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?