Does Raising the Minimum Wage Kill Jobs?

iStock.com/GCShutter

Connect with state & local government leaders
 

Connecting state and local government leaders

COMMENTARY | The question is actually one of the most studied in all of economics and still doesn’t have a definitive answer – though Nobel-winning economist David Card got us closer.

For decades it was conventional wisdom in the field of economics that a higher minimum wage results in fewer jobs.

In part, that’s because it’s based on the law of supply and demand, one of the most well-known ideas in economics. Despite it being called a “law,” it’s actually two theories that suggest if the price of something goes up – wages, for example—demand will fall—in this case, for workers. Meanwhile, their supply will rise. Thus an introduction of a high minimum wage would cause the supply of labor to exceed demand, resulting in unemployment.

But this is just a theory with many built-in assumptions.

Then, in 1994, David Card, an economist at the University of California, Berkeley, and one of this year’s Nobel winners, and the late Alan Krueger used a natural experiment to show that, in the real world, this doesn’t actually happen. In 1992, New Jersey increased its minimum wage while neighboring Pennsylvania did not. Yet there was little change in employment.

When I discuss their work in my economics classes, however, I don’t portray it as an example of economists providing a definitive answer to the question of whether minimum wage hikes kill jobs. Instead, I challenge my students to think about all the ways one could answer this question, which clearly cannot be settled based on our beliefs. But rather, the answer requires data—which in economics, can be hard to come by.

Using Models to Study Behavior

Economics studies the production, distribution and consumption of goods and services. And so, like other social sciences, economics is fundamentally interested in human behavior.

But humans behave in a wide variety of often hard-to-predict ways, with countless complications. As a result, economists rely on abstraction and theory to create models in hopes of representing and explaining the complex world that they are studying. This emphasis on complicated mathematical models, theory and abstraction has made economics a lot less accessible to the general public than other social sciences, such as psychology or sociology.

Economists also use these models to answer important questions, such as “Does a minimum wage cause unemployment?” In fact, this is one of the most studied questions in all of economics since at least 1912, when Massachusetts became the first state to create a minimum wage. The federal wage floor came in 1938 with the passage of the Fair Labor Standards Act.

And it’s been controversial ever since. Proponents argue that a higher minimum wage helps create jobs, grow the economy, fight poverty and reduce wage inequality.

Critics stress that minimum wages cause unemployment, hurt the economy and actually harm the low-income people that were supposed to be helped.

A Tale of Two Theories

Most students in my introductory microeconomics class can easily show, using the standard supply and demand model, that an increase in the minimum wage above the level that the market sets on its own should drive up unemployment. In fact, this is one of the most commonly used examples in introductory economics textbooks.

However, this result assumes a perfectly competitive labor market in which workers and employers are abundant and employees can change jobs with ease. This is rarely the case in the real world, where a few companies frequently dominate in what are known as monopsonies.

And so others theorized that because monopsonistic companies had the power to set wages artificially low, a higher minimum wage could, perhaps counterintuitively, prompt companies to hire more workers in order to recover some of their lost profitability as a result of the increased labor costs.

How can economists tell which of these two theories may be right? They need data.

David Card laughs as he leans against a balcony on campus in Berkeley, California.
David Card won the Nobel Prize for his work on the minimum wage. AP Photo/Noah Berger

Data Trumps Theory

Studying the real world is difficult, and it’s constantly changing, so it is not easy to obtain all the relevant evidence.

Unlike in medicine or other sciences, economists cannot conduct rigidly controlled clinical trials, a method vacinologists used to test the efficacy of COVID-19 vaccines. Due to financial, ethical or practical constraints, we cannot easily split people into treatment or control groups—as is common in psychology. And we cannot randomly assign a higher minimum wage to some and not others and observe what will happen, which is how a biomedical scientist might study the impact of various treatments on human health.

And in studying the minimum wage, we cannot simply look at past times when it was increased and check what happened to unemployment a few weeks or months later. There are many other factors that affect the labor market, such as outsourcing and immigration, and it’s virtually impossible to isolate and pin down one factor such as a minimum wage hike as the cause.

This is where the pioneering work of natural experiments like the ones Card and Krueger have used over the years to study the effects of raising the minimum wage and other policy changes comes in. It began with their 1994 paper, but they’ve replicated the findings with other studies that have deepened the amount of data that shows the original theory about the minimum wage causing job losses is likely wrong.

Their approach isn’t without flaws—mostly technical ones—and in fact economists still don’t have a clear answer to the question about the minimum wage that I posed earlier in this article. But because of Card, Krueger and their research, the debate over the minimum wage has gotten a lot less theoretical and much more empirical.

Only by studying how humans actually behave can economics hope to make meaningful predictions about how a policy change like increasing the minimum wage is likely to affect the behavior of the economy and the people living in it.

The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.