The employment effects of the minimum wage, from American Community Survey data

The minimum wage in New Zealand goes up tomorrow, from $21.20 to $22.70 per hour. At times like this, it is worth considering what impacts increasing the minimum wage will have. In terms of the effects of increasing the minimum wage on employment, the literature is not settled. It does appear that the effect depends a lot on context (see the links at the end of this post for more, as well as how the minimum wage affects a lot of things other than employment). However, my reading of the literature does suggest that increasing the minimum wage reduces employment, and that reduction in employment is concentrated among young and less educated workers (see my most recent post on that point here).

That most recent post drew on three articles, one of which was by Jeffrey Clemens (University of California, San Diego) and Michael Strain (American Enterprise Institute). I've now gone back read some of their earlier research (which had been sitting in my to-be-read pile), published in 2018 in the journal Contemporary Economic Policy (ungated version here). Like their more recent research, this paper uses data from the American Community Survey, and compares four groups of states:

1. States that increased their minimum wage by more than $1 between January 2013 and January 2015;
2. States that increased their minimum wage, but by less than $1, between January 2013 and January 2015;
3. States that indexed their minimum wage to inflation between January 2013 and January 2015; and
4. States that did none of those things (as a control group).

Those are quite similar to the 'policy groups' of states that Clemens and Strain looked at in their more recent research. They then apply a difference-in-differences strategy, comparing the difference in employment rates (separately for people under 25 with less than a high school education, people aged 16-21 years, and teenagers) between states in each group, before and after 2013. Their dataset covers the period from 2011 to 2015. Importantly, they control for a number of economic variables that may affect employment, including median house prices, state income per capita, and employment among higher skilled population groups. Clemens and Strain find that:

...minimum wage increases exceeding $1 reduced employment by just over 1 percentage point among groups including teenagers, individuals ages 16-21, and individuals ages 16-25 with less than a completed high school education. By contrast, smaller minimum wage increases (including those linked to inflation indexation provisions) appear to have had much smaller (and possibly positive) effects on employment.

In other words, the results are consistent with large minimum wages changes leading to disemployment. However, there is reason for caution with interpreting these results, because they didn't test for pre-trends between the policy group states. Clemens and Strain do note that:

...economic conditions were moderately stronger in states that enacted minimum wage increases relative to other states. Prime age employment, for example, grew by an average of 2.3 percentage points in states that either enacted minimum-wage changes exceeding $1 or that index their minimum wage rates for inflation. Across states that enacted no minimum wage increases, prime age employment increased by a more modest average of 1.6 percentage points.

However, that difference is evaluated across the entire period of the data. Looking at the time from 2011 to 2013 would be more helpful. Eyeballing Figure 3 from the paper does make it seem like the pre-trend for large statutory increases in the minimum wage (more than $1) is flatter than for the other groups (compare the bottom line with the top three lines, for the period from 2011 to 2013):

So maybe we should expect the group of states with large minimum wages not to experience as big an increase in employment as other states after 2013, because they weren't experiencing as big an increase in employment as other states before 2013. Clemens and Strain do report some additional analyses in the supplementary materials to the paper that they claim account for pre-trends, but I don't think that the approach that they report there really does account for pre-trends. That should temper any enthusiasm we have for these particular results, and given that they have been supplanted by more recent results from the same authors using similar data, we should discount them somewhat. Nevertheless, they do make a small contribution to the side of the evidence that supports the disemployment effects of the minimum wage.

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
• More empirical support for the disemployment effects of the minimum wage
• The minimum wage and job vacancies
• The minimum wage and hiring standards