Pointing to evidence that minimum wages tend to be raised when labor markets are tight, this research suggests that, among nearby states that are similar in other respects, minimum wage increases are more likely to be associated with positive shocks, obscuring the actual negative effects of minimum wages.
Some new strategies in recent studies have also found generally stronger evidence of job loss for low-skilled workers. For example, Clemens and Wither compare job changes within states between workers who received federal minimum wage increases because of lower state minimums and others whose wages were low but not low enough to be directly affected.
How do we summarize this evidence? Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses.
Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.
Despite the evidence of job loss, policymakers and the voting public have raised minimum wages frequently and sometimes substantially in recent years. Since the last federal increase in , 23 states have raised their minimum wage.
In these states, minimum wages in averaged If these higher minimum wages have in fact lowered employment opportunities, this could have implications for changes in aggregate employment over this period. Figure 1 Percent difference between state and federal minimum wages, June Note that more states 31 had minimums above the federal level just before the Great Recession than do now Figure 2.
The average relative to the federal minimum was nearly three times as high at To compare the average change across states between and , I account for the smaller number of states with higher minimums in and their lower levels, and weight the states by their working-age population.
I find that minimum wages were roughly Thus, between the federal increases in —09 and recent state increases, the minimum wage has grown only slightly faster than average wages in the economy—around 4. Figure 2 Percent difference between state and federal minimum wages, June From the research findings cited earlier, one can roughly translate these minimum wage increases into the overall job count.
Some of the larger estimates are from studies that are likely to receive more scrutiny in the future. If we instead use the larger 16—24 age group and apply the smaller elasticity to reflect that a smaller share of this group is affected, the crude estimate of missing jobs rises to about 75, Moreover, if some very low-skilled older adults also are affected as suggested by Clemens and Wither , the number could easily be twice as high, although there is much less evidence on older workers.
Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about , to ,, relative to the period just before the Great Recession.
This is a small drop in aggregate employment that should be weighed against increased earnings for still-employed workers because of higher minimum wages. Moreover, weighing employment losses against wage gains raises the broader question of how the minimum wage affects income inequality and poverty.
This issue will be addressed in the next Economic Letter. Baskaya, Yusuf Soner, and Yona Rubinstein. Eventually, Congress acts to increase the minimum wage to bring it back in line with inflation—although, as Figure The reduction in the real minimum wage also leads to a reduction in unemployment, as shown in Figure Markets are a mechanism that allow individuals to take advantage of gains from trade. Whenever a buyer has a higher valuation than a seller for a good or service, they can both benefit from carrying out a trade.
This is how economies create value—by finding opportunities for mutually beneficial trades. The minimum wage interferes with this process in the unskilled labor market. It reduces employment, which is the same as saying that fewer transactions take place. Because each voluntary transaction by definition generates a surplus, anything that reduces the number of transactions causes a loss of surplus. We can represent that inefficiency graphically.
Toolkit: Section You can review the different kinds of surplus, as well as the concepts of efficiency and deadweight loss, in the toolkit. With no minimum wage a , all the possible gains from trade in the market are realized, but with a minimum wage b , some gains from trade are lost because there are fewer transactions. In part a of Figure In the labor market, it is the firm who is the buyer. The total buyer surplus is the profit Revenues minus costs. Graphically, it is the area below the labor demand curve and above the market wage.
Sellers of labor workers receive surplus equal to the area below the market wage and above the supply curve. In part b of Figure As we already know, the higher wage leads to a reduction in employment.
Fewer transactions occur, so the total surplus in the market is reduced. Economists call the lost surplus the deadweight loss The economic surplus that disappears as a result of any policy that distorts a competitive market and thus causes the total volume of trade to differ from the equilibrium level. The most obvious cost of the minimum wage is this loss of surplus. But there may be other hidden costs as well.
Whenever people are prevented from carrying out mutually beneficial trades, they have an incentive to try to get around these restrictions. For example, a firm might pay a worker for fewer hours than he or she actually worked.
Abstract Since the late s, minimum wages have become an important plank of the Indonesian government's labour policy.
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