Does increasing the minimum wage lead to job losses? What does economics literature say?

Based on the economic multiplier effect that results from putting additional income in the hands of lower-income workers, raising the minimum wage will likely have a modest but positive impact on job creation, leading to an additional 85,000 net new jobs when fully phased in. Lower-income earners spend their income more immediately, more completely, and more locally, than do higher income earners, and therefore generate more economic activity. Increasing the wages of 27.8 million workers by $35 billion over the phase-in period generates an additional GDP impact of $22 billion.1

This finding is consistent with the most recent, highly rigorous, peer-reviewed economic literature based on an analysis of real-world minimum wage increases across counties on state borders that shows essentially no disemployment effect resulting from raising the minimum wage.2

The best report providing a comprehensive analytical overview of the literature, Why Does the Minimum Wage Have No Discernable Effect on Employment, comes from the Center on Economic and Policy Research’s John Schmitt. Schmitt’s report illustrates the folly of “doom and gloom” job-loss arguments, which fail to account for the several “avenues of adjustment” available to employers that can and do prevent employment loss, including improved productivity and efficiency, reduced turnover and training costs, modest price increases, increases in demand (resulting from the stimulative impact of increasing lower-income wages), and reduced profits.3

Schmitt’s work draws on a 2009 meta-analysis by Doucouliagos and Stanley that clearly shows that, among the many studies attempting to document the employment impact of raising the minimum wage, the vast majority concentrate around the zero-point, showing no discernable employment impact.

The figure above shows the results of a “meta-study,” (a study of studies), on the bulk of minimum wage research over the past several decades. The X-axis shows the effect on employment resulting from a minimum wage increase; the Y-axis shows the statistical rigor of the study. The results of the vast majority of studies cluster around zero, and those studies with the highest statistical power—i.e., the most rigorous studies—all fall on the zero line.

Moreover, the minimum wage increase proposed in the Fair Minimum Wage Act of 2013 is in line with previous increases. This chart shows the percentage increase of all previous increases in the federal minimum wage, in both nominal and real (inflation-adjusted) terms. Two dotted lines show the averages of all the previous single-year increases (excluding 1950, which was an outlier—the minimum wage was raised by about 85 percent that one year). The average nominal minimum wage increase is 14.2 percent, and the average real minimum wage increase is 9.6 percent.

The Harkin-Miller bill calls for three $0.95 increases. In percentage terms, this is a nominal average of 11.7 percent each year, or 9.5 percent adjusted for inflation. So it’s smaller than the average of all previous increases and smaller than the most recent increase from $5.15 to $7.25.

Endnotes

1. Data from David Cooper, Raising the Federal Minimum Wage to $10.10 Would Lift Wages for Millions and Provide a Modest Economic Boost, Economic Policy Institute Briefing Paper #371, December 19, 2013; http://epi86dev.wpengine.com/publication/raising-federal-minimum-wage-to-1010/

2.  See Arindrajit Dube, T. William Lester, and Michael Reich, “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties,” The Review of Economics and Statistics, vol. 92, no. 4; http://www.irle.berkeley.edu/workingpapers/157-07.pdf

3. John Schmitt, Why Does the Minimum Wage Have No Discernible Effect on Employment? Center for Economic and Policy Research report, February 2013; http://www.cepr.net/documents/publications/min-wage-2013-02.pdf