While Louisville considers whether to increase its minimum wage in the face of federal and state inaction, there’s no question that many thousands of low-wage workers stand to benefit. But some are claiming that the city will also suffer from harmful job loss were it to take this action.
You often hear opponents claim that minimum wage increases will result in meaningful declines in employment. However, that’s based on outdated theories about the minimum wage that don’t match where much of the best empirical research has been pointing. As noted in a recent review of the literature, “economists’ understanding of minimum wage effects has undergone significant changes over the past 20 years.”
An influential study in 1994 led to a new wave of research on the subject; that paper looked at employment in fast food restaurants close to the New Jersey-Pennsylvania border after New Jersey passed a minimum wage increase, and found no measurable negative effect on jobs. The study was later generalized to nearly 300 bordering counties in states where one state had raised its minimum wage, and again no statistically significant negative effect was found. An analysis of 64 published academic studies containing 1,500 estimates of the impact of minimum wage increases found the bulk of the estimates clustered around employment effects of zero or near-zero.
As a result of this and other research, 600 economists including seven Nobel Prize winners and eight former Presidents of the American Economic Association recently signed a letter urging action to raise the minimum wage to $10.10 an hour (as proposed in the Louisville Metro Council), noting that “the weight of evidence now show[s] that increases in the minimum wage have had little to no negative effect on the employment of minimum-wage workers.”
There’s growing recognition that minimum wage increases do not automatically mean less employment because businesses can and do utilize a number of channels of adjustment in response to increases besides layoffs. The evidence suggests that the most common channels are the cost savings and increased productivity associated with lower labor turnover as a result of increased wages, improvements in organizational efficiency, reductions in wages of high earners and minor price increases.
While the research on local minimum wage laws is necessarily limited because only 14 cities or counties have passed such laws, many of them recently, there are three rigorous studies of their employment impacts:
- Dube, Naidu and Reich surveyed a sample of restaurants in and outside of San Francisco before and after the city’s minimum wage increase in 2004 and found “no statistically significant negative effects on either employment or the proportion of full-time jobs as a result of the San Francisco law.”
- Potter compared employment in Santa Fe before and after its 65 percent increase in the minimum wage in 2004 (from $5.15 to $8.50) and compared it to nearby Albuquerque. Potter also “found no statistically significant negative impact. . . on Santa Fe employment, both at an absolute level and relative to Albuquerque.”
- Schmitt and Rosnick analyzed the impact of these two cities’ laws on a variety of fast food, food services, retail and broader low-wage establishments—as well as firms of different sizes—and “found no discernible negative effects on employment, even three years after the respective ordinances were implemented.” This study also compared the cities to control groups of nearby suburbs and cities.
But what about that Congressional Budget Office (CBO) study saying the minimum wage would eliminate half a million jobs? A lot’s been said about that report, much of which is misleading.
CBO picked an employment impact estimate that is higher than a large and growing body of research says is likely. Even given that, CBO didn’t say that 500,000 people would lose their jobs; these are typically high-turnover positions, meaning any reduction would most likely happen primarily through attrition. CBO also put potential job loss in a range from a little over zero to 1 million, meaning they acknowledged the possibility of practically no job loss at all.
More importantly, CBO also said that 24 million low-wage workers stand to benefit from the proposed increase, including 16.5 million who otherwise would make less than $10.10 an hour and another 7.6 million who would make up to $11.50 but who stand to benefit from a ripple effect. That means CBO thinks 98 percent of those workers who are affected would be winners. CBO also detailed how the proposed minimum wage increase will help mostly adults and low-and middle-income families, reduce poverty and stimulate the economy when workers spend the extra wages.
Can anyone guarantee that there would be no fewer jobs as a result of a minimum wage increase? Of course not.
But it’s clear that many low-wage workers who struggle to afford the basics would get help. And views of the minimum wage among experts are changing because of the strength of evidence suggesting job loss is small or non-existent. It’s important that the conversation in Louisville take account of what that new research says.