More Data on the Minimum Wage

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[Updated Feb. 15 5:30 pm GMT-7 to add material from the paper by William Even and David Macpherson.]
A few days ago I wrote a long piece about the minimum wage.  In it I summarized the findings of about half a dozen articles.  Today’s Wall Street Journal (“The Minority Youth Unemployment Act,” Feb. 16) points to several more comprehensive studies.  This article will attempt to summarize and cite those studies with appropriate links where required.  Here’s some more data on the minimum wage.

The damage from a minimum wage hike depends on the overall labor market. If the job market is buoyant, as it is in the fracking boomtown of Williston, N.D., fast-food workers may already make more than $9 an hour. But when the jobless rate is high, as it still is in California and New York, the increase punishes minority youth in particular.

That is what happened during the last series of wage hikes to $7.25 from $5.15 that started in July 2007 as the economy was headed toward recession. The last increase hit in July 2009 just after the recession ended, and as the nearby chart shows, the jobless rate jumped for teens and black teens especially. For black teens, the rate has remained close to 40% and was still 37.8% in January.

A study by economists William Even of Miami University and David Macpherson of Trinity University concludes that in the 21 states where the full 40% wage increase took effect, “the consequences of the minimum wage for black young adults without a diploma were actually worse than the consequences of the Great Recession.”

The Neumark-Wascher Meta-Analysis

The first paper, by  David Neumark and William Wascher (National Bureau of Economic Research, Inc, NBER Working Papers: 12663, 2006) summarizes the results of 102 empirical studies of the impact of the minimum wage on employment. These studies were all done after 1990.  To economists that means the studies were done carefully and correctly using the appropriate statistical techniques.  Of the 33 studies the authors selected as being the “most credible” 85 percent found a significant negative impact of a higher minimum wage on employment.  Raise the minimum wage and unemployment increases.  (Using all 102 studies, “only eight give a relatively consistent indication of positive employment effects.” (Neumark and Wascher, p. 121).  In other words, about 92% of the studies found a negative or ambiguous impact on employment.  The authors also state that about 2/3 of the 102 studies find unambiguous negative impacts on employment when the minimum wage rises.

Prof. Neumark has written extensively on this subject, including an intriguing article on the interaction between the minimum wage and the earned income tax credit (EITC). In “Does a Higher Minimum Wage Enhance the Effectiveness of the Earned Income Tax Credit?” (Industrial and Labor Relations Review, July 2011, v. 64, iss. 4, pp. 712-46).  Summarizing their results, they find that the EITC is a far more effective tool for raising income without negative impacts on employment.  They also found that a higher minimum wage has virtually no impact on poverty.

The Wall Street Journal article also cites two other studies.  Here’s a pullquote from the Wall Street Journal editorial  →.

The Even-Macpherson Micro Study

Even and Macpherson (“Unequal Harm: Racial Disparities in the Employment Consequences of Minimum Wage Increases.” Employment Policies Institute, May, 2011. This is the summary page. Scroll to the bottom to find the links to a longer summary and the full text.) look at a sample of about 600,000 males between 16 and 24 years old without a high school diploma.  They examine the impact on three groups: whites, Hispanic, and black.  Their results are pretty incredible.  Rather than try to summarize a long, detailed and very specific study, let me just quote from the Executive Summary:

In this new study, labor economists William Even (Miami University) and David Macpherson (Trinity University) overcome this problem by amassing a dataset from the years 1994 to 2010 that includes over 600,000 data observations—including a robust sample of minority young adults unprecedented in previous studies on the minimum wage.

By taking advantage of the “natural experiment” created by the substantial interstate variation in the minimum wage between 1994 and 2010, and carefully controlling for labor market and demographic differences, the authors provide conclusive answers to the crucial policy question of whether wage mandates have a disparate impact on minority groups.

Drs. Even and Macpherson focus on 16-to-24 year-old males without a high school diploma, a group that previous studies suggest are particularly susceptible to wage mandates. Among white males in this group, the authors find that each 10 percent increase in a federal or state minimum wage decreased employment by 2.5 percent; for Hispanic males, the figure is 1.2 percent. But among black males in this group, each 10 percent increase in the minimum wage decreased employment by 6.5 percent.

The effect is similar for hours worked: each 10 percent increase reduced hours worked by 3 percent among white males, 1.7 percent for Hispanic males, and by 6.6 percent for black males.

But the picture grows even more troubling when the authors focus just on the 21 states fully affected by the federal minimum wage increases in 2007, 2008, and 2009. Approximately 13,200 black young adults in these states lost their job as a direct result of the recession; 18,500 lost their job as a result of the federal wage mandate—nearly 40 percent more than the recession. In other words, the consequences of the minimum wage for this subgroup were more harmful than the consequences of the recession.

The substantial disemployment effects that emerge from the data raise an important question: Why do black males suffer more harm from wage mandates than their white or Hispanic counterparts?

The authors find that they’re more likely to be employed in eating and drinking places–nearly one out of three black young adults without a high school diploma works in the industry. Businesses in this industry generally have narrow profit margins and are more likely to be adversely impacted by a wage mandate. There’s also substantial variation in regional location, as black young adults are overwhelmingly located in the South and in urban areas.

Conclusion

Those who believe that increases in the minimum wage do not reduce employment are simply in denial.  Economists have a mountain of evidence in support of this proposition.  You are free to believe  what you like, but please don’t call yourself an economist if you choose to deny the facts.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.