The Empirical Reality of the Minimum Wage

Why is the empirical evidence on the employment effects of minimum-wage legislation so ambiguous? After all, if the textbook model of minimum wages is correct, hikes in the minimum wage should be followed by observable decreases in employment. Yet dozens of economic studies over the past two decades have found that real-world increases in minimum wages have no such effect.

In fact, according to Nobel-laureate economist Paul Krugman the empirical evidence isn’t even ambiguous. It’s crystal clear that the textbook model of minimum wages is incorrect: “There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.”

Wow.

Is elementary economics mistaken to feature as its central tenet the law of demand, a tenet that holds that whenever there’s an increase in the cost to someone of taking some particular action (such as employing workers), that someone will take that action less eagerly, less fully, and less frequently? Alternatively, is low-skilled labor (which in practice is the only kind of labor directly affected by minimum wages) unique among all the billions of goods and services in the world in being immune to the law of demand?

These questions are apropos given the intense debate today among professional economists about whether minimum-wage hikes negatively affect employment.

The Current Consensus

So what, really, is the state of modern empirical research into minimum wages? Let’s start with an unambiguous statement: Paul Krugman is factually mistaken. Plenty of recent evidence indicates that raising the minimum wage costs jobs. As long-time minimum-wage researcher David Neumark concluded in a December 2015 article for the Federal Reserve Bank of San Francisco:

Coupled with critiques of the [econometric] methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers — with possibly larger adverse effects than earlier research suggested.

My own extensive reading of minimum-wage research confirms Neumark’s conclusion.

That said, it is also the case that quite a few, although not a majority, of the empirical studies of minimum-wage hikes find no evidence that these hikes destroy jobs. What explains these conflicting research results?

One reason for these inconsistent conclusions is simply the differences in skill and meticulousness that separate some researchers from others. Economic studies vary greatly in quality and reliability. Not every piece of published work by Ph.D. economists is trustworthy. Far from it.

But even after excluding all shoddily done studies of minimum wages, we’re still left with conflict in the conclusions. Fortunately, economic theory itself supplies clues as to why.

Clue #1: While the destruction of jobs for some low-wage workers is the banner prediction elementary economics makes about minimum wages, it’s not the only prediction. Employers and workers can adjust to minimum-wage hikes in other ways. For example, the value of fringe benefits can be reduced, as when restaurants no longer let their employees eat free of charge and when retailers stop offering their merchandise to employees at discount prices.

Similarly, employers can work their low-wage employees harder or become less tolerant of these employees’ showing up for work late, leaving work early, or texting and making personal phone calls while on company time.

To the extent that employers and employees adjust to hikes in minimum wages in these ways, the incentive for employers to reduce the number of low-wage workers they employ is muted. Hence the number of workers cast into unemployment by minimum-wage hikes is diminished.

Clue #2: Employers can adjust to higher minimum wages not only by reducing the number of low-skilled workers they employ, but by reducing the number of hours they employ each of these workers. Indeed, because minimum-wage legislation is written in terms of hourly wages, the most precise description of the banner prediction that elementary economics makes about minimum wages is that these legislative mandates reduce the number of hours of low-skilled labor that employers wish to hire (rather than the number of such workers themselves).

Therefore, empirical studies that count the number of workers employed, rather than the number of hours workers work, count the wrong variable. While it’s true that the most obvious way, and often the easiest way, for employers to reduce the number of hours of labor they employ is to employ fewer workers, empirical studies that find that minimum wages cause no reduction in the number of people employed do nothing to cast doubt on the elementary case against minimum wages because an alternative way is to employ the same number of workers but at fewer hours.

Even if no workers lose jobs because of minimum wages, minimum wages harm these workers if some of them are thereby unable to work as many hours as they would work absent minimum wages.

Clue #3: Employers in countries in which minimum wages have existed for many years have adjusted their business plans not only to the existence of minimum wages, but also to the likelihood that minimum wages will rise. In the United States, the current national minimum wage was first imposed in 1938 by the Fair Labor Standards Act. Starting off at $0.25 per hour, it has since been raised 22 times, an average of once every 44 months. This minimum wage is now $7.25 per hour.

Because this minimum wage has been around, without pause, for 80 years, because it is routinely increased, and because there is no realistic prospect of its being repealed, employers make their business plans accordingly. No firm today in the United States uses a production process as heavily reliant on low-skilled workers as some of these processes would be absent a minimum wage. Knowing of the existence both of the minimum wage and of the likelihood that it will be raised in the not-too-distant future, employers use more labor-saving machinery and fewer low-skilled workers than they would use otherwise.

So it’s no surprise that some researchers fail to detect any resulting decrease in employment whenever the minimum wage is increased. The negative employment effects of the minimum wage were already built into the structure of the American economy. Indeed, when this undeniably correct prediction of economics is understood, it is not too much to say that the most surprising fact about the many modern empirical studies of minimum wages is that any of them find that hikes in minimum wages continue to have statistically significant negative employment effects.

Despite some commentary to the contrary, empirical studies of the employment effects of minimum wages do not come close to proving that minimum wages don’t harm many of the people most minimum-wage supporters wish to help: low-skilled workers.