Wednesday, 19 February 2025

Effects of the minimum wage on the nonprofit sector

After a few days of 'rest' (by which I really mean some intensely long work days), I'm going to pick up again on my recent series of posts about the minimum wage (see here for the most recent post), but returning to more familiar ground - the disemployment effects of the minimum wage. The story we tell using basic supply and demand is that a minimum wage that is above the equilibrium wage in a labour market will reduce the number of jobs (reduce the quantity of labour demanded by employers). 

Considering this post from last week (along with others), we should now be recognising that the simple story is incomplete, because there are other margins that employers may adjust along. They might not reduce jobs, but they might change some of the non-monetary characteristics of jobs, for example. Employers may also absorb some of a higher minimum wage in the form of higher costs, and reduced profits.

Minimum wages don't only affect for-profit firms though. They also affect nonprofit firms. And non-profit firms have one margin that they cannot adjust - profits. A non-profit firm cannot sustainably absorb higher costs by accepting lower profits. So, we might expect to see larger disemployment (and other) effects on firms operating in the nonprofit sector.

That is essentially what this 2023 article by Jonathan Meer (Texas A&M University) and Hedieh Tajali (University of Edinburgh), published in the journal Oxford Economic Papers (ungated earlier version here), looks at. Specifically, Meer and Tajali use data from electronic charity filings to the US Internal Revenue Service (IRS) from 2011 to 2017, as well as data for the same years from the Quarterly Census of Employment and Wages, collected by the Bureau of Labour Statistics (BLS). The two different data sources paint a generally similar picture, but the IRS data offers somewhat more detail for the analyses.

Meer and Tajali then look at the difference in impacts of higher state-level minimum wages, differentiating (similar to what Clemens and Strain did in the paper I discussed here) between states that had large minimum wage rate changes (more than US$2), small minimum wage rate changes (less than US$2), and indexed rates (that change annually in step with inflation). Notice though that the threshold between large and small changes is $2, rather than the $1 that Clemens and Strain used. I'm unsure if that is material, but they don't present any alternative analyses based on other thresholds.

Meer and Tajali find that, using the IRS data:

Large statutory changers have a statistically significant 7.1% (s.e. = 2.3%) decrease in employment relative to nonchangers. But states with smaller minimum wage increases see little impact on employment... States with inflation-indexed minimum wages also see a negative effect despite relatively small increases.

The effect for small (less than $2) minimum wage increases is a statistically insignificant decrease in employment of 1.6 percent, while for indexers a minimum wage increase is associated with a 2.3 percent decrease in employment. Those are quite substantial effects (particularly for large minimum wage increases). The BLS data shows that:

...states with large statutory increases see a 2.7% (s.e. = 1.1%) decrease in employment relative to states that did not increase their minimum wage. Small statutory increasers see a negative but imprecise effect, while there is no meaningful impact on indexers.

So the effects are smaller using the BLS data. However, the BLS data:

...only includes organizations with an employee covered by unemployment insurance, it does not include nonprofits without paid workers...

You might think that shouldn't make much difference, but a higher minimum wage will also affect employers who don't pay any of their workers (because those workers are volunteers), because for some of those volunteers a higher minimum wage represents a better 'outside option'. So, with higher minimum wages, nonprofit firms might lose some workers to for-profit firms (or to other nonprofit firms) that are paying the now-higher minimum wage. That would mean that there would likely be larger disemployment effects showing up in the IRS data than in the BLS data. However, I doubt it explains a large proportion of the difference, and in any case, both datasets show statistically significant disemployment for nonprofit firms when minimum wage increases are large.

Moving on to other aspects of nonprofit firms, Meer and Tajali find (using the more-detailed IRS data) that large minimum wage changes are associated with lower grant receipts, less fundraising expenditures (which might partially explain the lower grant receipts), and lower total expenses. Looking at different sizes of nonprofit firms, they find that:

The smallest nonprofits, with three or fewer employees (including those that are entirely volunteer-run), are the most affected. Aggregate employment in this size bin is 25.0% (s.e. = 15.6%) lower in states with large statutory changes relative to nonchanging states. Estimates for other size categories are negative but not statistically significant.

Altogether, it is apparent that employment in nonprofit firms is negatively affected by large increases in the minimum wage, which is consistent with my impression of the overall literature on employment generally.

[HT: Marginal Revolution, back in 2023]

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