Minimum wages and the adoption of robots

Manufacturing firms typically have a choice of various production technologies. Some production technologies involve more labour. Others involve more automation (robots, as in this post). If labour becomes relatively more expensive compared with robots, firms have a greater incentive to adopt robots. That suggests that higher minimum wages, which make labour relatively more expensive for firms, may not only decrease employment (see the links at the end of this post for more on that point), but may increase the adoption of robots.

The extent to which firms adopt robots in the face of increasing minimum wages is the subject of this recent NBER Working Paper by Erik Brynjolfsson (Stanford University) and co-authors (ungated version here). They look at this question in two ways. First, Brynjolfsson et al. create a state-level measure of exposure to robots, which captures the extent to which robots are over- or under-adopted in each state, given the state's mix of industries and employment. They then correlate changes in that measure with changes in the state-level minimum wage over the period from 2003 to 2015. That correlation is illustrated in Figure 1(c) from the paper:

The regression line in the figure implies that a 10 percent increase in the minimum wage is associated with an increase in robot exposure equivalent to about 8 percent of the sample mean level of robot exposure.

Second, Brynjolfsson et al. use microdata from the US Census Bureau, including the Longitudinal Business Database and Longitudinal Firm Trade Transactions Database (LFTTD), to construct a panel dataset of robot adoption among US manufacturing firms from 1992 to 2021. They use the LFTTD data to identify which firms imported industrial robots. They then compare robot adoption between firms in adjacent counties on opposite sides of state borders, which face different state-level minimum wages but are likely to share many local economic conditions. Their measure of robot adoption in this analysis is simply whether a given firm adopted a robot in a given year, or not. In this second analysis, they find that:

...a 10% increase in minimum wage leads to an 8.4% rise in robot adoption relative to the sample average...

Notice how similar in magnitude the effects from their two analyses are, despite being quite different in nature, as well as covering different time periods. Both analyses suggest that higher minimum wages are associated with greater levels of robot adoption. The state-level relationship in the first analysis is clearly correlational, rather than causal. However, the comparison between firms in adjacent counties provides some plausibly causal effects (at least, there are plenty of other research papers that use a similar approach to estimate the causal effects of minimum wages). More generally, this research provides another example of how firms may respond to minimum wages on margins other than employment (see the links at the end of this post for more). When the relative price of labour increases, firms may change not only how many workers they employ, but also the production technology they use.

[HT: Marginal Revolution, back in February] 

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases
• Minimum wage increases and employer noncompliance
• Higher minimum wages and poverty revisited
• Minimum wages and health
• Effects of the minimum wage on the nonprofit sector
• 15 years of US research on the minimum wage elasticity of employment
• Local minimum wages and low-quality housing rents in Japan
• Minimum wages and student summer employment

How important is the apprenticeship model to entering a research career?

Those of us working in research careers can invariably share stories about working as a research assistant, cleaning datasets, coding, running models, doing literature reviews, and many of the other less-glamorous tasks that make up the research process. That was a key aspect of our apprenticeship into the world of research, and a gateway into a research career. But how important really is research assistance as an entry point into a research career?

That is the question addressed in this 2025 NBER Working Paper (ungated version here) by Ina Ganguli (University of Massachusetts, Amherst) and Raviv Murciano-Goroff (Boston University). They look at the impact of working in a university lab (an important subset of research assistance work) on subsequently pursuing a scientific career. Interestingly, Ganguli and Murciano-Goroff use changes in the local minimum wage as an exogenous source of variation in lab employment, so this paper also indirectly contributes to the literature on the employment effects of the minimum wage, in a context (research labs) that is not often the focus of that literature.

Their data comes from UMETRICS, which collates data on research grants across universities, and their dataset covers 32 universities over the period from 2000 to 2019 (although the dataset has coverage up to 2022, including those additional years would mean having to account for the COVID-19 pandemic).

First, using a dataset collated at the lab level, Ganguli and Murciano-Goroff use a staggered difference-in-differences approach to look at the impact of minimum wage changes on employment of undergraduates in the labs. This analysis essentially compares the change in undergraduate employment between the time before and the time after an increase in the minimum wage, between university labs that were affected by the minimum wage increase and those that were not. In that analysis, they find that:

...following minimum wage increases, labs decrease the employment of undergraduates by 7.4% on average...

So, not dissimilar to the literature on minimum wage effects on employment, when focused on young people in exposed occupations. Ganguli and Murciano-Goroff then use the minimum wage change as an instrument for students' exposure to laboratory research as an undergraduate. The key assumption is that minimum wages while an undergraduate affect later scientific careers only through their effect on lab employment opportunities.

Using a dataset of over 28,000 undergraduates and their subsequent career paths, Ganguli and Murciano-Goroff find that:

...decreased exposure to scientific work translates into significantly lower rates of undergraduate research assistants pursuing doctoral degrees or working in the life sciences sector after graduation. We find that working one fewer quarter in a lab during an undergrad student’s college years translates into between a 7.0 and 10.3 percentage point decrease in the rate of enrolling in a doctoral-level program. Given our sample of 28,283 students, this implies that if all students had experienced a minimum wage increase, roughly 500 fewer undergraduates in our sample would have pursued these advanced degrees.

So, the results imply that one fewer quarter of lab experience as an undergraduate reduces enrolment in a doctoral programme by 7.0 to 10.3 percentage points. That is a fairly large effect and should make graduate research programmes take notice of the importance of undergraduate research assistance opportunities for the pipeline into graduate research.

So, working in a lab as an undergraduate is a key pathway towards a career in the life sciences, and when those opportunities are restricted, students are less likely to embark on such a career. These results won't be too surprising to those of us who have been through an apprenticeship as a researcher. It is likely that I would be doing something very different right now if I hadn't been pulled into a lot of research projects towards the end of my undergraduate studies. I almost certainly wouldn't have pursued a PhD, or become an academic. Research assistant jobs are more than just jobs. They provide mentoring, information, skills, networks, references, and a chance to try out being a researcher in a safe setting.

These results also highlight two other things for me. First, they suggest that minimum wage increases may have a negative impact on the career pipeline into science. I'm unsure that this negative impact of the minimum wage has been identified before. However, we should be cautious because Ganguli and Murciano-Goroff are primarily interested in using minimum wage changes to identify the effect of undergraduate research experience on later careers, rather than estimating the overall long-run consequences of minimum wage increases for the scientific workforce. Nevertheless, their results suggest that this may be an important unintended consequence of higher minimum wages, and one that would be worth further research.

Second, given that research assistants do a lot of the 'drudge work' in research, if generative AI is also able to do a lot of that work, that further suggests a negative impact on the career pipeline into science through the rise of generative AI. I know others have written on this before (see here), so the challenge here is not a new idea.

On the plus side, that suggests another method that could be used to further test for the impacts of undergraduate (and graduate) research assistance on future academic careers, beyond focusing on life sciences (as Ganguli and Murciano-Goroff do). By comparing academic fields that are more (or less) exposed to generative AI (especially in the early days of generative AI), we might be able to tease out how important research assistance is to future academic careers across many fields.

Research apprenticeship is important, and these results give us a clear indication of how important it can be. Cleaning data, running models, searching the literature, and doing all the other seemingly mundane tasks of a research assistant are not just cheap ways for senior researchers to get research done. They are also how the next generation of researchers learns what research is, discovers whether they enjoy doing it, and gets started on a research career. If these opportunities are reduced, whether through higher minimum wages or through substitution by generative AI, we may save on some of the drudge work today, but at the cost of having fewer researchers tomorrow.

[HT: Marginal Revolution]

Minimum wages and student summer employment

The research literature is starting to coalesce around minimum wages have small disemployment effects, consistent with the standard demand-and-supply model (see the meta-analysis in this post, or the links at the end of this post, for more details). To add to that evidence, this recent article by Adam Wright, Darius Martin, and John Krieg (all Western Washington University), published in the journal Contemporary Economic Policy (), looks at the impact on student summer employment. Specifically, Wright et al. use data from Washington state, and focus on students enrolled in Western Washington University in Bellingham, which has about 15,000 undergraduate students.

Wright et al. match student data from 2013 to 2019 to employment records from the Washington State Employment Security Division (ESD) from 2009 to 2019. The ESD data includes both earnings and hours worked, but only for employers that pay into the state's unemployment insurance programme. This excludes workers for the federal government and the self-employed, who are unlikely to be students. However, it also excludes students "students working under financial assistance programs provided by the school", so Wright et al. supplement the ESD data with data on student employees at WWU. Because the employment data starts before the student data, Wright et al. can control for past work experience. And because the data are quarterly, they are able to look separately at employment effects over summer, and during term time.

There are over 31,000 students in the analysis sample, and nearly 260,000 student-by-quarter observations. Wright et al. apply a fairly straightforward panel regression model, controlling for work experience and for the unemployment rate of Whatcom County (where the WWU campus is located). They look at three outcome variables: (1) hours worked; (2) wage income; and (3) a binary variable indicating whether a student worked any hours at all. The overall effects of the minimum wage are not statistically significant. However, when looking at the results by season, Wright et al. find that:

In summer, when students are most likely to work, higher minimum wages significantly predict reduced work hours and the probability of employment, whereas the relationship with income is negative but imprecisely measured. In particular, the coefficient estimates imply that a 100% increase in the minimum wage is associated with 90.08 fewer hours worked in the summer and a reduction in the probability of work by 34.2% points. This suggests that the 16% minimum wage increase experienced in 2016–2017 was linked to a 14.4 h decrease in summer hours worked (an 8.5% decrease relative to the average) and a 5.5% point decrease in summer employment (an 8% decrease)... Minimum wage policy does not appear to predict disemployment in non-summer quarters, leading wage income to rise with increasing minimum wages in winter and spring...

So, minimum wages reduce student summer employment. It is unclear why Wright et al. decided to illustrate the size of the effect with a 100% change in the minimum wage (although that is what the coefficient in the table represents), since that size of change is never observed in the data. It is better to say that a 10% increase in the minimum wage would reduce hours worked in summer by about nine hours (compared with a mean of 170 hours of work in the summer quarter). It's a small effect, but not zero. And since student summer employment tends to be concentrated in low-wage industries like retail or hospitality, that makes sense. Turning to the effect of previous work experience, Wright et al. find that:

...higher wage income in winter and spring quarters when minimum wages increase only holds for students with prior work experience. However, there is statistically significant drop in employment in summer for both students with and without work experience. We estimate that a 100% minimum wage increase for workers with no pre‐matriculation work experience is associated with 115 fewer hours of work and a 38.8% point decrease in the probability of employment during the summer quarter. These estimates imply that the 16% minimum wage increase in 2017 corresponded with inexperienced students working 18.1 fewer hours and being 12.8% points less likely to be employed in the summer. These results are attenuated for those who entered WWU with work experience: a 100% minimum wage increase corresponds to 21.4% point reduction in summer employment for this group whereas the relationship between minimum wages and hours worked is negative but statistically insignificant.

The key finding is that students with no prior work experience and more negatively affected by the minimum wage increase than students with prior work experience. This is to be expected, since employers facing a higher minimum wage would be likely to concentrate employment in more experienced (and more productive) workers, even within summer student workers.

Next, comparing the effects between students who are local to Whatcom County and those who are not, Wright et al. find that:

...the negative relationship between minimum wages and summer employment only occurs for non‐locals, with estimates comparable to those experienced by students with no prior pre‐matriculation work history... Taken together, the full sample and quarterly results indicate that those with higher search costs may be more negatively impacted by minimum wage changes.

The mention of search costs here is important. In a search model of the labour market, workers face a search cost, made up of the time and effort spent looking for a job. Locals face lower search costs, because they likely have networks of local acquaintances and friends who can more easily help them find work, compared with non-locals. These results show that, in the context of higher minimum wages, those differences in search costs really matter.

Wright et al. are careful to point out that their results are correlations rather than causal. Specifically, their analysis lacks a control group. Nevertheless, it provides some descriptive evidence that is consistent with the emerging consensus of small but significant disemployment effects of the minimum wage. However, it would be interesting to see whether these results stood up to a more careful analysis using methods designed to elicit causal impacts. Nevertheless, Wright et al. conclude that:

Our results suggest that minimum wages particularly hurt inexperienced workers in summer, the quarter in which students tend to work most.

As someone who teaches students who rely on summer employment to build up reserves that they can draw on during term time, these results, even if they are not definitively causal, are a worry.

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases
• Minimum wage increases and employer noncompliance
• Higher minimum wages and poverty revisited
• Minimum wages and health
• Effects of the minimum wage on the nonprofit sector
• 15 years of US research on the minimum wage elasticity of employment
• Local minimum wages and low-quality housing rents in Japan

Minimum wages and alcohol consumption

There are several reasons to believe that higher minimum wages will affect alcohol consumption. First, higher incomes for those on the minimum wage gives them greater purchasing power. If alcohol is a normal good (which it is), then as their incomes increase people will consume more alcohol. On the other hand, higher minimum wages may lead to disemployment, especially among young people and those in the food and beverage industries. In that case, those workers without jobs have lower incomes and would consume less alcohol. However, losing a job (or not having a job) can be a stressful experience, and increase the incentives to drink alcohol as a coping strategy. And having a job that pays more due to a higher minimum wage may reduce financial stress and reduce the incentives to drink. Overall, there is a lot going on, and it isn't clear at all whether, overall, a higher minimum wage should lead to more alcohol consumption, or less alcohol consumption.

That's where this new article by Yihong Bai (Western University in Ontario) and Michael Veall (McMaster University), published in the journal Economics and Human Biology (open access), comes in. Bai and Veall use longitudinal data from the Canadian National Population Health Survey (NPHS) from 1994/95 to 2010/11, and look at how alcohol consumption is related to the province-level minimum wage (adjusted for inflation). Their full sample includes over 18,000 observations for a little over 4000 individuals in Canada. They measure alcohol consumption in six different ways: (1) whether each person is a drinker or not; (2) whether they binge drink at least once per month on average; (3) whether they are a 'heavy drinker' (defined by binge drinking at least once per week on average, or having average daily alcohol consumption [ADAC] of two drinks for men, or one drink for women; (4) average number of drinks over the last month; (5) number of binge drinking events over the last month; and (6) ADAC.

Bai and Veall apply a two-way fixed effects approach to identify the effects of the minimum wage on alcohol consumption, and find that:

...almost all the estimated coefficients are very small with reasonably tight confidence intervals that cover zero.

In other words, there is very little evidence that higher minimum wages increase alcohol consumption. However, that is based on the whole population, and minimum wages are more likely to affect low-income workers. Rather than looking at low-income workers directly, Bai and Veall look at low-education workers (being those with high school education or less), who are also more likely to be affected by minimum wage changes. For that group, they also find that almost all of the coefficients are not statistically significant. Another group that tends to be more affected by minimum wage changes is young people, and Bai and Veall report that:

We also estimate using samples for a sample of ages 21–25 and ages 15–20 and find no evidence of minimum wages increasing drinking. However, our confidence intervals are wide and this finding must be treated with caution.

One of the key issues with this paper is that they perform a large number of regressions (with six dependent variables), but don't adjust for multiple comparisons. This is important because the more comparisons they make, the more likely it is that some will turn out to be statistically significant just by chance. That's why I discount their finding that the ADAC decreases when the minimum wage increases. I doubt that it would be robust to an adjustment for multiple comparisons, and the ADAC results are inconsistent with the effects in the other models.

On the other hand, the two-way fixed effects approach is problematic and has attracted a lot of criticism recently (which is nicely outlined in two posts on the Development Impact blog, here and here, as well as this post). The short version is that the two-way fixed effects approach is likely to lead to biased estimates of the treatment effect - in this case, it would lead to a biased estimate of the effect of minimum wages on alcohol consumption. It isn't clear what direction the bias would lead.

So, by itself this paper doesn't give an answer to the question of whether minimum wages affect alcohol consumption or not, and if they do affect alcohol consumption whether minimum wages lead to an increase, or a decrease, in alcohol consumption. This research question is far from settled and is an area where future research would be useful.

Local minimum wages and low-quality housing rents in Japan

In this 2023 post, I discussed the impact of higher minimum wages on homelessness. Part of the story related to housing rents:

There are a couple of reasons to expect that higher minimum wages might increase homelessness. If minimum wages decrease employment (a result that is contested, but I believe it is likely given the galaxy of literature we have to date; again, see the links at the end of this post), then higher minimum wages may directly increase the risk of people becoming homeless. That's because when low-income people workers lose their jobs, they may no longer be able to afford to pay rent, and may lose their homes. Second, if minimum wages increase incomes for those that are not made unemployed, they may increase the demand for housing, pushing up rents. This may indirectly increase the risk of people becoming homeless, who can no longer afford the higher market rent.

The research that I referred to in that post found that higher minimum wages increased homelessness, and that they also increased housing rents, consistent with the mechanism outlined above. However, we shouldn't believe just a single paper's research findings. This 2021 article by Atsushi Yamagishi (Princeton University), published in the journal Regional Science and Urban Economics (ungated earlier version here), provides some additional evidence, this time from Japan.

Japan provides an interesting case study for examining the effects of the minimum wage on housing, because:

Japan has forty-seven prefectures and each has a different minimum wage rate. There is no difference in the minimum wage rate within a prefecture...

And on top of that, each prefecture has little control over its local minimum wage. Yamagishi notes that:

...the minimum wage setting in Japan is highly centralized and unresponsive to trends in local housing markets due to institutional features. Japanese prefectural minimum wages are determined by the following process. First, the central government classifies prefectures into four categories, and it assigns the targeted amount of minimum wage increase to each category. The categorization is reviewed only once every five years and changes in the classification are rare.

Yamagishi uses data from 2007 to 2013, and exploits an interesting natural experiment, where:

From 2007 to 2012, a new consideration took the primary role in setting minimum wages due to the national policy change... after the revision of the Minimum Wage Law in 2007, the primary consideration in setting the minimum wage rate became closing the gap between the quality of life of minimum wage workers and people relying on Public Assistance (seikatsu-hogo, PA henceforth)...

Since the gap was generally larger in urban areas, the policy resulted in a plausibly exogenous minimum wage increase in urban prefectures...

So, not only is there variation in minimum wages across prefectures, and that variation is not related to local housing markets, there is a change in the variation driven by the policy change. Yamagishi uses data on advertised apartment [*] rents from At Home, "one of the most popular online real estate search engines in Japan". Using both an event study research design and a difference-in-differences design, Yamagishi found that:

...low-quality apartments experience around a 2.5-4.5% rent increase in response to a 10% minimum wage increase.

When looking at differences by apartment quality (proxied by the age of the apartment, with 'old' apartments being over 25 years old and 'very old' apartments being over 35 years old), Yamagishi found that:

An old apartment experiences a rent increase of around 3.3% when the minimum wage increases by 10%, which is statistically significant at the 1% level. A very old apartment experiences an increase of around 4%, which is also significant at 1% level. Overall, the result reveals the larger impact on the rents of lower-quality apartments...

Of course, the key point here is that workers on the minimum wage are more likely to live in low-quality apartments than in higher-quality apartments. So, the takeaway from this paper is that higher minimum wages may make some workers better off in terms of higher wages (while also considering the disemployment effects of the higher minimum wage), but that the gains of those workers would be offset somewhat by higher rents. Yamagishi estimates that landlords gain between 7.5-13.5 percent of the increased minimum wage, but the assumptions necessary to arrive at that estimate are a little difficult to justify.

Nevertheless, the overall point stands. The minimum wage workers lose some of their higher minimum wage to higher rents.

[HT: Marginal Revolution, back in 2023]

*****

[*] As an interesting aside, Yamagishi notes that in Japan, 'apartments' are generally low quality. A high quality apartment is referred to as a 'mansion' (see here).

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases
• Minimum wage increases and employer noncompliance
• Higher minimum wages and poverty revisited
• Minimum wages and health
• Effects of the minimum wage on the nonprofit sector
• 15 years of US research on the minimum wage elasticity of employment

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).

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases
• Minimum wage increases and employer noncompliance
• Higher minimum wages and poverty revisited
• Minimum wages and health
• Effects of the minimum wage on the nonprofit sector

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]

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases
• Minimum wage increases and employer noncompliance
• Higher minimum wages and poverty revisited
• Minimum wages and health

Minimum wages and health

Picking up again on the theme of last week's posts about recent research on the minimum wage, this 2024 article by David Neumark (University of California-Irvine), published in the journal Labour (open access), reviews the literature on the impacts of minimum wages on health and health behaviours. It's somewhat of a systematic review, although it doesn't closely follow the PRISMA reporting guidelines. Nevertheless, it is a helpful summary of the literature relating minimum wages to health, which is important in light of statements such as this one from the American Public Health Association, claiming unambiguously that higher minimum wages would improve health.

As you might expect the reality is somewhat more nuanced. Neumark starts by pointing out why the effect of higher minimum wages on health is theoretically ambiguous:

The potential for higher minimum wages to improve health is clear, as a higher minimum wage unambiguously raises incomes for some workers (and their families). On the other hand, job loss can reduce income among other workers and their families... it is entirely possible that health benefits from income gains for some workers outweigh adverse health effects for others who lose their jobs, perhaps because there are almost certainly more income gainers than job losers. This net gain might be more likely if there was clear evidence that minimum wages raise incomes in lower income families (rather than for low-wage workers). However, the evidence on family income is ambiguous, in part because many minimum wage workers are not in poor or low-income families, and many low-income families have no workers...

That latter point relates to my most recent post on the effect of minimum wages on poverty, covering research by Burkhauser et al. that demonstrated (as has been shown before) that only a minority of minimum wage workers live in poor families. Neumark's review covers 63 published and peer-reviewed articles, mostly using US data, and mostly published in the last decade. He separated his review into sections on adult and teen health, infant and child health, diet and obesity, mental health, suicide, family structure and children, risky behaviour, crime (which seems a little out of place, but many studies that consider risky behaviour also consider crime), and mechanisms that can affect health (like access to health insurance). Neumark briefly summarises each paper, notes some of the positives and negatives of the methods employed, and draws a conclusion about how convincing (or otherwise) each study is (generally on the basis of the methods employed).

There is a lot to unpack in the review, and I'm not going to try to summarise it all here. Instead, here's what Neumark says in the concluding section:

...the evidence, even focusing on the more-compelling studies (which I do), is decidedly mixed. The evidence on overall physical health points in conflicting directions, and may lean toward adverse effects—possibly a reflection, in part, of the conflicting influences of minimum wages on factors that can affect health (related to how higher income is spent). In particular, research on the effects of minimum wages on diet and obesity sometimes points to beneficial effects, whereas other evidence indicates that higher minimum wages increase smoking and drinking and reduce exercise (and possibly hygiene). In contrast, there is rather strong evidence that higher minimum wages reduce suicides, perhaps partly consistent with the evidence on effects on other measures of mental health/depression being either positive or mixed.

Going a little farther afield, research on minimum wage effects on family structure and children indicates that mothers spend more time with children, provides no clear indication of changes in treatment of children, but point to declines in children's test scores—clearly a mixed picture. There are many good studies of the effects of minimum wages on crime, but the conclusions are mixed. Turning to channels of influence on health (most notably, health insurance), the stronger evidence points to declines in employer-provided health insurance, and other adverse effects on potential influences on health, but there is no clear evidence of effects on unmet medical needs.

When Neumark narrows his focus only to those studies where the evidence is most convincing, he concludes that:

...the mixed conclusions on how minimum wages affect health and related behaviors undermine the evidence base for concluding that the minimum wage is an effective means of improving health.

However, one thing that this review highlights is the comparative lack of research on the effect of minimum wages on health, particularly in comparison to, say, studies on the effect of minimum wages on labour market outcomes (of which there are many). It also highlights that few studies, even relatively recent studies, perform even basic supplementary analysis such as placebo checks on the effects of minimum wages on groups unlikely to be affected by higher minimum wages (such as those with high education), and many studies over-control by including unemployment, income, or poverty in their analyses. Clearly, there is substantial scope for additional research in this space. Indeed, in a footnote to the paper, Neumark notes that:

Effects of minimum wages on drug use, perhaps particularly opioids, could impact health and suicides (as well as other outcomes). This would be a natural question to consider. However, I have not found any such evidence.

So, not only is there scope to improve on the extant studies, there is also scope for studies on areas of health that have not been considered to date. Clearly, there will be more research to come on this theme.

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases
• Minimum wage increases and employer noncompliance
• Higher minimum wages and poverty revisited

Higher minimum wages and poverty revisited

One of the key purposes of a minimum wage is to decrease poverty. However, there is no certainty that poverty would be reduced by a higher minimum wage. In the simplest sense, we can think about several effects of higher minimum wages on poverty. Income goes up for those earning the minimum wage, and therefore poverty may decrease. However, if there is any disemployment (workers losing their jobs) resulting from the minimum wage, poverty may increase. Poverty may also increase if there is significant pass-through of higher minimum wages into prices (as noted in this post), increasing the cost of living for all households. So, whether higher minimum wages increase or decrease poverty, or don't affect poverty at all, is essentially an empirical question (and one that I have written about before).

Until relatively recently though, there was some general consensus among economists that the minimum wage is ineffective at reducing poverty. Aside from the offsetting effects I noted above, the minimum wage isn't really well targeted at the poor (consider, for example, the number of teens from relatively high-income families who work in jobs paying the minimum wage).

So, the lack of an effect of minimum wages on poverty was generally agreed on by economists. Until this 2019 article by Arindrajit Dube, published in the American Economic Journal: Applied Economics (open access), which claimed to show that there was a large effect of higher minimum wages on poverty in the US between 1983 and 2012. That Dube article got a lot of press at the time, and encouraged support for a much higher federal minimum wage, as encapsulated in the US Raise the Wage Act of 2021 (which died in Committee).

Dube's article also shook the consensus among economists, and thus it also attracted attention from other researchers. And unsurprisingly, some have looked closely at the analyses. This 2023 NBER Working Paper by Richard Burkhauser (Cornell University), Drew McNichols (Amazon), and Joseph Sabia (San Diego State University) is one such effort. As they explain:

This study revisits the relationship between minimum wage increases and poverty. We highlight four key results. First, we replicate and reassess the findings of Dube (2019), based on poverty data from the March 1984 to March 2013 CPS (corresponding to calendar years 1983-2012). After precisely replicating his estimates, we show that his results are driven by two specification choices: (1) the inclusion of macroeconomic controls (the state unemployment rate and per capita state Gross Domestic Product) that may also capture a mechanism through which the minimum wage affects poverty: its employment and hours effects, and (2) restricting treatment states’ counterfactuals to states within the same census division (“close controls”), even when geographically proximate states are rejected by a data-driven synthetic control approach to generate counterfactuals. When we (1) use the state house price index and the unemployment and average wage rate among more highly educated individuals to control for state macroeconomic conditions that are less likely to capture pathways through which minimum wages affect poverty in a difference-in-differences framework, or (2) allow states outside a treatment state’s census division to serve as potential donors in a synthetic control framework, we find no evidence of poverty-reducing effects of the minimum wage over the 1983-2012 period... The 95 percent confidence intervals around our preferred estimates rule out poverty elasticities with respect to the minimum wage of less than -0.138, which include central estimates reported by Dube (2019).

In other words, Burkhauser et al. show that Dube's results are not robust to several modelling choices that Dube made. When the models are run with different control variables, or with a different selection of control states, there are no negative effects of higher minimum wages on poverty. Also:

...when we explore the most recent decade of CPS data, which captures the years following the Great Recession (2010-2019), the contemporaneous and longer-run poverty findings reported by Dube (2019) are largely absent, including in models that use Dube’s preferred macroeconomic controls or controls for spatial heterogeneity. Specifically, we find no evidence that post-Great Recession minimum wage increases had a statistically significant or economically important effect on poverty.

So, Burkhauser et al. show that Dube's results are sensitive to the choice of the time period that the dataset covers. And then:

...when we combine the two data windows discussed above and amass our “full panel” from 1983-2019, we find little support for the hypothesis that minimum wage increases reduce poverty over this 37-year period. Estimated elasticities below -0.131 for non-elderly individuals (and below -0.129 for all persons) lie outside of our 95% confidence interval, which would rule out the central long-run estimate reported by Dube (2019). Our preferred estimate shows that a 10 percent increase in the minimum wage is associated with a (statistically insignificant) 0.17 percent increase in the probability of poverty among all persons.

So, using the broader dataset from 1983 to 2019, the effect of higher minimum wages on poverty is small and statistically insignificant. Finally, Burkhauser et al. reiterate earlier findings in the literature, by showing that:

...less than 10 percent of those whose hourly wage rate would be directly impacted by a $15 minimum wage live in poor families. Approximately two-thirds live in families with incomes over two times the poverty line and nearly half live in families with incomes over three times the poverty line.

Burkhauser et al. conclude that:

In summary, our findings provide little compelling evidence that raising the minimum wage will be an effective or target efficient policy tool for alleviating poverty.

Burkhauser et al.'s paper is a comprehensive and systematic take-down of Dube's earlier work. And, it reestablishes the earlier consensus - higher minimum wages do not reduce poverty (at least, in the US - the paper I discussed in this earlier post showed some short run, but not long run, effects on poverty in Brazil). As with all research, it pays not to overcorrect greatly on the basis of a single new research paper. Policy makers would do well to remember that.

[HT: Marginal Revolution, back in 2023]

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases
• Minimum wage increases and employer noncompliance

Minimum wage increases and employer noncompliance

As noted in yesterday's post, one of the ways that employers may respond to an increase in the minimum wage is to increase noncompliance (by paying a wage that is below the new, higher, minimum wage). Is there evidence for employers changing their behaviour on that margin? 

This 2022 article by Jeffrey Clemens (University of California at San Diego) and Michael Strain (American Enterprise Institute), published in the journal Labour Economics (open access), provides some evidence. They look at wage data from the Current Population Survey, where:

The first key piece of information is an indicator for whether respondents are paid on an hourly basis. When they are, respondents are asked for their hourly wage rates. When they are not, hourly wage rates can be inferred by dividing an individual’s usual weekly earnings by his or her usual weekly hours.

Using this survey data, Clemens and Strain are able to determine whether the hourly wage rate for each person in the survey is below the minimum wage in their state, suggesting that their employer was noncompliant with the minimum wage. To avoid overstating the amount of noncompliance, they only consider noncompliance in the case where the wage is more than 25 cents per hour below the minimum. 

Now, because of the potential for measurement error and other biases, the absolute level of noncompliance is not instructive. Instead, Clemens and Strain look at the changes in noncompliance when the minimum wage rate changes. They distinguish between large minimum wage rate changes (more than US$1), small minimum wage rate changes (less than US$1), and indexed rates (that change annually in step with inflation). Focusing their main analyses on workers aged 16 to 25 (who are most likely to be affected by changes in the minimum wage), they find that:

...a one-dollar increase in the minimum wage predicts, on average, a wage gain of 29 cents and a 3.6 cent increase in underpayment... On average across the country, we estimate that each dollar of minimum wage increase would, if applied nationally, have generated an increase in subminimum wage payment of roughly $1.16 billion and an increase in realized wage gains, among the employed, of roughly $6.86 billion. Our results thus suggest that compliance with the minimum wage is the norm, but that avoidance and evasion are nontrivial.

Comparing the different types of minimum wage rate change, Clemens and Strain find that there are:

...far larger increases in subminimum payment following increases that were enacted through new legislation than following increases that came about due to pre-existing laws that call for annual, inflation-indexed updates to states’ minimum wages.

In other words, when minimum wage rate changes are small and expected and can be planned for (as indexed minimum wage rate changes are), then noncompliance is low. However, when minimum wage rate changes are unexpected, and especially if they are unexpected and large, there are significant increases in noncompliance.

Finally, Clemens and Strain look at the effect of enforcement regimes, and find that:

...increases in the minimum wage predict larger increases in the prevalence of subminimum wage payment under strong enforcement regimes than under weak enforcement regimes.

This is quite a counter-intuitive result, which they explain in relation to models of enforcement, where:

...strong enforcement regimes encourage reporting and compliance when the minimum wage is low, such that enforcement is in the worker’s interest. If the minimum wage rises beyond the level an employer would be willing or able to pay, however, enforcement may cease to be in the worker’s interest. As the minimum wage crosses this threshold, reductions in compliance will tend to be larger under strong enforcement regimes because these were precisely the regimes in which workers had an incentive to report noncompliance at baseline.

So, states get higher noncompliance in strong enforcement states because higher minimum wages turn those states into weak enforcement states. In contrast, noncompliance is already higher in weak enforcement states and enforcement there cannot get weaker. I'm not sure that I find this argument convincing, as the way that the enforcement regimes (strong or weak) are defined in the data is not related to workers' actions, but to the penalties that minimum wage violators face, and the authority of enforcement agencies. These aspects would not necessarily be affected by the change in the minimum wage rate.

Aside from that, Clemens and Strain are very careful in presenting various robustness checks based on different samples of workers, and different types of models (as you would expect, if you read the article by Clemens that I referred to in yesterday's post). They are also quite worried by the potential for measurement error in wages (arising from people misreporting their wage, or their hours worked), but their additional analyses suggest that measurement error is not likely to be driving their results.

What we can take away from this article is that, again, employment is not the only margin along which employers adjust to a higher minimum wage. Some (not all) employers may respond by not complying with the higher minimum wage, leaving their workers working for a lower wage (but still working, at least). If the increase in noncompliance is large, then that would reduce any negative employment impacts of a higher 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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety
• How employers respond to minimum wage increases

How employers respond to minimum wage increases

In yesterday's post, I made reference to this 2021 article by Jeffrey Clemens (University of California at San Diego), published in the Journal of Economic Perspectives (open access). Clemens puts forward an interesting perspective on the debate about the observed employment impacts of the minimum wage (or lack thereof):

...I contend that controversies over the economics of minimum wages stem, to a surprising degree, from a common but under-considered assumption. The assumption of interest is that when studying labor markets, output prices and nonwage aspects of jobs (which include benefits and working conditions) can be taken as fixed. In standard diagrams of the labor market, this assumption implicitly underlies each supply or demand curve. When these curves are held fixed, output prices and nonwage aspects of jobs have also, whether implicitly or explicitly, been held fixed...

...textbook models of both perfectly and imperfectly competitive labor markets sweep many factors under the rug. Benefits, including employer-provided health insurance, account for around one-third of compensation costs... Working conditions, including safety measures and flexible schedules, can also have value to workers while generating costs to firms... In the jargon of undergraduate instruction, the ceteris paribus assumption (that is, “other things held constant”) that professors invoke when we draw labor supply and demand curves is unlikely to describe the real world.

Clemens then goes on to show how changes in the non-wage aspects of jobs affect employment, using the standard supply and demand model. I'm going to reproduce that here, but with a couple of modifications. First, I'll show an increase in the minimum wage in each diagram (Clemens shows changes without changing the minimum wage). Second, I'll explain the changes using the language I use in my ECONS101 and ECONS102 classes, to make it more familiar for my students (past and future - my first ECONS101 class for 2025 starts two weeks from today).

The standard demonstration of the effect of an increase in the minimum wage is shown in the diagram below. The equilibrium wage, W0, is the wage where the quantity of labour supplied (Q0) is exactly equal to the quantity of labour demanded (Q0). Economists say that the market clears. Every worker who wants to work for the wage W0 is able to find a job that pays W0. Now consider the effect of a binding minimum wage, WMIN1, which is higher than the equilibrium wage. The quantity of labour supplied increases to QS1, because more workers want to work (or because already-employed workers want to work even more) at the higher wage. The quantity of labour demanded decreases to QD1, because employers want to employ fewer workers as they are now more expensive. The difference between QS1 and QD1 is structural unemployment arising from the minimum wage. The decrease in employment as a result of the minimum wage is the difference between Q0 and QD1. If the government increases the minimum wage from WMIN1 to WMIN2, then the quantity of labour supplied increases even more (to QS2), and the quantity of labour demanded decreases even more (to QD2). Structural unemployment increases (to the difference between QS2 and QD2), and the employment impact of the minimum wage increases as well (to the difference between Q0 and QD2). The employment impact of the higher minimum wage (compared to the lower minimum wage) is the difference between QD1 and QD2.

Now consider alternative firm responses to an increase in the minimum wage. The first example that Clemens uses is pass-through of the increased costs onto consumers:

If demand for a firm’s output is not perfectly elastic, it can raise prices while losing some, but not all, of its customers. A price increase in response to a minimum wage increase is often called pass-through: that is, the minimum wage’s cost passes through the firm to its consumers. An increase in output prices implies an outward shift of the labor demand curve...

The demand curve shifts out to the right because, if the firm increases the price that it sells its output for, each worker now produces more value for the firm, and so the firm will want to hire more workers. This is shown in the diagram below. At the same time that the minimum wage increases from WMIN1 to WMIN2, the demand for workers increases from D0 to D3. Now, although the quantity of labour supplied still increases to QS2, the quantity of labour demanded only decreases to QD3. Structural unemployment increases, but by less (to the difference between QS2 and QD3), and the employment impact of the higher minimum wage (compared to the lower minimum wage) decreases to the difference between QD1 and QD3. 

Notice that firms' ability to pass-through the higher minimum wage onto consumers in the form of higher prices will make it more difficult to detect any employment impact. Not all firms can pass-through higher costs equally. Clemens notes that the price elasticity of demand for the firm's output matters:

Firms that produce widely traded goods or services may face large demand elasticities and thus have little capacity to raise prices. By contrast, firms that produce “nontradable” goods and services may face smaller demand elasticities and have more substantial scope for passing cost increases to consumers... Standard examples of non-tradables include beauty services, meals at restaurants, and home construction, which are more or less constrained to be provided where they are consumed. Pass-through may also depend on whether the minimum wage is increased at the city, state, or federal level. When a minimum wage increase is localized, there is greater scope for importing products from unaffected firms.

The second example that Clemens uses is 'non-cash compensation', which is essentially the additional benefits that firms provide to workers. These may include health insurance, contributions to retirement savings, travel allowances, a company vehicle, and so on. If firms respond to higher minimum wages by reducing the value of non-cash compensation, then this:

...can shift both the supply curve and the demand curve...

From the perspective of firms, lower noncash compensation implies a higher labor demand curve because it increases revenues net of nonwage costs. From the perspective of workers, lower noncash compensation implies a higher labor supply curve, since a higher wage is required to make employment attractive when nonwage benefits are lower.

These combined effects are shown in the diagram below (and we are now ignoring any pass-through of the higher minimum wage to consumers). The demand curve increases to D4, and the supply curve decreases to S4. The overall effect of the higher minimum wage, compared with the lower minimum wage, is no effect on either the quantity of labour supplied (which remains QS1) or the quantity of labour demanded (which remains QD1), and so there is no effect on structural unemployment and there is no effect of the higher minimum wage on unemployment (compared with the lower minimum wage). However, this outcome is purely an artefact of how I have chosen to draw the diagram (as was the case in Clemens' article). If the effect of lower non-cash compensation was larger for workers than shown in the diagram, then the shift in supply will be larger, and structural unemployment will increase (although the employment impact of the minimum wage would still be unaffected). The reverse is true for a smaller effect for workers. And, if the effect of lower non-cash compensation was larger for employers than shown in the diagram, then the shift in demand will be larger, and structural unemployment will increase (and the employment impact of the minimum wage would be negative). The reverse is true for a smaller effect for employers (and in that case the employment impact of the minimum wage would be positive). [*]

Finally, Clemens discusses employer changes in 'productive disamenities' and 'unproductive amenities':

Conceptually, a firm facing minimum wage increases might seek to offset some of the increase in costs by raising productive disamenities (like effort requirements) and reducing unproductive amenities (like the quality of office furniture). As with changes in noncash compensation, these changes will shift both the supply curve and the demand curve...

Increases in productive disamenities... imply upward shifts in the labor demand curve (due to an increase in marginal product) and upward shifts in the labor supply curve (due to an increase in disutility from work effort).

I'm not going to draw a new diagram for this situation, as the third diagram above already shows the effect of increasing the demand for labour (which would happen if firms increased productive disamenities) and decreasing the supply of labour (which would happen if firms decreased unproductive amenities). Clemens notes that there is little empirical evidence 

...little, if any, empirical evidence on the minimum wage’s effects on scheduling, workplace safety, workplace comfort, and other related margins.

However, Clemens' article was published in 2021, and the literature has moved on. These firm responses relate directly to the new empirical evidence I discussed in yesterday's post about workplace safety. The Davies' et al. paper showed an increase in workplace injuries, and suggested that it arose because of firms demanding increased effort from workers (an increase in a productive disamenity). The Liu et al. article showed an increase in workplace injuries, and instead suggested that it arose because firms were spending less on workplace safety (a decrease in an unproductive amenity).

Finally, Clemens turns to other adjustments that firms might make, including changes in profits, firms shutting down, changes in job design and production technologies, and firms' compliance with the minimum wage (the latter of these will be the subject of my post tomorrow). It is clear that there are many ways that firms can respond to a higher minimum wage, and that changes in employment are not the only relevant margin that researchers should be considering. In fact, changes on these other margins may cause researchers to erroneously conclude that there are no employment effects of a higher minimum wage, when they solely focus on the number of jobs.

[HT: Marginal Revolution, which reminded me that I hadn't read the Clemens article]

*****

[*] I haven't drawn all of these alternative scenarios, but I am confident that you can imagine smaller or larger shifts in the demand or supply curves, and their effects. Otherwise, this would turn into an even longer post than it already is!

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
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness
• New York restaurants find a new way to respond to the minimum wage
• The minimum wage and workplace safety