How the Minimum Wage Destroyed 1.4 Million Jobs
This past Thursday, the Service Employees International Union (SEIU) organized a series of protests across the country demanding higher minimum wages. This is of course not a new push: President Obama backed a 40% increase in the federal minimum wage earlier this year. Senate Republicans successfully blocked the passage of a bill along those lines, thereby keeping the 500,000 jobs, the Congressional Budget Office estimated it would have cost, from being destroyed. With the elections over, and Republicans securely in control of both House and Senate, we can probably rest assured that the federal minimum wage will not increase for the next two years.
But there is a reason why elected officials keep bringing it to the limelight, especially in even-numbered years: increases in the minimum wage poll quite well, despite the damage they would do if enacted. Large majorities of Americans, including majorities of self-identified Republicans, routinely express their support for raising the federal minimum wage to $8.25, $9, or even all the way to the President's preferred $10.10. And it sounds so reasonable: why not give hard-working people a raise? Well, let's walk through some new empirical evidence showing why doing so is a bad idea.
In 2007, Congress passed a series of minimum wage increases that president Bush signed into law. The last increase, raising the federal minimum wage from $6.55 to $7.25, took effect on July 24, 2009. Some states had minimum wage laws on the book that already mandated a wage higher than $7.25, so those states weren't affected by the new federal law. In a new research paper, Michael Wither, a Ph.D. candidate at the University of California, San Diego (UCSD), and his adviser, UCSD economics professor Jeffrey Clemens (disclosure: one of my classmates in graduate school) use the differences between these two groups of states to estimate the impact of this minimum wage increase. They do so by looking at two different groups of workers. One group, the "target" group as they call it, made less than $7.50, on average, during the previous year. The other group, the "control" group, made between $7.50 and $10 in the year before the new federal minimum wage kicked in.
So what did happen after July 24, 2009? In the states that already had high minimum wages, we shouldn't expect much to change: the difference between the target and control groups should remain steady. In the other states, on the other hand, workers in the target group are no longer allowed to accept some of the jobs they used to hold, as some of those jobs used to pay less than the new minimum wage. Compared to the control group, we should expect their wages to go up, on average, as long as they find jobs, but we would also expect them to find employment less often.
And that is precisely what happened. Clemens and Wither find that after July 2009, a smaller percentage of low-skilled workers in the affected states made less than $7.50 an hour, but they also find that a smaller percentage of them did not manage to find any employment whatsoever. After a year, in the midst of rough economic times, the targeted workers found themselves 6 percentage points less likely to have a job, thanks to the well-intentioned efforts of the United States Congress. Remember that we know the local economy wasn't to blame: that's what our control group was for. And we know it wasn't the national economy, or broad labor market trends: none of this happened in the states that already had higher minimum wages.
The damage done by minimum wage increases doesn't stop here though: it is not just low-education workers who are replaced by machines or whose employers go out of business. When Clemens and Wither look at the background of individual workers and how they fared, they find intriguing effects on low-wage, entry-level workers who have some college education. These workers do not just lose jobs; they are also more likely to work without pay, as businesses turn entry-level jobs into internships. Both the lost jobs and the additional internships lower the workers' pay down the road, as they accumulate less valuable work experience. Two years down the road, Clemens and Wither find that the targeted workers had seen their likelihood of clearing $1,500 per month, what you might consider entry into middle class earnings, reduced by 5 percentage points.
These negative consequences of raising the minimum wage all harm precisely those workers who are most vulnerable, and for no good reason. Sure, some people see their earnings rise, but that could be accomplished in a different way as well. As an example, look at the Earned Income Tax Credit (EITC). The EITC, by design, targets only the poor, as opposed to teenagers from middle-class families who happen to hold minimum-wage jobs. Research has also demonstrated that the EITC raises the employment of low-skilled workers by making work more attractive to them by raising their effective wages, instead of eliminating their jobs. One of the most worrisome findings Clemens and Wither report is that the minimum-wage increases of the late 2000s lowered the employment-to-population ratio of working-age adults by 0.7 percentage point. That's 14 percent of the total decline during that period, or some 1.4 million people - a staggering figure during a once-in-a-lifetime economic crisis, and hopefully a sufficiently strong warning for those considering more of the same poisonous medicine.