Explaining the Small Employment Effects of the Minimum Wage in the United States

• Date: 01 October 2015
• DOI: http://doi.org/10.1111/irel.12106
• Published date: 01 October 2015
• Author: John Schmitt

Explaining the Small Employment Effects of the

Minimum Wage in the United States

*

JOHN SCHMITT

This paper reviews the most recent wave of research—roughly since 2000—on

the employment effects of the U.S. minimum wage and concludes that the weight

of evidence points to little or no employment response to modest increases. The

paper then examines eleven possible adjustments to minimum-wage increases that

may explain why the measured employment effects are consistently small. Given

the relatively low cost to employers of modest increases in the minimum wage,

these adjustment mechanisms appear to be sufficient to avoid employment losses,

even for employers with a large share of low-wage workers.

Introduction

The employment effect of the minimum wage is one of the most studied

topics in all of economics. This paper examines the most recent wave of this

research—roughly since 2000—to determine the best current estimate of the

impact of increases in the minimum wage on the employment prospects of

low-wage workers in the United States. The weight of that evidence points to

little or no employment response to modest increases in the minimum wage.

The paper also reviews evidence on a range of possible adjustments to mini-

mum-wage increases that may help to explain why the measured employment

effects are consistently small.

Empirical Research on the Minimum Wage

The volume of research on the employment impact of the minimum wage is

vast and a complete review is beyond the scope of this paper. Instead, I

provide a quick summary of the state of the U.S. debate as of the early 2000s

and then concentrate on the main developments over the last decade.

*The author’saffiliation is Center for Economic Policy and Research, Washington, DC. Email: schmitt@

cepr.net.

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547

Pre-2000s. In 1977, the Minimum Wage Study Commission (1981; here-

after MWSC) undertook a review of the existing research on the minimum

wage in the United States (and Canada), with a particular focus on the likely

impact of indexing the minimum wage to inflation and providing a separate,

lower, minimum for younger workers. Four years and $17 million later, the

MWSC released a 250-page summary report and six additional volumes of

related research papers.

1

In their independent summary of the research

reviewed in the MWSC, Brown, Gilroy, and Kohen (1982), three economists

who were involved in producing the MWSC report, distinguished between

employment effects on: teenagers (ages 16–19), where they concluded that a

10 percent increase in the minimum wage reduced teen employment, most

plausibly from between zero and 1.5 percent; young adults (ages 20–24),

where they believed the employment impact is “negative and smaller than that

for teenagers”; and adults, where the “direction of the effect ... is uncertain in

the empirical work as it is in the theory.”

2

Their summary of the theoretical

and empirical research through the late 1970s suggested that any “disemploy-

ment”effects of the minimum wage were small and almost exclusively limited

to teenagers and possibly other younger workers.

3

For a decade, the MWSC’s conclusions remained the dominant view in the

economics profession. By the early 1990s, however, several researchers had

begun to take a fresh look at the minimum wage. The principal innovations of

what came to be known as “the new minimum wage research”were the use of

“natural experiments”and cross-state variation in the “bite”of the minimum

wage.

Natural experiments sought to reproduce in the real world some of the fea-

tures of a laboratory experiment. In the context of the minimum wage, these

natural experiments typically measured the employment impact of a single

instance of a policy change (an increase in a state or the federal minimum

wage) by comparing a group of workers directly affected by the change (teen-

agers in a state where the minimum wage increased, for example) with a simi-

lar group that was not affected (teenagers in a neighboring state where the

minimum did not change).

1

For an overview of the workings of MWSC and a review of its main findings, see Eccles and Freeman

(1982). For a lengthy review of the MWSC’sfinding, prepared by three economists involved in preparation

of the MWSC report, see Brown, Gilroy, and Kohen (1982).

2

Brown, Gilroy, and Kohen (1982: 524). The employment impact on adults is uncertain in theory

because an increase in the minimum wage might encourage employers to replace some (presumably lower

productivity) teenagers with more (presumably higher productivity) adults.

3

Teens were a much larger share of the low-wage workforce in 1979 than they are in recent years (Sch-

mitt and Jones 2012).

548 / JOHN SCHMITT

Without a doubt, the most influential of the studies using a natural experiment

was Card and Krueger’s (1994) paper on the impact on fast-food employment of

the 1992 increase in the New Jersey state minimum wage.

4

In advance of the

1992 increase in the New Jersey state minimum wage, Card and Krueger con-

ducted their own telephone survey of fast-food restaurants in New Jersey and

neighboring Pennsylvania. They repeated the survey after the increase had gone

into effect and then compared the change in employment in New Jersey’s restau-

rants (the minimum wage treatment group) with what happened in Pennsylvania

(the control group). They found “no evidence that the rise in New Jersey’s mini-

mum wage reduced employment at fast-food restaurants in the state.”

5

The “new minimum wage”research also emphasized research methods

based on important differences in the “bite”of the federal minimum across the

states. Any given increase in the federal minimum, the thinking went, should

have more impact in low-wage states, where many workers would be eligible

for an increase, than it would in high-wage states, where a smaller share of the

workforce would be affected. Card, for example, divided the U.S. states into

three groups—low impact, medium impact, and high impact—according to the

share of their teenage workforce that would be affected by the 1990 and 1991

increases in the federal minimum wage. His analysis concluded: “Comparisons

of grouped and individual state data confirm that the rise in the minimum

wage raised average teenage wages .... On the other hand, there is no evi-

dence that the rise in the minimum wage significantly lowered teenage

employment rates ...”(Card 1992b: 36)

Card and Krueger’s (1995) book Myth and Measurement: The New

Economics of the Minimum Wage is the best (though early) summary of these

two strands of the “new minimum wage”research. Their detailed review of

studies using a variety of methods and datasets to examine restaurant workers,

retail employment, and teenagers, concludes: “The weight of this evidence

suggests that it is very unlikely that the minimum wage has a large, negative

employment effect”(Card and Krueger 1995: 389–90)

Myth and Measurement also inspired a considerable response from economists

more critical of the minimum wage. Neumark and Wascher’s (2008) book Mini-

mum Wages brings together much of this critique, with an emphasis on their own

work. In Neumark and Wascher’s assessment, the most reliable recent research on

4

Other important studies along these lines include Card’s (1992a) analysis of the impact of the 1988

increase in California’s state minimum wage and Katz and Krueger’s (1992) study of the impact of the 1990

and 1991 increases in the federal minimum wage.

5

Card and Krueger (1994: 792). Neumark and Wascher (2000) criticized Card and Krueger’s study,

arguing that the survey was poorly designed and implemented. Card and Krueger (2000) responded by

confirming their original results using payroll records from a virtual census of fast-food restaurants in New

Jersey and eastern Pennsylvania.

Employment Effects of the Minimum Wage / 549