November 6, 2010

A 20-Year Look at Minimum Wage Effects on Unemployment

Traditionally, proponents of a livable minimum wage have argued that putting money in the hands of workers at the lower end of the economic scale can help drive the economy, since such people are unlikely to save much, and will spend most of their earnings on goods and services that must be produced, putting money into the pockets of others and expanding the economic pie. Those in opposition believe that jobs will be lost because employers, forced to pay each employee a higher wage, will reduce staffing in order to offset higher payroll costs.  New research may finally put this debate to rest.

At the end of September, a 20-year study grippingly entitled Minimum Wage Effects Across State Borders: Estimages Across Contiguous Counties (*.pdf) was released by a team of economists from the University of Massachusetts, the University of North Carolina, and the University of California.  In it, the researchers examined communities adjoined across borders between states with different minimum wage laws to determine what employment effects, if any, were driven by these regulations.

As it turns out, effects on employment by increases in minimum wages were generally negligible, and where they were noticable, they had a positive influence. The driving factor of this somewhat counter-intuitive result is the ubiquity of the wage laws. Since everyone is affected equally within a region, the cost to employers is easily offset by slightly higher prices, which are passed along to consumers, effectively creating a level playing field, and therefore, no incentive to reduce payrolls.

This might in turn, however, be expected to suppress demand from end users, but such price increases tend to be very small - almost always just a few pennies by the time they are distributed across the entire customer base - and the researchers found no evidence that consumers travel to neighboring, lower-wage regions to make purchases.

A fast food restaurant, for example, would, in fact, be likely to reduce its employee ranks when the minimum wage goes up, but only if it is the sole restaurant to raise pay rates.  If most, or all, employers in a sector raise their compensation - as happens with state mandated minimum wage laws - the added cost is passed to the consumer who generally absorbs it without diminshing demand.

So, there you have it: a two-decade study of empirical evidence providing conclusive evidence that a small government intervention in the market provides not only economic benefits, but societal ones as well.  Want to bet that's still not going to convince some people?


Anonymous said...

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Haters Gonna Hate said...

Ah yes, Mr. Anonymous, if you can't beat them, tar them and their character as much as possible while ignoring that their statement may very well be TRUE.

Look at this criticism of the author, isn't it shiny? I mean, that ugly stuff attached consists of figures and research explaining why his cartoon is accurate, but look at MY criticism. Isn't it so SHINY?!

Otis Fudpucker said...

I like pornography. I did what the commenter suggested and I couldn't find any filth, just moderately amusing leftish cartoons. Anon@4:08 could you be more specific please?

Also welcome back PBI!

PBI said...

I also looked for the reputed porn, but came up empty.

Perhaps this is just more of the technique that Haters Gonna Hate describes: Anonymous seems to be one of those people who is too credulous for his own good - maybe he didn't think anyone would actually check his link. : )

And thanks, Otis - I appreciate it!

Anonymous said...

I have never thought a minimum wage increase failed to help those receiving minimum wage.

I suggest that a minimum wage increase hurts those receiving above minimum wage -- we don't get a wage increase to cover the resultant price increases. This basically takes money from everyone else.

PBI said...


What you describe doesn't seem to occur in anything but the most negligible fashion. The data seems to show that aggregate economic growth spurred by people with money to spend - i.e. minimum wage earners - covers the few pennies in additional cost for everybody else.

More broadly, no one gets a wage increase anytime anyone at another company gets a wage increase for some reason other than a minimum wage hike, anyway...


Carrie said...

Does anyone have any thoughts on minimum wage's impact on the US economy/jobs vs cheaper markets? I am usually a hard core capitalist and say let the jobs go abroad and focus on retraining workers, but I'm interested in any data on the relationship between this and minimum wage.

PBI said...


I think the data in the study addresses this to a degree, but it is primarily focused on service workers, so offshoring has a minimal role in what was observed.

I think you can make the case that higher wages - whether through legislation or collective bargaining or employer good will - can drive jobs offshore. However, from what I can tell, any data on that would be hard to pull apart to determine root causes, as there are a host of tax incentives that already drive jobs like manufacturing overseas. (You may recall that was a campaign issue for the president.)

In a perfect world, we would be retraining people, but the reality is that has never happened on any sort of consistent basis. If that retraining doesn't take place - or can't take place because the relevant workers lack the aptitude for higher-skilled positions - we have the choice of providing a living minimum wage, supporting the working poor through social welfare or charity, or letting them starve, and the last two choices don't do much for society as a whole. (And let's not forget the multiplier effect of wages immediately spent on goods and services!)