Monday, December 08, 2014

New estimates of the effects of the minimum wage | Econbrowser

New estimates of the effects of the minimum wage | Econbrowser

A large literature has examined the effects on employment of raising the minimum wage, with different researchers arriving at conflicting conclusions. The core reason that economists can’t answer questions like this better is that we usually can’t run controlled experiments. There is always some reason that the legislators chose to raise the minimum wage, often related to prevailing economic conditions. We can never be sure if changes in employment that followed the legislation were the result of those motivating conditions or the result of the legislation itself. For example, if Congress only raises the minimum wage when the economy is on the rebound and all wages are about to rise anyway, we’d usually observe a rise in employment following a hike in the minimum wage that is not caused by the legislation itself. UCSD Ph.D. candidate Michael Wither and his adviser Professor Jeffrey Clemens have some interesting new research that sheds some more light on this question.

Clemens and Wither study the effects of a series of hikes in the federal minimum wage signed into law in May 2007. The first of these raised the minimum rage from $5.15 to $5.85 effective July 2007, the second from $5.85 to $6.55 effective July 2008, and the third from $6.55 to $7.25 in July 2009. They note that such legislation would be expected to affect some states more than others, since many states already had a state-mandated minimum wage that was higher than the federal. They therefore chose to compare two groups of states, the first of which had a state-mandated minimum wage of $6.55 or higher as of January 2008, with all other states included in the second group. The hope is that this gives us a kind of controlled experient, with the federal legislation effectively raising the minimum wage for some states but not others.

The hike in the federal minimum wage should also matter more for some workers than others. To allow for the latter possibility, Clemens and Wither considered two different groups of workers. The first group had an average wage in the 12 months leading up to July 2009 that was below $7.50, while the second group had an average wage over this period between $7.50 and $10.00. We would expect the legislation to matter more for the first group than for the second. The quasi-experiment is thus to compare the change in wages between low skill and slightly higher skill individuals between states that were affected by the federal legislation and those that were not.
The hike in the minimum wage thus appears to have raised the wage for low-skilled workers but made it harder for them to find jobs. Clemens and Wither conclude:
Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.

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