In a comment on my blog post about the proposed $15 federal minimum wage, frequent (and careful) commenter KevinDC quotes my statement:
Here’s what they found. The vast majority of studies, 79.3 percent, found that a higher minimum wage led to less employment.
He then comments:
I like the precise wording here by using the term “less employment.” One thing I’ve tried explaining to people is that is possible for increases in the minimum wage to decrease employment without increasing unemployment, because economists are bad at naming things in a way that make intuitive sense to people outside the field. (“Public goods? Obviously that means goods provided by the public sector, right?” “Market failure? That’s whenever I personally don’t like a market outcome, isn’t it?”) So, even in the case where particular study doesn’t find increased unemployment after a minimum wage hike, that doesn’t actually mean that the increase in the minimum wage didn’t decrease employment.
Well said, Kevin.
I want to add that the CBO study I cited makes this distinction also. Here’s a key paragraph:
Taking those factors into account, CBO projects that, on net, the Raise the Wage Act of 2021 would reduce employment by increasing amounts over the 2021–2025 period. In 2025, when the minimum wage reached $15 per hour, employment would be reduced by 1.4 million workers (or 0.9 percent), according to CBO’s average estimate. In 2021, most workers who would not have a job because of the higher minimum wage would still be looking for work and hence be categorized as unemployed; by 2025, however, half of the 1.4 million people who would be jobless because of the bill would have dropped out of the labor force, CBO estimates. Young, less educated people would account for a disproportionate share of those reductions in employment.
READER COMMENTS
Andrew_FL
Feb 22 2021 at 6:41pm
A few years ago I did a simple multiple regression on youth unemployment using only Prime Age unemployment and the deflated minimum wage (I used the quarterly GDP deflator and the ratio of intra-quarter months of CPI to quarters of CPI to give the deflator monthly granularity) the model strongly favored a rather large unemployment effect from increases in the minimum wage. You’ll definitely miss some of the disemployment effect by only looking at unemployment, but some people evidently do still stay in the labor force even when they’ve been priced out by a minimum wage increase.
Thomas Hutcheson
Feb 23 2021 at 7:15am
The distinction between fewer hours worked and “unemployment” strengthens the argument for the minimum wage, compared to no increase. If the 0.9% fall in quantity of labor demanded were spread uniformly among the persons whose wages will rise, no one would suffer a fall in income. [The distinction still leaves the higher EITC as a superior way to transfer income to low income workers, however, as the deadweight loss or the higher taxes needed to pay for the higher EITC would be less than the deadweight loss on firms paying the higher wage.]
A question for those who have studied this in some detail, is the CBO study only microeconomic or does it take account of the interaction of the higher minimum with obligation of the Fed to maintain maximum employment and price stability?
KevinDC
Feb 23 2021 at 10:46am
Hey Thomas –
The distinction I was drawing wasn’t about “fewer hours worked” vs “unemployment.” The distinction is about the difference between “decreasing employment” and “increasing unemployment.” In this context, “decreasing employment” doesn’t mean “fewer hours worked” – it means jobs lost. The point I was getting at was that increases in the minimum wage can cause net job losses in a way that doesn’t actually constitute an increase in unemployment, as these terms are usually defined and measured.
Extreme hypothetical with made up numbers to follow!
Imagine a town with 50 working age adults in the labor force. 45 are employed, and 5 are out of work and looking for jobs. In this case, the unemployment rate is 10% – 5 out of 50 people in the labor force are out of work and looking for a job. Now suppose the minimum wage doubles, and lets say that 3 people currently working lose their jobs and start looking for new work. But, in addition to this, the 5 people who were out of work before just give up. They couldn’t find anyone to give them a job when the minimum wage was half of what is is now – so they assume they’ve got no chance when the starting rate they’d have to be paid now has doubled. Now, the labor force is 45 adults, with 3 people out of work and looking for a job. The unemployment rate in this town has now decreased from 10% to 6.7% – even though the total number of people without jobs has actually gone up. In this scenario, a study on the effects of the minimum wage could say that the increase in the minimum wage caused a decrease in unemployment and it would be technically correct (the best kind of correct!). But if a non-economist were to hear this technically correct summary, they would wrongly conclude that it meant the minimum wage increase didn’t cause any job losses.
And this is why I appreciated the careful distinction between increasing unemployment and decreasing employment.
James Hammill
Feb 24 2021 at 8:29am
Raising the minimum wage would hurt normal working people that already make 15 or slightly more an hour. Imagine a grocery store that pays 8 or 9 an hour now would have to increase food prices to cover paying workers but there are businesses that don’t give employees raises or even cost of living increase every year so someone making 15 now is still making 15 but prices on everything have gone up but not their pay. A lot of normal working people would have to decide do I eat or have a place to live. Perfect example is before pandemic I was paying between 80 and 120 a week for groceries and now I’m paying 200 but my paycheck is still the same.
Craig
Mar 19 2021 at 1:01pm
I suspect it will hurt more people than that too. Right now the left is already letting it be known that $15/hr, to THEM, is a ‘compromise’ so they actually want more. So if you’re an employer currently paying $20, maybe $23/hr you are going to be wondering if you should expand or if the government is just going to turn around and arbitrarily raise it again. So, there’s that.
Right now if I were going to start a business where labor would need $18-$20/hr I wouldn’t start it. That’s just me, but the leftist signposts are everywhere. US is a place you probably don’t want to start a business right now.
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