January 27, 2016

New evidence quantifies disemployment effects of minimum wages

As cleverly explained by Professor Donald Boudreaux earlier this month on his blog Cafe Hayek, just as no physicist can deny dropping coins into a pool raises the water level, no economist can deny that raising minimum wages creates disemployment:
The principal practical economic argument against the minimum wage is that it puts some low-skilled workers out of jobs. The core of economic theory informs us of this result, in the same way that the core of physics tells us that a dime dropped into an Olympic-sized swimming pool causes the water level of that pool to be higher than it would be had the dime not been dropped into it – and no amount of failure to detect empirically the resulting rise in the water level will cause physicists to doubt that a dime dropped into a body of water causes the water level to rise. (Howls would greet any physicist who said “Well, physiometricians keep studying the dropping of dimes into big pools – real-world pools that have swimmers and divers constantly going into and out of them – and these physiometricians very often, although admittedly not always, find empirically that these dropped dimes have no effect on the water level of the pools. So, being a data-driven physicist, I conclude that a dime dropped into a real-world big swimming pool does not displace water in those pools. I am, I repeat, driven scientifically by facts and not dogmatically by theory!”)

Unlike with physics (because the economy is a vastly more complex phenomenon than is the physical universe), what the core of economic theory does not reveal is the magnitude of the job losses. Will the implementation today in Someplace, USA, of a minimum wage of $X.YZ destroy 1% of the current number of jobs in Someplace? Ten percent of these jobs? Eighty percent? One-twentieth of one percent? That’s an empirical question that no amount of a priori theorizing can answer. 
Given that minimum wages undeniably cost jobs, it is unsurprising that most empirical studies confirm the theory.

A paper by David Neumark and William Wascher in 2006 looked at close to 100 studies examining the impact of minimum wages on employment. Here’s what Neumark and Wascher found:
Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.
How significant are the employment losses caused by minimum wages? Quite significant, according to a recently study published by the National Bureau of Economic Research.

The study examined the employment effects of increases in the U.S. federal minimum wage from $5.15 in 2007 to $7.25 in 2009. The findings of the study are summarized by Charles Lammam and Hugh MacIntyre of the Fraser Institute thusly:
It finds that increasing the minimum wage had a significant negative impact on the employment rate of low-skilled workers. In fact, hiking the minimum wage reduced the employment rate among this group by 5.6 percentage points from 2006 to 2012 (the employment rate for low-skilled workers in December 2006 was 40 per cent).

In addition to a drop in the employment rate, the study finds that minimum wage hikes had other negative employment effects. For example, the minimum wage hikes led to a drop in the average number of hours per week worked by low-skilled workers of between 1.7 hours and 1.8 hours, the latter representing a 17 per cent decrease. Even workers who kept their jobs saw a decrease of 1.3 hours worked per week. Another consequence is that the average weekly earnings of low-skilled workers fell by $15 in the short-term (one year) and $13 in the medium-term (a little more than three years).
Unfortunately, as the Fraser Institute laments, despite the ever-mounting body of evidence showing the significant economic disadvantages of minimum wage increases, and in particular the severe disemployment effect on young and unskilled workers, Canada's provincial governments are forging ahead with reckless minimum wage increases.

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