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Does Higher Minimum Wage Reduce Jobs?
Arindrajit Dube: Research shows raising minimum wage does not impact job loss in short or long term.
Oct. 7 – TRNN As the November elections near, The Real News looks at strategies to increase purchasing power to stimulate the economy. In an interview with The Real News, Arindrajit Dube, labour economist and Assistant Professor of Economics at University of Massachusetts, said that increasing the minimum wage in some areas has not reduced jobs as expected by the conventional theory.
Dube’s research looks at the effects of minimum wage differentials across state boarders where the minimum wage is higher on one side of the boarder than the other. His research looks at the service industry, which he said employs the majority of minimum wage workers. According to his findings, both the short and long term effects of the increased wage on unemployment were negligible.
“And that, I think, is an important factor to keep in mind for policy makers as they consider raising the minimum wage,” he said.
Dube said the conventional wisdom surrounding minimum wage comes from research done before the early ‘90s. The theory is that jobs will be lost because employers, having to pay each employee more, will reduce the number of employees to offset the cost.
Dube told TRNN that around the early to mid ‘90s some economists realized these studies were badly flawed, and began looking at local evidence instead of just national evidence. The famous work of labour economists David Card and Alan Kruger looked at the boarder of New Jersey and Pennsylvania when New Jersey raised its minimum wage. Within a year, he said, not only had employment in New Jersey not decreased, it had actually risen in some groups.
He said the report received strong criticism from the economic community, but Dube’s studies apply this technique across boarders of all the states, over a twenty year period to track the effects in many cases, and for a much longer period.
“In that sense, we build on, but really generalize the Card and Kruger approach, and really address some of the serious criticisms that were made. And at the end of the day our results are actually strikingly similar to the original Card and Kruger finding, even though we were able to respond to pretty much, you know, all the criticisms that were levied against the single, kind of case study approach.”
Dube’s findings indicate that a higher minimum wage helps service retailers attract and retain employees, increasing their productivity. He said that a restaurateur, for example, is likely to reduce his employees when the wage goes up if only one restaurant raises their wage, but if most of them raise it, the added cost is passed on to the consumer who is likely to absorb it without decreasing their demand.
Dube’s findings are specific to the service industry, which is generally tied to a specific market and does not have the mobility that manufacturing jobs have. However, he said there are very few Americans left in manufacturing that receive the minimum wage.
His research includes tracking the effect of minimum wage increases during the recession. He said he found no difference in the effect of raised minimum wages during the higher unemployment of the recession.
He said the ‘spillover effect’, where rising the minimum wage pushes up other wages, has only been found to affect those earning up to 25 per cent more than the minimum wage.
Finally he added that work done by economists at the Federal Reserve showed minimum wage increase led to significant increases in purchases of durable goods.
“From a perspective of stimulating demand, minimum wages will tend to increase demand by increasing the purchasing power of those workers.”
To view/read full interview – Does Higher Minimum Wage Reduce Jobs?
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. As the November elections come ever closer, economics are at the heart of the fight. One of the questions that everyone needs to answer is: what is the cause of this recession? And most people come to the answer—at least most economists do—that lack of real demand is at the core of the issue. An economy driven by credit card debt is not sustainable. One of the ideas of how to increase demand has been to raise the minimum wage. Federal minimum wage now is $7.25. Some people have suggested taking it to $10 an hour. But we’re told by some people, some economists, a lot of politicians, you raise the minimum wage, you’ll kill jobs. Well, the question is: is that real? Now joining us from Amherst, Massachusetts, an associate of the PERI institute, and he teaches at the University of Massachusetts there, is Arin Dube. Thanks for joining us, Arin.
ARINDRAJIT DUBE, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you.
JAY: So you’ve just completed a study where you’ve looked at, if I understand it correctly, what you call contiguous counties, counties on either side of a state border, where one side the minimum wage is higher than the other, and you looked to see whether that affects employment rates or not. So what’d you find?
DUBE: That’s right. We looked across state borders, on two sides of the borders that have different minimum wages, and tracking that over 5, 6 years to see what happens to jobs, for instance, in restaurants, which is a sector that is an intensive user of minimum wage workers—or teens, about a quarter of whom actually are minimum wage workers as well. And the answers were somewhat surprising. We actually found absolutely no evidence of any kind of disemployment effect (in other words, jobs being killed) when the minimum wage went up, for the kind of minimum wage differences and changes that we have experienced in the United States. And this was over a very long (1990-2008) period of time. So, as I said, the short- and the long-run effects were actually negligible, and that, I think, is an important factor to keep in mind for policymakers as they consider raising the minimum wage.
JAY: Now, some of the sort of “common sense” logic that we would hear—I’m putting quotations around “common sense”—but at any rate, a restaurant has four workers, minimum wage goes up, and the restaurant owner says, well, you three are now going to do the work of four, ’cause I can’t afford all four of you anymore. Does that not happen?
DUBE: That might happen in some places. I’ll also tell you some other things that could happen. Some of the restaurants have really high turnover rates. They find it difficult to attract and retain workers. So one of the things that we find in some recent work is that the turnover rate in restaurants falls dramatically when the minimum wage rises. So, actually, employers find it easier to recruit and retain workers. That in turn tends to raise productivity somewhat. And then, finally, the restaurants—if a single restaurant has to pay a higher wage, then making less people do more is a more attractive and in some ways imperative reaction. On the other hand, if most restaurants actually face the same higher-wage standard, some of that actually is going to—some of the increase in wages are going to get passed on as higher prices to consumers who may be willing to pay a cent more for a burger or a couple of cents more for a burger and not necessarily reduce their demand. So all of these other channels are also at play besides simply the so-called law of demand, that if wages rise, jobs must fall.
JAY: Now, a lot of the literature or studies previously had come to somewhat different conclusions, that there was some evidence of job loss. What was different about your study?
DUBE: Right. So let me give you a quick synopsis. I think until about 1990 or so, the consensus in the economics profession was that there was a small but very clear negative effect of minimum wage on employment. In the early to mid ’90s, the profession realized that a lot of these studies are really badly flawed, and really moved away from using—just looking at national-level evidence to looking at more local evidence. Along those lines, a very famous study by David Card and Alan Krueger, two labor economists, now at Berkeley and Princeton respectively, decided to look at New Jersey and Pennsylvania, two states next to each other, when one state, New Jersey, increased its minimum wage. And they found that, looking within the span of a year after the passage of the minimum wage, employment in New Jersey, not only did it not fall compared to Pennsylvania, in fact in some ways it actually—or for some groups it actually rose. That was a very surprising finding, and it actually attracted also a very strong counter-response and criticism from parts of the profession. What we do in our study is to really generalize and sharpen the kind of approach that Card and Krueger took, by looking, really, right across the boarders of all the states, not just a single case study like the New Jersey and Pennsylvania; looking at over a 20 year period, or almost 20 year period, and allowing for not just what—not looking just at what happens to jobs a year after the passage, but much later after the passage, 5, 6 years. So in that sense we build on but really generalize in, like, the Carter and Krueger approach and really address some of the serious criticisms that were made. And at the end of the day, our results are actually strikingly similar to the original Carter and Krueger finding, even though we were able to respond to pretty much, you know, all the criticisms that were levied against a single kind of case-study approach.
JAY: Give us an example of two counties on either side of the border and what you found.
DUBE: As an example, if you look at counties across the Washington-Idaho border, there’s a fairly large difference in minimum wage, and that’s built up basically over the last 10 years. You have Coeur d’Alene on the Idaho side of the border, you have Spokane on the Washington side of the border, and looking across that, you don’t find the kind of reductions in jobs on the Spokane side that you would have expected if the conventional view were accurate.
JAY: So what’s the minimum wage in Spokane?
DUBE: Spokane today would be $8.52 an hour, which is the Washington minimum wage.
JAY: $7.25 on the other side?
DUBE: That’s right. But it actually—the difference was closer to $3 an hour just a few years back, because before the federal minimum wage went up from $5.15 to $7.25, Idaho just had the $5.15, and at that time Washington State had something close to $8 an hour. So you had basically a $3 difference in minimum wage—nothing to scoff at. And then—yet you did not find the kind of job losses that one would have expected.
JAY: Now, is it possible that because you’re particularly looking at fast food industry and restaurants, that it’s—I mean, they can’t really move. If you move the restaurant, you’ve just left your market. But if this same was applied to something more industrial where there’s a minimum wage, where you could move the manufacturing place somewhere else, would you come up with a different conclusion?
DUBE: I would have to imagine the answer is yes, to a certain extent. But that’s also the interesting point about minimum wage workers today: they largely are not in manufacturing. They’re—well, hardly anyone actually in the United States is, unfortunately. But certainly when you look at the minimum wage workforce, they’re largely in the service work. And these kind of service industries and low-wage service sector jobs are not mobile. I’ll give you an example. Besides looking at the state lines, we also look at San Francisco and neighboring areas, because San Francisco, the city of San Francisco, actually has a much higher minimum wage—close to $10 an hour—than the rest of California, which at this point is $8 an hour. It’s possible that when the wage goes up in San Francisco, maybe people end up going right down to Daly City to, you know, get a burger or something like that. So, if anything, when you look so close across the border, those kind of substitution effects are likely to be more likely to be pronounced. Even so, we don’t find any, which is, I think, fairly reassuring, that if basically the entire country or entire state raises the minimum wage, people aren’t going to actually drive fairly far away to get a burger.
JAY: Actually, that kind of argues anyway for a higher federal minimum wage, ’cause if the whole country had a higher minimum wage, it would eliminate this county or state-by-state competition anyway.
DUBE: Absolutely. Any time you have a even standard, there’s less possibilities for substituting across places. You can also make an argument that there should be some differences in states. Higher cost of living areas, such as California, may opt to have a somewhat higher wage standard than a lower cost of living area. However, it is true that, for [the] most part, you want to have a high minimum wage throughout the country to precisely not put one part of the country at a disadvantage, you know, versus another, even though, again, as I said, given the service sector nature of most minimum wage jobs, you know, it’s harder to actually, you know, pick up and move to a different state to produce the same product and services.
JAY: Did you look at all at the influence of a higher minimum wage on other wages?
DUBE: Yeah. So there is some spillover, and this is both my own work—as well, there’s work by others. The spillover effect—which is to say that when you raise the minimum wage, you not only increase the wages of those people earning right at the minimum-wage, but also people earning a little bit above—that goes for probably about 20 or 25 percent above the minimum wage, depending on some other factors. So you end up pushing the wage up for people. Imagine if the minimum wage is $8. You may end up pushing [up] wages for people who initially were making about $10 an hour, but not much more than that.
JAY: So—but it’s still—if one understands the need to raise real purchasing power, which everybody talks about, it’s kind of hard to comprehend why raising minimum wage isn’t one of the answers being talked about in this election campaign.
DUBE: Right. So there was very interesting work done by economists who are at the Federal Reserve, showing that minimum wage increases led to significant increase in purchases of durable goods—and, in fact, the implied multipliers were quite large. So from a perspective of stimulating demand, minimum wages will tend to increase demand by increasing the purchasing power of those workers. Well, the other side of it which is argued is that in a recession it’s a particularly bad time to raise the minimum wage, because on the one hand, you have this increase in purchasing power; on the other hand, raising the wages will cut jobs, even if it doesn’t cut jobs during a boom period. So we actually looked at what happens to the changes in minimum wages across different states, including during this recession, and we found no difference in the effect of the minimum wage on jobs in—depending on sort of the level of unemployment rate in that local area. So that again raised real question about some of the conventional wisdom that’s sometimes bandied around about minimum wages and jobs and recessions.
JAY: Thanks very much for joining us, Arin.
DUBE: Thank you. My pleasure.
JAY: And thank you for joining us on The Real News Network.
End of Transcript
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