Introduction:
Minimum wage is one of the most debated economic policies across the world. It aims to set a floor for hourly compensation for work and is legislated at federal and state levels in many countries. There are disputes regarding its impact on employment, economy, income equality and living standards. This research paper aims to analyze the existing research around minimum wage and discuss its effects. It will focus on the United States minimum wage history, debates and empirical evidence from studies.
History of Minimum Wage in the United States:
The minimum wage policy was first introduced in the United States through the Fair Labor Standards Act (FLSA) of 1938. It set the initial minimum hourly wage at $0.25. Since then, the minimum wage has been raised 22 times by Congress. In 1996, the federal minimum wage was raised to $5.15 per hour where it remained stagnant for over a decade. The most recent increase was in 2009 when it was raised to $7.25 per hour through the Fair Minimum Wage Act. Several states and some cities have set their minimum wages higher than the federal level. For example, California and Massachusetts have minimum wages over $12 per hour while Seattle and Washington D.C. have a minimum of over $15 per hour.
Debates around Minimum Wage: There are two broad schools of thought regarding the impact and appropriate level of minimum wage –
Supporters argue that raising the minimum wage would boost aggregate demand by putting more money in the hands of low-income consumers who are likely to spend most of their increased wages. It would help reduce income inequality and improve living standards of millions of low-wage workers. They cite research showing little to no impact on employment.
Critics contend that higher minimum wages increase the costs of low-skilled labor which incentivizes employers to cut jobs or reduce hours for some workers. Small businesses could find it difficult to afford and may have to raise prices. It can reduce opportunities for young and low-skilled workers to gain employment experience. Studies finding negligible impacts are challenged on methodological grounds. Critics argue for alternative policies like the Earned Income Tax Credit to help low-income families without job losses.
Empirical Evidence from Studies: There is a large body of academic research investigating the impact of minimum wage increases on employment, poverty and incomes. Here is a summary of some of the key studies –
Card and Krueger (1994) studied fast-food restaurants in New Jersey and eastern Pennsylvania and found no evidence that a raise in New Jersey’s minimum wage led to job losses. Two subsequent reanalyses by Neumark and Wascher disputed the validity of the results.
Dube, Lester and Reich (2010) conducted a meta-analysis of 64 US state-level minimum wage studies published between 1992 and 2007. They concluded that a 10% increase in minimum wage leads to a very small (0-0.5%) decrease in employment on average, with most studies finding little to no negative effects.
CBO (2014) estimated that raising the federal minimum wage to $10.10 per hour would reduce total employment by about 500,000 workers. Other studies have criticized the assumptions in this analysis.
Reich, Allegretto and Godoey (2017) reviewed more than 50 studies and concluded that raising minimum wage does not necessarily decrease jobs for low-wage workers and has modest effects, if any, on employment. Their meta-analysis found little to no evidence of negative employment effects of minimum wage.
Meer and West (2016) analyzed administrative payroll data from large US retail chains and found no systematic effects of minimum wage increases on employment, hours or average pay. Other studies on Seattle and San Francisco minimum wage hikes also found little to no impact on employment.
Aaronson et al (2019) studied data from a range of sources in Seattle and found that the citywide $15 per hour minimum wage did not significantly reduce employment or hours worked. For low-wage jobs it found modest disemployment effects. Analysis of other data points suggested some negative impacts on restaurant jobs and hours worked.
Several studies have found robust evidence that minimum wage increases significantly reduce poverty rates among workers without substantial disemployment effects. Doucouliagos and Stanley (2009) review of 60 US studies found strong evidence that minimum wages reduce poverty.
Wolfson and Belman (2019) conducted a literature review and found the vast majority of minimum wage studies show little to no effect of minimum wages on job growth and most show positive or no effects on employment and hours worked. Effects may differ for specific groups.
Conclusion:
Overall, the accumulated weight of evidence from dozens of empirical studies over recent decades suggests that moderate increases in minimum wage have little to no negative effect on the employment prospects of low-wage workers. While some studies find small disemployment effects for certain sub-groups, most credible research finds little to no impacts on overall employment. At the same time, there is strong evidence that minimum wage increases significantly reduce poverty and improve living standards of low-wage families. Businesses face higher costs which could impact prices or negatively impact specific sub-groups under some conditions based on a few studies. Given varying results, more research is still needed on differentiated state and local policy impacts. Policymakers need to weigh the trade-offs while considering minimum wage increases. But the preponderance of evidence challenges earlier assumptions that modest increases will significantly reduce jobs.
Andrew Stroud