A SEATTLE GAME-CHANGER? the Latest Empirical Research Further Underscores the Harm of Minimum Wage Laws

By Bourne, Ryan | Regulation, Winter 2017 | Go to article overview

A SEATTLE GAME-CHANGER? the Latest Empirical Research Further Underscores the Harm of Minimum Wage Laws


Bourne, Ryan, Regulation


Whether minimum wage increases result in significant "disemployment" effects--i.e., fewer jobs or hours worked--has been one of the most vigorous empirical debates in economics. To help resolve this debate, this article reviews the history of minimum wage scholarship and discusses a headline-grabbing new study showing large negative employment effects from recent increases in Seattle's minimum wage.

THE RECEIVED VIEW

Until the early 1990s, economists largely believed in the competitive model of the labor market. This model entails that raising a binding legal price floor on labor--that is, raising the minimum wage when a number of workers earn that wage--will result in a reduction in the quantity of labor demanded and therefore lower the level of employment. In that era, policy disagreements over minimum wage laws manifested themselves over whether the lost employment was a tolerable tradeoff for higher pay for low-wage workers who did maintain their jobs and hours.

A 1981 review by a Congressional Minimum Wage Study Commission concluded that "time-series studies typically find that a 10 percent increase in the minimum wage reduces teenage employment by one to three percent." Minimum wages were thought to reduce aggregate employment overall, with the biggest effect falling on younger, more disposable workers--those with low skill levels--or in regions with low levels of productivity. This is in line with the notion that raising minimum wages could raise take-home pay for those keeping their jobs, but it would also reduce employment opportunities.

CARD AND KRUEGER CHANGE THE DEBATE

However, there are theoretical models asserting that minimum wage laws can increase employment--if the labor market isn't competitive. If employers face little competition for labor (say, in a "company town") and so have monopsony power, they can pay labor less than the workers' marginal product, resulting in some would-be workers opting for leisure. Under such circumstances, a state-enforced higher minimum wage could make a minimum wage increase a "free lunch," increasing wages and employment.

David Card and Alan Krueger in 1994 seemed to find such a result. Using a telephone survey to analyze the response of fast-food restaurants in New Jersey to an increase in the state's minimum wage relative to nearby Pennsylvania, Card and Krueger concluded that the higher minimum wage actually increased employment in New Jersey.

However, David Neumark and William Wascher in 2004 reexamined the New Jersey increase using actual payroll data from the two neighboring states. They found that a combination of measurement error in the Card and Krueger telephone survey and the fact that the wages of many of the workers were already above both the new and old minimum wage accounted for Card and Krueger's findings, rather than a monopsony effect.

This scholarly fight sparked an explosion of both theoretical and empirical research on the minimum wage. Given sectors that include the overwhelming majority of workers earning at or below the minimum wage (e.g., food preparation and serving, sales, administrative support, transportation, and material moving) look fairly competitive, economists such as Alan Manning developed models that argued instead that all employment situations have an element of monopsony. Imperfect information and the costs to an employee of switching jobs are thought to give the current employer some market power over workers. As a result, these economists argue, raising the minimum wage can raise employment.

In truth though, theory has long taken a back seat in the literature to pure empirical work. And though the empirical work generally supports the received view on minimum wage laws, it is not unanimous. Hence, the main debates over the minimum wage today are about econometric methodology--which empirical studies better describe the effects of minimum wage laws? …

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