment. This is significant for policymakers weighing tradeoffs between increased wages for minimum wage earners and potential reductions in hiring and employment. Moreover, we reconcile tensions between expected theoretical effects of the minimum wage (lower employment) and the estimated insignificant effects found by some researchers.
Given the nature of minimum wage policies, finding no effect on employment levels should be unsurprising. In contrast, the minimum wage significantly reduces net job growth; in particular, new job creation for young people and low-income earners.
Federal, state, and local policy makers should keep this tradeoff in mind as they debate changes to minimum wage laws.
Jonathan Meer is an Economics Professor at Texas A&M University. Jeremy West is a Fellow in the Private Enterprise Research Center and the Bradley Foundation, and a Ph.D. student in Economics at Texas A&M University.
Read full study here.