Raising the minimum wage as a way to reduce poverty has become all the rage lately, with lots of states doing what many think the federal government should do. Claims about the effect of the minimum wage in popular discourse have largely split along predictable ideological lines, with conservatives saying that minimum wage increases are job killers and liberals arguing that the wage increases don't kill jobs and help alleviate poverty.
Oddly enough, economists seem equally split on an issue that one might expect to be resolved easily with data. Certainly, standard labor economics argues that making labor more expensive should reduce demand for labor (what they call a negative wage elasticity). The scholarly consensus strongly supported this idea up until the 1990's, when new approaches began to muddy and shift the picture, starting with the famous study by Card and Krueger (1994) that found no disemployment effect from a minimum wage increase for fast-food restaurants in New Jersey. Overall, studies still seem to favor a small but negative effect, though there are claims that even these effects are due to publication selection bias, as illustrated in this funnel graph:
This past year provided a perfect opportunity to test these ideas, with 13 states increasing their minimum wage on January 1, 2014. Of these, nine made small cost-of-living adjustments (and have been for a number of years) but four--New Jersey, New York, Connecticut, and Rhode Island--made substantial one-time increases. The two largest, $1.00 in New Jersey and $0.75 in New York, are large enough that they should show significant disemployment effects if there are any. Indeed, in the early summer of 2014, many in the media trumpeted the results that the 13 states with minimum wage hikes had better growth rates than those that didn't. Even President Obama got into the act.
So is there any observable effect? The graph at the top shows not job growth rates, but percent change in the job growth rates from fiscal year 2013 to calendar year 2014 (Jan. - Nov.) as a function of the percent change in the minimum wage. What everyone ignored in previous analyses is that states with the largest increases have done the worst in maintaining job growth, leading to a downward slope in the best fit line. Indeed, the fit indicates that a 10% increase in the minimum wage correlates with 1.5% decrease in the number of jobs. This number is especially interesting given that the percent of workers directly affected by these raises is roughly 10% of the workforce. These data clearly support the claim that minimum wage increases are job killers.
The linear fit seems to suggest that an economy can tolerate a 6% increase in minimum wage without a loss of jobs. So which is better: a 6% increase in minimum wage or a 1% change in the number of jobs? For the federal minimum wage, this constitutes $29 more dollars per paycheck, but when you multiply that by the number of minimum wage jobs, it could become a substantial sum of money. That being said, to bring the real minimum wage back to the level of the 1960s would require about a 25% increase. I do think that increasing minimum wage is necessary to combating poverty, but it also needs to be part of a panoply of other solutions.
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