The Minimum Wage and Employment: Does the Minimum Wage Decrease Employment?

By Miles Williams

B.A. (History & Political Science; Philosophy), Greenville College

Political Science Graduate Student, Eastern Illinois University 

I often hear pundits and politicians debating—sometimes ad nauseum—the purported effects of raising the minimum wage.  Won’t raising it hurt employers and cause a rise in unemployment?  Or, wouldn’t an increase in wages filter into an increase in worker’s disposable incomes and thus drive consumption of goods and increase the demand employers have for workers?  When talking politics around the watercooler (or on CNN, Fox, ABC, NBC, CBS, etc.), people often generalize about abstractions.  Sometimes a number or a factoid will be thrown into the dialogue, but usually with far from objective intentions.  As someone on his way to becoming a political scientist (not a politician) I have to wonder whether there’s any truth beyond the politics. 

              The key difference between a political scientist and a politician is that the latter tries to get others to go along with how they think the world ought to be, while the former tries to explain how the world is as it is.  A political scientist, therefore, is to be a scientist.  As a scientist, a political scientist is to, as far as he or she can, try to examine political phenomena in a way that is valueless.  By valueless, I don’t mean “meaningless.”  I mean that political scientists should put aside any political, philosophical, ideological, and religious agendas that they may have when they look at the world.  Doing so is not always easy, or even entirely possible.  Nevertheless, the political scientist must try, just as I will try as I examine the issue of raising the minimum wage, to be objective.

What Have Other Researchers Said?

In general, the research seems a bit mixed as to whether raising the minimum wage has positive or negative effects.  Some contend that increases in unemployment due to increases in the minimum wage are nonexistent when one controls for certain factors (Dube, Lester, and Reich 2010).  According to a report from the Center of Economic and Policy Research by Schmitt (2013), the majority of extant evidence suggests that “modest increases in the minimum wage” have hardly, if any, effect on employment.  Schmitt indicates that this finding likely results from decreased labor turnover, increases in organizational efficiency, decreases in wages for higher earners, and small price increases for goods in response to minimum wage increases.  Manning (2012) concurs, arguing in a report for the Resolution Foundation that little evidence suggests increases in the minimum wage have a negative impact on both employment and wage distribution.  Moreover, after examining labor markets with relatively high minimum wages, he concludes that there is no “major reason for concern;” although, he does caution that such positive evidence does not provide us with “significant confidence to experiment with a much higher national minimum wage.”  It is worth noting that Manning makes his case in reference to the U.K.’s national minimum wage, but this fact need not necessitate the exclusion of his findings for those of us across the pond.

              Some other research indicates, however, that raising the minimum wage has few positive effects on employment (Rocheteau et al. 2007; Neumark, Salas, and Wascher 2013).  In fact, Meer and West (2013) argue that when one looks at the long-term growth impact of increasing the minimum wage, as opposed to simply looking at its short-term effect on employment levels, one observes a reduction in job growth over the course of several years, particularly for younger workers and those working in industries that employ a large percentage of low-wage earners.  I would, however, argue that a reduction in growth does not by definition mean a decline in jobs.  Nevertheless, reduced growth is, by various standards, not as good as increased growth. 

A 2014 report by the U.S. Congressional Budget Office indicates that increasing the minimum wage would have the positive effect of raising the income of low-wage workers, and by default their families; but, concomitant to this improvement for many would be the elimination of some jobs.  The balance between the two is, according to the report, related to the magnitude of minimum wage increase.  Of course, much of the literature would disagree with this Congressional report regarding its claim that raising the minimum wage would result in the elimination of certain jobs (however, and again, the research on this subject is mixed). 

What to Make of This Discrepancy

One could argue that, in light of the evidence, moderate yearly increases in the minimum wage should at the very least not have a harmful effect on employment.  Moreover, doing so would potentially have the benefit of raising wages for many families, thus raising the standard of living for several disadvantaged groups.  However, as Sherk (2012) contends, a great deal of empirical evidence suggests that increases in the minimum wage in fact reduce the chances disadvantaged workers have for employment while having a less pronounced effect on overall employment.  Sherk cites an interesting case study of a large retail chain:

“When the minimum wage rose, the chain slightly reduced overall employment.  Surprisingly, however, teenage employment rose in several stores.  These teen employment gains came at the expense of larger job losses among adults.  The composition of teenage employment also changed, with more teens coming from wealthier neighborhoods and fewer from low-income neighborhoods.  They crowded many low-income adults and youth out of jobs.”

Moreover, as Sherk contends:

“Higher minimum wages encourage employers to replace less-skilled workers with more productive employees.  Given the choice between hiring an unskilled worker for $10.10 an hour and a worker with more experience for the same rate, companies will always choose the more experienced and productive employee.”

Sherk further argues that many of the purported net benefits for low-wage workers fall into obscurity when one factors in tax and welfare policy.  Many of the programs that benefit low-income earners, such as SNAP, TANF, and EITC, child-care subsidies, and many others, phase out as income rises.  Also, an increase in pay means an increase in payroll and income taxes.  The issue here for Sherk is not that such reductions in welfare benefits and increases in taxes are inherently bad; rather, he argues that

“Congress did not coordinate these benefit phase-outs across programs.  Consequently low-income workers can face very high effective tax rates as they lose benefits from multiple programs.  Consider workers both losing SNAP benefits and landing in the EITC phase out range.  For each additional dollar they earn they pay 15 cents in additional payroll taxes, 15 cents in income taxes, an average of 5 cents in state income taxes, as well as losing 21 cents of their EITC benefit and forgoing 24 cents of SNAP benefits – an effective marginal tax rate of 80 percent.  Each extra dollar earned increases their net income by only 20 cents.  Not even millionaires pay such high tax rates.”

It Is What It Is

As already discussed, a political scientist’s job is to, effectively, “tell it like it is” in such a way that minimizes any biases and ideological leanings that may obscure his or her view.  As a political scientist-in-training, I have attempted to do just that for minimum wage.  What have I discovered? 

1. Raising the minimum wage (if done moderately) has few, if any, negative effects on overall employment.
2. Raising the minimum wage does have potentially negative effects for low-income workers (the very people policymakers are trying to help by raising the minimum wage).
3. One cannot simply raise the minimum wage to help disadvantaged workers.  One must also contend with, and properly coordinate, taxes and welfare programs in conjunction with increasing the minimum wage in order to eliminate any disincentives low-wage earners have for increasing their pay.
4. Even if raising the minimum wage is properly done, the problem of disadvantaged workers losing out to more skilled and advantaged workers is still not resolved.

As the cliché goes, more research needs to be done.  None of my conclusions are definitive by any stretch of the imagination.  Science, in addition to being (ideally) objective, is tentative.  I could be wrong in part or whole, but my conclusions seem to make sense in light of my research.  Now, I leave it up to you the reader to do something with this info (maybe you could make a claim about how things ought to be).  Meanwhile, I have to go back to making claims about what is.

Resources Cited

Dube, Andrajit, T. William Lester, and Michael Reich.  2010.  “Minimum Wage Effects Across State Borders:  Estimates Using Contiguous Counties.”  The Review of Economics and Statistics (November):  945-964.

Manning, Alan.  2012.  “Minimum Wage:  Maximum Impact.”  Resolution Foundation (April).

Meer, Jonathan and Jeremy West.  2013.  “Effects of the Minimum Wage on Employment Dynamics.”  NBER Working Paper No. 19262 (August).

Neumark, David, J.M. Ian Salas, and William Wascher.  2013.  “Revisiting the Minimum Wage-Employment Debate:  Throwing Out the Baby with the Bathwater?”  NBER Working Paper No. 18681 (January).

Rocheteau, Guillaume and Murat Tasci.  2007.  “The Minimum Wage and the Labor Market.”  Federal Reserve Bank of Cleveland (May).

Schmitt, John.  2013.  “Why Does the Minimum Wage Have No Discernible Effect on Employment?”  Center for Economic and Policy Research (February).

Sherk, James.  2013.  “What is Minimum Wage:  Its History and Effects on the Economy.”  The Heritage Foundation (June). 

2014.  “The Effects of a Minimum-Wage Increase on Employment and Family Income.”  Congress of the United States, Congressional Budget Office (February).