… But Like All Public Policies, Minimum Wage Increases Have Trade-Offs

Traditional textbook economics tells us that employers will cut jobs or hours for low-wage work if they’re required to set the price of labor above the level consistent with market supply and demand. Therein lies one of the most contentious debates in economics right now.

In the real world, it’s difficult to test this because of so many confounding factors.

For example, teenage employment rose about as much between 2013 and 2018 in states whose effective minimum wage didn’t change as it did in states where it rose an average of 4 percent or greater each year.

The places that chose to raise their minimum wages may be different in important respects, both socioeconomic and demographic, from those that did not, like education; industry and occupation; and labor market health.

A sizable body of empirical research that adjusts for these issues concludes that while some workers are winners from minimum wage increases, many others lose out, particularly vulnerable workers like the young and those with less education. This calls into question whether raising the minimum wage is really the best way to help workers.

But beginning with David Card and Alan Krueger’s landmark 1994 study of New Jersey’s minimum wage increase, a growing economics literature is reaching a different conclusion: that the jobs effects found in these other studies is overstated, and that the rising minimum wages in the United States have had more of a net benefit.

For example, a huge study released this month analyzed 138 different state-level minimum wage increases since 1979. The authors found largely no net negative employment effects, though they did find some in sectors exposed to international trade. And University of Washington economists revised an initial study of Seattle’s recent minimum wage increase that had showed significant negative effects on earnings for some workers. The new study found that the downsides were more muted.

Economists have several ideas for why negative jobs effects might be lower than expected. Employers may be less sensitive to minimum-wage increases because of long-term declines in national business competition and labor bargaining power, and the rise in profit rates and monopsony (in which a single buyer dominates a market).