Friday, August 22, 2014

22/8/2014: Minimum Wage and Employment: Recent Study

The effects of minimum wage laws on employment levels and employment prospects for various categories of workers are subject of voluminous literature in economics. Still, little consensus exists on whether higher minimum wages impede new jobs creation or destroy existent jobs or suppress earnings growth for lower wage employees.

A recent paper by Meer, Jonathan and West, Jeremy, titled "Effects of the Minimum Wage on Employment Dynamics" (June 26, 2012, http://ssrn.com/abstract=2094726) offers estimates "how the minimum wage affects both employment levels and dynamics... To do so, we employ the Business Dynamics Statistics, a long (1977-2009) panel of administrative data on the aggregate population of non-agriculture private-sector employers in the United States, broken out based on establishment location. These data offer the ability to examine gross job creation and destruction separately, an important advantage."

The authors first discuss "why even a carefully-designed study may not find a statistically significant effect of the minimum wage on employment levels":

1) "…Newly hired employees within a company are more likely to be paid minimum wage than are more senior employees. …It follows that minimum wage employees are likely to be relatively recent hires. …A direct implication is that minimum wage increases are most likely to affect workers who are (or would be) recent hires."

2)"…any reduction in new employment should also be reflected in total employment, so theoretically the decision of which of these outcomes to analyze is arbitrary. However, for estimates using a finite panel of real-world data, the distinction becomes much more important because the impact of an unrelated shock to total employment may easily overwhelm an effect of the minimum wage. Furthermore, …relatively rapid transitions to higher wages are common for minimum wage workers; we… calculate that nearly two-thirds of minimum wage workers who remain employed after one year earn more than the minimum wage. This illustrates the policy importance of focusing on the job creation margin; if higher minimum wages reduce employment entry by these workers, they never have the opportunity to develop the skills or tenure to earn even higher wages."

3) "…inflation can inhibit identification of statistically significant employment effects,
especially in studies relying on data from the 1970s-1980s, which experienced relatively
high rates of inflation. Historically, minimum wages have been set in nominal dollars and not adjusted for inflation, so any nominal wage differential between two states will become economically less meaningful over time."

4) "…sooner or later every state experiences a nominal increase in its minimum wage, either due to a revision to a state law or because the federal minimum wage increases. Unlike the slow erosion of nominal minimum wage gaps brought about by inflation, a discrete increase to the counterfactual's minimum wage may quickly close or even reverse this gap. To put this another way: in the long run, there is no permanent control group. This situation would not be problematic if the minimum wage affected employment in an abrupt, discrete manner. But if the minimum wage primarily affects new employment, then it may take years to observe a statistically significant effect on total employment."

So the authors conclude that "considered together, we believe that examining employee hiring and job growth directly provides for a more accurate assessment of minimum wage effects than examining total
employment. There are also theoretical arguments for why minimum wages are more likely to impact employment dynamics than employment levels."

The authors find that "…the minimum wage significantly reduces rates of job growth, that this occurs primarily through reductions in job creation, and that this effect is somewhat more pronounced in continuing establishments than for establishment births. We also find that the reduction in job creation cannot be attributed to reductions in employee turnover, as well as no effects on the entry and exit of establishments."

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