Minimum Wage Laws

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Components of Health Reform >> Employer Mandate >> Minimum Wage Laws (last updated 4.12.16)

Characteristics of Low-Wage Workers

  • Economic Policy Institute (EPI). Minimum Wage. The left-of-center EPI has compiled extensive statistics on minimum wage workers.
  • Steven Greenhouse. Fighting Back Against Wretched Wages. New York Times. July 28, 2013. According to the EPI, the lowest 20% of workers (28 million) earn less than $9.89 hourly. Distribution by characteristics:
    • Age. 14% under 20; 46% age 21-34; $27% age 35-54; 13% age 55 and older.
    • Education. 23% under H.S.; 34% H.S. grad; 26% some college; 17% college degree.
    • Family Status. 56% not married, no children; 18% married, no children; 11% unmarried parents; 16% married parents.
    • Industry. 24% retail trade; 23% leisure/hospitality (includes fast food); 19% education or health services; 34% all other.
  • David Neumark. Who Really Gets the Minimum Wage? Wall Street Journal , July 7, 2014.
    • When the minimum wage was first established in 1939 Burkhauser and Sabia have estimated that 85% of low-wage workers (i.e., earning <1/2 the private sector wage) were in poor families.
    • By the early 2000’s this had dropped to 17% and 34% were in families >3x poverty level.
    • Neumark’s graduate student Sam Lundstrom has used Current Population Survey data to calculate that:
      • 18% of the benefits of increasing MW to $10.10 would go to poor families and 29% to families > 3x poverty.
      • 12% of benefits of increasing MW to $15 would go to poor families and 36% to families > 3x poverty.
    • Most studies have failed to find solid evidence that higher minimum wages reduce poverty.
  • Pew Research Center. 5 facts about the minimum wage (7.23.15)
    • Nearly half (48.2%) of the 3 million hourly workers who were at or below the federal minimum in 2014 were ages 16 to 24.
    • About 20.6 million people (or 30% of all hourly, non-self-employed workers 18 and older) are “near-minimum-wage” workers (those who make more than the minimum wage in their state but less than $10.10 an hour).
    • The restaurant/food service industry is the single biggest employer of near-minimum-wage workers (18% of total).

 

Trends in Wages for Low-Wage Workers

Current Minimum Wage Laws

 

 

Effects of Minimum Wage Laws

International Data

  • Hanke, Steven. For Europe’s Youth, Minimum Wages Mean Minimal Employment. Cato at Liberty. January 30, 2014. In the twenty-one EU countries where there are minimum wage laws, 27.7% of the youth demographic – more than one in four young adults – was unemployed in 2012. This is considerably higher than the youth unemployment rate in the seven EU countries without minimum wage laws – 19.5% in 2012 – a gap that has only widened since the Lehman Brothers collapse in 2008.

U.S. Data

The effects of employer mandates should be similar to the effects of minimum wage laws insofar as they raise the cost of employment. Economists disagree about whether raising the wage will cost some workers their jobs. A pollin 2013 found top economists about evenly divided on whether a $9 minimum would make it noticeably harder for low-skilled workers to find a job.A recent New York Times article noted that “some question whether a higher minimum would really help the poor over all, since some workers would keep their jobs while others would lose them. “It’s kind of a wash,” said David Neumark of the University of California, Irvine. “The hit to losers wipes out the gains for winners.” He said the earned-income tax credit has proved much more effective at relieving poverty among families and, especially, children.”

Advocates of a $10.10 minimum wage argue that it would merely take the minimum wage back to its 1968 value in inflation-adjusted terms. Manhattan Institute researcher Scott Winship argues that this calculation is based on a measure of inflation that experts generally think overstates it. Using the best measure of inflation, $10.10 would be high relative to historical minimum-wage levels.

There is an extensive literature on the economic impact of minimum wage laws:

  • Aaronson, Daniel; Eric French, and Isaac Sorkin. Firm dynamics and the minimum wage: A putty-clay approach. Working Paper, Federal Reserve Bank of Chicago, No. 2013-26, November 2013. We present new evidence on the effect of minimum wage hikes on establishment entry, exit, and employment among employers of low-wage labor. We show that small net employment changes in the restaurant industry may hide a significant amount of firm level churning that arises in response to a minimum wage hike. In particular, increases in the minimum wage induce greater firm exit, a result consistent with many existing models. [Specifically: Increases in the minimum wage induce greater firm exit; in all three states that we study in the ES-202, firm exit rises by 4 to 7 percent in the two years after the minimum wage has been fully phased in relative to bordering states that did not experience a minimum wage change. The effects appear to be slightly larger as we move closer to the border]. However, more surprising, we find a simultaneous and roughly offsetting increase in firm entry. To capture these dynamics, we extend a putty-clay model to incorporate endogenous exit. The key feature of the putty-clay model is that, after entry, technology and input mix is fixed for the life of the firm. This introduces the possibility that inflexible incumbents are replaced by potential entrants who can optimize on input mix.
  • Bandow, Doug. The Minimum Wage Typifies Much That Is Wrong With Washington. 2013. Details the evidence regarding minimum wage laws and explains why Card/Kreuger study found no impact on unemployment.
  • Clemens, Jeffrey. The Minimum Wage and the Great Recession: Evidence from the Current Population Survey. NBER Working Paper No. 21830 Issued in December 2015. My baseline estimate is that this period’s full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group’s employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.
  • Clemens, Jeffrey and Michael Wither. The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers. November 24, 2014. We estimate the minimum wage’s effects on low-skilled workers’ employment andincome trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a “target” group, whose baseline wage rates were directly affected, and a “within-state control” group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation. Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies  used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage’s effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.
  • Congressional Budget Office. The Effects of a Minimum-Wage Increase on Employment and Family Income (2.18.14). Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects (see the table below). As with any such estimates, however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers.
  • Dalmia, Shikha. Democrats have lost their minds over the minimum wage. The Week (4.11.16). This opinion piece explodes 4 myths about the beneficial effects of the minimum wage.
    • Minimum wage hikes will lead to productivity-boosting automation. In reality, forcing investments in capital equipment when labor is plentiful will raises the overall opportunity cost, rendering an economy less efficient.
    • Minimum wage hikes helps firms make more money. If minimum wages would make employees happier and pay for themselves through lower turnover, then why haven’t companies in competitive markets already figured this out?
    • Minimum wage hikes will stimulate the economy. In reality, ordering employers to give artificial raises means that they would have less money to spend or invest, cancelling out any extra spending by workers.
    • Minimum wage hikes will diminish the strain on welfare programs. Indeed, According to University of California, Irvine’s David Neumark, the probability that a family will escape poverty due to higher wages will be offset by the probability that another will enter poverty because it has been priced out of the labor market.
  • How to Keep More Kids on the Streets. Summary of economic literature on the adverse impact of minimum wage laws on youth/low-skilled unemployment.
  • Lehto, Skyler. What You Weren’t Told About The Minimum Wage (Video: 9:28). Tightly narrated summary of reasons raising minimum wage is a bad idea.
  • Meer, Jonathan and Jeremy West. Effects of the Minimum Wage on Employment Dynamics (December 2013).  The voluminous literature on minimum wages offers little consensus on the extent to which a wage floor impacts employment. For both theoretical and econometric reasons, we argue that the effect of the minimum wage should be more apparent in new employment growth than in employment levels. In addition, we conduct a simulation showing that the common practice of including state-specific time trends will attenuate the measured effects of the minimum wage on employment if the true effect is in fact on the rate of job growth. Using three separate state panels of administrative employment data, we find that the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers.
  • Neumark, David (December 2015).  The Evidence Is Piling Up That Higher Minimum Wages Kill Jobs,” Wall Street Journal op-ed (12.16.15). A 10% increase in the minimum wage is expected to result in a 1% to 2% drop in employment of low-skilled workers earning the minimum wage.
    • William Pease responded in a letter to the editor (12.27.15): “Assuming that his worst case scenario is this 2% loss of jobs in this low-wage group, let’s consider the immediate effects. Out of 100 workers two would lose their jobs as a layoff and be eligible for unemployment compensation. The other 98 of these 100 workers would get raises of 10%. The net increase in wages for the entire group will be 7.8%, without including the unemployment compensation for those laid off. Surely Mr. Neumark would agree that a policy change causing a wage increase over 7.8% for a significant group would be positive for society and a significant economic stimulus for the geographic area affected.”
  • Neumark, David and Wascher, William. Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research (November 2006). NBER Working Paper No. w12663. We review the burgeoning literature on the employment effects of minimum wages – in the United States and other countries – that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few – if any – studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.
  • Neumark, David, Ian Salas and William Wascher. More on Recent Evidence on the Effects of Minimum Wages in the United States (October 2014). NBER Working Paper No. w20619. A central issue in estimating the employment effects of minimum wages is the appropriate comparison group for states (or other regions) that adopt or increase the minimum wage. In recent research, Dube et al. (2010) and Allegretto et al. (2011) argue that past U.S. research is flawed because it does not restrict comparison areas to those that are geographically proximate and fails to control for changes in low-skill labor markets that are correlated with minimum wage increases. They argue that using “local controls” establishes that higher minimum wages do not reduce employment of less-skilled workers. In Neumark et al. (2014), we present evidence that their methods fail to isolate more reliable identifying information and lead to incorrect conclusions. Moreover, for subsets of treatment groups where the identifying variation they use is supported by the data, the evidence is consistent with past findings of disemployment effects. Allegretto et al. (2013) have challenged our conclusions, continuing the debate regarding some key issues regarding choosing comparison groups for estimating minimum wage effects. We explain these issues and evaluate the evidence. In general, we find little basis for their analyses and conclusions, and argue that the best evidence still points to job loss from minimum wages for very low-skilled workers – in particular, for teens. “when we let the data determine the appropriate control states to use for estimating the effects of state minimum wage increases in the Current Population Survey (CPS) data, we find evidence of disemployment effects for teens, with elasticities near −0.15.“
  • Neumark, David, Ian Salas and William Wascher. Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater? (January 2013). NBER Working Paper No. w18681. We revisit the minimum wage-employment debate, which is as old as the Department of Labor. In particular, we assess new studies claiming that the standard panel data approach used in much of the “new minimum wage research” is flawed because it fails to account for spatial heterogeneity. These new studies use research designs intended to control for this heterogeneity and conclude that minimum wages in the United States have not reduced employment. We explore the ability of these research designs to isolate reliable identifying information and test the untested assumptions in this new research about the construction of better control groups. Our evidence points to serious problems with these research designs. Moreover, new evidence based on methods that let the data identify the appropriate control groups leads to stronger evidence of disemployment effects, with teen employment elasticities near −0.3. We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.
  • Political Calculations. Can Increasing the Minimum Wage Boost GDP?
  • Sabia, Joseph J., Richard V. Burkhauser and Benjamin Hansen. “Are the Effects of Minimum Wage Increases Always Small? New Evidence from a Case Study of New York State.” Industrial and Labor Relations Review.The NYS minimum wage increase is associated with a 20.2 to 21.8 percent reduction in the employment of younger less-educated individuals, with the largest effects for those ages 16-to-24.Our results provide plausible evidence that state minimum wage increases can have substantial adverse labor demand effects for low-skilled individuals that are outside the consensus elasticity range of -0.1 to -0.3.
  • John Schmitt. Why Does the Minimum Wage Have No Discernible Effect on Employment? Center for Economic and Policy Research, February 2013.
  • Mark Wilson. The Negative Effects of Minimum Wage Laws. Cato Institute, Policy Analysis No. 701, June 21, 2012. The federal government has imposed a minimum wage since 1938, and nearly all the states impose their own minimum wages. These laws prevent employers from paying wages below a mandated level. While the aim is to help workers, decades of economic research show that minimum wages usually end up harming workers and the broader economy. Minimum wages particularly stifle job opportunities for low-skill workers, youth, and minorities, which are the groups that policymakers are often trying to help with these policies. There is no “free lunch” when the government mandates a minimum wage. If the government requires that certain workers be paid higher wages, then businesses make adjustments to pay for the added costs, such as reducing hiring, cutting employee work hours, reducing benefits, and charging higher prices. Some policymakers may believe that companies simply absorb the costs of minimum wage increases through reduced profits, but that’s rarely the case. Instead, businesses rationally respond to such mandates by cutting employment and making other decisions to maintain their net earnings. These behavioral responses usually offset the positive labor market results that policymakers are hoping for. This study reviews the economic models used to understand minimum wage laws and examines the empirical evidence. It describes why most of the academic evidence points to negative effects from minimum wages, and discusses why some studies may produce seemingly positive results. Some federal and state policymakers are currently considering increases in minimum wages, but such policy changes would be particularly damaging in today’s sluggish economy. Instead, federal and state governments should focus on policies that generate faster economic growth, which would generate rising wages and more opportunities for all workers.

Impact on Poor Families.

The general evidence shows that minimum wage laws do relatively little to assist poor families:

  • Congressional Budget Office. The Effects of a Minimum-Wage Increase on Employment and Family Income (2.18.14). Just 19 percent of the $31 billion in increased wages would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates.
  • Sabia, Joseph J., Richard V. Burkhauser and Benjamin Hansen. Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor? Southern Economic Journal (2010). This study found that state poverty rates were unaffected by minimum-wage increases. It also found that if the minimum wage were raised to $9.50 an hour from $7.25, only 11% of the beneficiaries would be people who live in poor households. Conversely, 42% would be people living in households making more than three times the poverty line (which means they’re well above the country’s median household income). Moreover, poor workers were disproportionately represented among those who would lose jobs.

Impact on Minorities.

  • Riley, Jason L. Obama’s Tragic Legacy for Black Americans. Wall Street Journal 10.14.15. “minimum-wage mandates have been so effective for so long at keeping blacks out of work that 1930, the last year in which there was no federal minimum-wage law, was also the last year that the black unemployment rate was lower than the white rate. For the past half-century, black joblessness on average has been double that of whites.”

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