Monday, 3 March 2025

15 years of US research on the minimum wage elasticity of employment

It's time to pick up my recent thread of posts on the minimum wage (most recently in this post). I want to return for a moment to more conventional research on the minimum wage, specifically looking at the effects of higher minimum wages on employment. The majority of minimum wage research has focused on estimating some variation on the minimum wage elasticity of employment - that is, the responsiveness of employment to a change in the minimum wage.

This 2019 article by Paul Wolfson (Dartmouth College) and Dale Belman (Michigan State University), published in the journal Labour (ungated version here), presents a meta-analysis of the findings of 15 years of such research in the US context. As they explain:

The beginning of the New Minimum Wage Research can be dated to a 1991 conference at Cornell University, and the exchange between Neumark and Wascher (2000) and Card and Krueger (2000) in the December 2000 issue of the American Economic Review marks the end of its first period. Our study includes analyses of US data that have appeared after December 2000. We identified 60 analyses, working papers, and published articles that both satisfied these criteria and included at least one estimate of the effect of the minimum wage on employment. In 37 of these 60, either the analysis explicitly reported one or more elasticities and their standard errors or it was possible to calculate them...

As a reminder, a meta-analysis involves combining the results from many other studies in order to estimate an overall effect. Wolfson and Belman's meta-analysis overall includes 739 estimates of the minimum wage elasticity of employment, drawn from those 37 studies. They also run analyses based on the 'best' estimate from each study, as well as the average estimate from each study. All of the analyses result in similar findings. 

The starting point for Wolfson and Belman is an estimate from a survey article by Brown et al. published in 1982, which estimated that the elasticity was between -0.1 and -0.3. That would mean that a 10 percent increase in the minimum wage would result in a decrease in employment of between 1 percent and 3 percent. Brown et al.'s estimates were not based on a meta-analysis, but instead based on a narrative review of the literature up to 1982. Obviously, there literature has moved on a lot since then, and new methods and better data have been applied to the question of the employment impacts of the minimum wage.

So, what do Wolfson and Belman find? They report 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]... 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.

The estimated elasticity range overall of -0.07 to -0.13 implies that a 10 percent increase in the minimum wage would result in a decrease in employment of between 0.7 and 1.3 percent. That effect is small, but it is not zero either. Overall, estimates from the literature do tend to show that higher minimum wages decrease employment (as also noted in some of the more recent findings in my earlier posts - see the list below).

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