More empirical support for the disemployment effects of the minimum wage

Three new papers I recently read, taking different approaches, have all come out supporting the disemployment effects of the minimum wage. The first is this NBER Working Paper (alternatively, here) by David Neumark (University of California, Irvine) and Peter Shirley (West Virginia Legislature). They first take issue with the way that the body of literature on the minimum wage is summarised in existing research, noting that:

Most academic writing on the U.S. research evidence gives the impression that even where there is some evidence of negative employment effects, we really cannot reach any conclusions or consensus...

The absence of complete agreement across a large set of studies is not surprising. It is also not surprising that advocates on one side or the other emphasize different studies – in particular, the ones more consistent with their policy positions. What is surprising, though, is the absence of agreement on what the research literature says – that is, how economists even summarize what the body of evidence says about the employment effects of minimum wages. Depending on what one reads about how economists summarize the evidence, one might conclude that: (1) it is now well-established that higher minimum wages do not reduce employment, (2) the evidence is very mixed with effects centered on zero with no basis for a strong conclusion one way or the other, or (3) most evidence points to adverse employment effects... 

The disparate conclusions has been a feature of the literature at least since the groundbreaking Card and Krueger study (ungated) in 1994 that suggested the minimum wage had no disemployment effects. Neumark and Shirley then construct a database of all 69 papers presenting estimates of the employment effects of the minimum wage in the U.S., since the New Minimum Wage Research Symposium in 1992. They avoid taking a meta-analysis approach (a point I will come back to), instead simply summarising the point estimates of the 'preferred estimate' from each of the studies in their sample. They argue in favour of this approach because:

...we think that using the entire set of estimates reported is likely to fail to convey the conclusions of the research, most importantly because many papers present estimates that the authors do not view as credible.

In other words, because most studies present many estimates in order to demonstrate their robustness to different assumptions or subsamples, or in order to demonstrate the effects based on assumptions used in other studies, Neumark and Shirley feel justified in selecting a single 'preferred' estimate from each study. Before you get carried away though, they didn't cherry pick the 'preferred' estimate - they used the estimate that was referred to by the authors as preferred, was highlighted in the conclusions to the paper, and for papers where it wasn't obvious, Neumark and Shirley contacted the authors.

It turns out that most studies find negative employment effects of the minimum wage. Neumark and Shirley draw the following conclusions:

• There is a clear preponderance of negative estimates in the literature. In our data, 78.9% of the estimated employment elasticities are negative, 53.9% are negative and significant at the 10% level or better, and 46.1% are negative and significant at the 5% level or better.
• This evidence of negative employment effects is stronger for teens and young adults, and more so for the less-educated.
• The evidence from studies of directly-affected workers points even more strongly to negative employment effects.
• The evidence from studies of low-wage industries is less one-sided, with 66.7% of the estimated employment elasticities negative, but only 33.3% negative and significant at the 10% level or better, and the same percent negative and significant at the 5% level or better. We suggest, however, that the evidence from low-wage industries is less informative about the effects of minimum wages on the employment of low-skill, low-wage workers.

From my perspective, the problem with this study is that it isn't a meta-analysis, despite Neumark and Shirley's arguments to the contrary. Neumark and Shirley are known for their studies finding in favour of disemployment effects of the minimum wage, so many readers would not be surprised by their conclusions. What we need is a more objective analysis.

This 2019 meta-analysis by Paul Wolfson (Dartmouth College) and Dale Belman (Michigan State University), published in the journal Labour (ungated version here) avoids the same accusations of bias, because Wolfson and Belman don't have the same history of being on one side of the debate. Their meta-analysis covers 37 studies (with 739 estimates) of the employment effects of the minimum wage in the U.S., published over the period from 2000 to 2015. They find that:

...the range of the employment elasticity has shifted toward zero since Brown et al. (1982), from [-0.3, -0.1] to [-0.13, -0.07], but, in contrast to prior meta-analyses Doucouliagos and Stanley (2009), Belman and Wolfson (2014), our estimates are negative and statistically significant, albeit of small magnitude.

The employment elasticity of the minimum wage is the percentage change in employment that results from a one percent increase in the minimum wage. The range of [-0.13, -0.07] suggests that a one percent increase in the minimum wage would reduce employment by between 0.07 and 0.13 percent. It's not an incredibly large effect, but it is negative and statistically significant, suggesting that across all of the studies in this meta-analysis considered jointly, increases in the minimum wage do reduce employment overall. However, Wolfson and Belman also note that:

Teenagers, and eating and drinking establishments together account for more than half of the estimates in our sample. Estimating separate models for teens and for eating and drinking places has little effect on our estimated range, moving it from [-0.13, -0.10] to [-0.11, -0.07]... The minimum wage then has negative employment effects, but estimates of them have become smaller and are largely localized to teenagers, who comprise a declining share of the labor force.

Finally, a common critique of the minimum wage literature (from both sides) is that the analyses are conducted in a way that increases the chances of concluding one way or the other. One way to avoid that is to adopt a pre-analysis plan (see this post for more). This is uncommon in research in non-experimental settings, but is the approach adopted in this NBER Working Paper (alternatively, here) by Jeffrey Clemens (University of California, San Diego) and Michael Strain (American Enterprise Institute). After two initial papers they wrote in 2017 and 2018 (using U.S. state-level data from 2011 to 2015), Clemens and Strain pre-committed to a particular analysis to be conducted using data through to 2019. This has been a period of significant change in minimum wages in the U.S., as they note:

After the Great Recession, there was a pause in both state and federal efforts to increase minimum wages. This pause created a baseline (or “pre-period”) for empirical purposes. It was followed by considerable divergence in states’ minimum wage policies. A number of states legislated and began to enact minimum wage changes that varied substantially in their magnitude. From January 2011 to January 2019, for example, Washington, D.C., California, and New York had increased their minimum wages by 61, 50, and 53 percent, respectively. Wage floors rose more moderately in an additional 24 states and were unchanged in the remainder.

Clemens and Strain differentiate between four 'policy groups' of states in their analysis:

The first group consists of states that enacted no minimum wage changes between January 2013 and the later years of our sample. The second group consists of states that enacted minimum wage changes due to prior legislation that calls for indexing the minimum wage for inflation. The third and fourth groups consist of states that have enacted minimum wage changes through relatively recent legislation. We divide the latter set of states into two groups based on the size of their minimum wage changes and based on how early in our sample they passed the underlying legislation.

 Using data from the Current Population Survey and the American Community Survey, they find that:

...over the short and medium run, relatively large increases in minimum wages have reduced employment rates among individuals with low levels of experience and education by just over 2.5 percentage points. Second, our estimates of the effects of relatively small minimum wage increases are variable and centered on zero, as are our estimates of the effects of minimum wage increases linked to inflation-indexing provisions. Finally, our results provide evidence that the medium-run effects of large minimum wage changes are larger and more negative than their short-run effects.

All of that seems consistent with the other two papers - there are disemployment effects of the minimum wage. However, there is a note of caution about the Clemens and Strain results:

The minimum wage increases we analyze are thus much larger than the typical increases analyzed in previous research. Indeed, the average increase in our set of “large” increases is over four times as large, in percent terms, as the average size of the 138 increases analyzed by Cengiz et al. (2019).

Large changes in the minimum wage can be expected to have large disemployment effects. That should be a worry in the U.S. context, where there are policy proposals to substantially raise the minimum wage in some states.

Overall, these three papers paint a picture that, to me, is consistent with much of the highest quality research on the minimum wage in recent years. Raising the minimum wage does reduce employment, and that reduction in employment is concentrated among young and less educated workers. Policy proposals to raise the minimum wage (or, to implement a living wage) need to consider how to best ameliorate these negative effects.

[HT: For the Neumark and Shirley paper, Marginal Revolution]

Read more:

• A bunch of research findings on minimum wages in New Zealand
• The disemployment effects of Canadian minimum wages
• Jeffrey Clemens on the disemployment effects of the minimum wage
• The impact of an online minimum wage
• Seattle's minimum wage, revisited
• The latest evidence supports negative employment effects of the minimum wage
• Latest research suggests the minimum wage DOES reduce employment