UC Irvine prof. wonders if 200,000 jobs lost to minimum wage increase is a good thing

An economics professor at the University of California, Irvine estimates that state and local minimum wage increases have cost up to 200,000 jobs since the Great Recession, but says the figure must be evaluated against the benefits to those who manage to keep their jobs.

In a report published Monday by the Federal Reserve Bank of San Francisco, David Neumark, who directs UC Irvine’s Center for Economics and Public Policy, discusses the “conflicting evidence” on the minimum wage issue, explaining that “the evidence suggests that it is appropriate to weigh the cost of potential job losses from a higher minimum wage against the benefits of wage increases for other workers.”

Neumark begins by pointing out that standard economic models expect that minimum wage increases will generally lead to job losses, particularly for teenagers and other low-skilled workers. Not only does a higher cost of labor encourage employers to substitute other inputs like machinery for human labor, he explains, but it also leads to “labor-labor substitution,” whereby high-skilled workers displace low-skilled workers and obscure the actual job losses among those the minimum wage hike was primarily intended to help.

While those predictions are purely theoretical, Neumark also examines previous research into the real-world consequences of minimum wage increases and finds support for the theory.

The earliest studies, he notes, were determined based on national data that for every 10 percent increase in the wage floor, employment for low-skilled workers declines by between 1 and 2 percent. More recent studies, however, have offered conflicting conclusions.

The authors of a 2009 research paper, for instance, argue that while their data showed a negative correlation between minimum wage increases and employment, they believed the true effect was closer to zero, because “they suggest that the biases of authors and journal editors make it more likely that studies with negative estimates will be published.” Neumark, though, cautions that “it is impossible to rule out an alternative interpretation—that peer review and publication lead to more evidence of negative estimates because the true effect is negative.”

Another strand of research has suggested that the employment effects of minimum wage increases are minimal when examined in the context of a specific geographical area, but Neumark claims the findings of those studies are confounded by local factors, such as positive economic shocks, that obscure the actual consequences.

Overall, he determines that despite the contrary examples, the existing body of research strongly supports the notion that minimum wage hikes cause job losses for low-skilled workers, observing that “nearly two-thirds of the more than 100 newer minimum wage studies, and 85 percent of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers.”

“Despite the evidence of job loss, policymakers and the voting public have raised minimum wages frequently and sometimes substantially in recent years,” Neumark writes, noting that 23 states have raised their minimum wages since the last federal increase in 2009.

In those states, he finds that “minimum wages were roughly 20.6 percent higher in 2014 than in 2007, compared with a 16.5 percent increase in average hourly earnings over the same period,” meaning the wage floor has grown a little more than 4 percent faster than have salaries determined in a more-free labor market.

Using a conservative estimate of the job loss effects of those minimum wage hikes drawn from the research, Neumark calculates that minimum wage increases cost teenagers and young adults (16-24 years old) approximately 75,600 jobs between 2007 and 2014, adding that the figure “could easily be twice as high” when older, low-skilled workers are included.

“Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession,” he concludes.

Neumark also claims that “this is a small drop in aggregate employment that should be weighed against increased earnings for still-employed workers because of higher minimum wages,” but says an examination of how the minimum wage affects income inequality and poverty will have to wait for his next missive.

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