Another week, another long post about wages and employment: So lets take a look at the effect of the minimum wage on employment levels. Traditionally, this has been a really divisive question in economics for a lot of reasons. One was that for a long time there were just conflicting studies about it, any right-wing economist could point to studies suggesting the minimum wage made businesses lay off low-wage workers, thereby decreasing employment, while any left-wing economist could point to studies suggesting the minimum wage created more demand and wasnt that hard on employers, so the effect on employment was basically none. Economics 101 basically said if you increased wages, then fewer people would be employed as a result. Now thats still true (see 2), but basically since 2000 a whole bunch of studies came out about this, and the bulk of the evidence has pointed towards the minimum wage having basically no impact on employment (See 1 for an exhaustive summary). Basically, when you look at natural experiments where one location raised its minimum wage, and one very similar location did not, there was virtually no change in wage that wasnt accounted for by other economic factors. Instead, when the minimum wage is increased, workers tend to work harder and leave their jobs less frequently (lower job-turnover), and employers can adjust in a number of ways. The conclusion of the CEPR study (see 1) sums it up pretty well: Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers. The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment. Employers can reduce hours, non-wage benefits, or training. Employers can also shift the composition toward higher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity (from reorganizing production to increasing training), increase prices to consumers, or simply accept a smaller profit margin. Workers may also respond to the higher wage by working harder on the job. But, probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers. None of thats to say wed know what would happen if the minimum wage was raised to $15 or $20, these studies all deal with increases of a couple dollars or less, but the increasing consensus among modern economists is that smaller increases are a worthwhile policy, specifically the presidents proposed increased to $10.10 per hour (see 3, 4). 1. cepr.net/documents/publications/min-wage-2013-02.pdf 2. stanford.edu/class/econ101c/class2.pdf 3.washingtonpost/blogs/wonkblog/wp/2013/02/27/economists-think-the-minimum-wage-is-worth-it/ 4.epi.org/minimum-wage-statement/ 5. washingtonpost/blogs/wonkblog/wp/2013/02/14/why-economists-are-so-puzzled-by-the-minimum-wage/ 6. nytimes/2013/02/18/opinion/krugman-raise-that-wage.html
Posted on: Thu, 30 Jan 2014 03:45:54 +0000