A Non-Thumb on the Scale Look at the Impact of Higher Minimum Wages

March 26th, 2014 at 10:45 am

An obvious problem in DC is that when it comes to a variety of issues, it can be hard to find objective evidence.  Especially around the minimum wage, organizations with vested interests bang out “analyses” whose results you could precisely predict simply by knowing who they represent.

You might think that CBO plays this objective arbiter role, and in many ways they do, but while their minimum wage analysis was certainly in the objective ballpark, they quite clearly underweighted newer, high-quality literature that showed smaller employment impacts than they ultimately reported (even so, CBO found that 98 percent of affected workers benefited from the increase).

So it was with some interest that I perused a research note from Goldman Sachs researchers on the minimum wage (no link).  These economists do excellent, highly objective research on every issue that might affect markets and the economy, typically looking for impacts on growth, jobs, inflation, interest rates, and so on.  They also tend to be very up-to-date on the most relevant findings in these areas.

Here’s what they found on the minimum wage.

  • Economists are split on the question of whether a minimum wage hike would reduce employment. In our view, the CBO’s recent estimate of a 500k hit to the level of employment (0.3%) is likely a bit toward the upper end of reasonable estimates, both because many studies find no significant impact of minimum wage hikes on employment and because the offsetting boost to demand is likely to be larger than usual at present. Any impact on the monthly payroll numbers would likely be small relative to normal volatility and would likely be concentrated in the retail trade and leisure/hospitality sectors.

  • A minimum wage hike might also boost inflation, but probably only very modestly. Hikes since 1990 have not been associated with discernibly higher inflation, and even if all employment cost increases were passed on to consumers, the resulting increase would probably not boost inflation by more than 0.1pp per year.

They also included a useful, though somewhat hard to read for at least my aged eyes (click on it for a better view), table of the relevant lit on employment effects (see below).  Therein, you’ll see a lot of “small negatives,” a few “small positives,” and a bunch of “insignficiants.”  The title of the table—Economic Research on Minimum Wage Hikes has Found a Small Effect to No Effect on Employment—is the relevant punchline.

If facts mattered right now, debates like this one would benefit greatly from this type of objective input.

gs_minwgSource: Goldman Sachs Global Macro Research


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13 comments in reply to "A Non-Thumb on the Scale Look at the Impact of Higher Minimum Wages"

  1. tyler says:

    “When in 1996 I recommended the minimum wage be raised, Republicans and the Chamber screamed it would ‘kill jobs.’ In fact, in the four years after it was raised, the U.S. economy created more jobs than were ever created in any four-year period.” – Robert Reich

    • Robert Buttons says:

      How many jobs were lost when the MW was raised 2006-2008?

      • tyler says:

        2006-2008 was when the housing bubble popped, which caused massive job loss from which we have still not recovered.

        • Robert buttons says:

          It sounds very arbitrary that you think we can ignore overall macro effects on MW data in 1996(during dot com bubble), but macro effects are relevant in 2007.

          • Red says:

            So, we would have had a ton more jobs created in the 90’s had the minimum wage not increased?

            The conservative argument was that jobs would be lost, that clearly did not happen. As Jared and Goldman Sachs point out, the minimum wage has, at most, a very small impact on jobs.

  2. bakho says:

    We need wage inflation to allow relative prices to reset upward. A MinWage increase would be a small boost in that direction. The Fed undershoots their (too low) 2% inflation target and we even had DEFLATION of the median wage in 2009. Wage deflation is never a good thing.

  3. Larry Signor says:

    The MW debate is an insignificant battle for the plutocrats…but losing is not an option to them. Labor is to be tamed not nourished as a significant economic input. 100% unemployment would make them happy if they could eat us.

  4. Robert Buttons says:

    Red, the conservative argument is NOT “jobs would be lost”. That is an over-simplified strawman argument. My position is: Fewer jobs exist under a high MW than would exist under a low MW, ceteris paribus.

    • Red says:

      And how did you arrive at this position?

      The CBO and Goldman Sachs put an upper bound on a MW increase at, perhaps, 500k jobs lost, and a lower bound of zero.

      So what is the conservative argument? Because I remember all kinds of doom and gloom being predicted by all kinds of conservatives regarding higher taxes and an increased MW. None of which actually bore out.

      • Robert Buttons says:

        ***IF***1996 is evidence of the success of MW, 2008 is testament of its failure.

        • Red says:

          Looks who’s straw-manning now. No one is saying that 1996 is evidence that raising the MW was the cause of the economic growth of that decade, or even that it was a main driver of that growth.

          All we’re saying is exactly what Jared, the CBO and Goldman Sachs have said and continue to say: raising the minimum wage will, at worst, have a very small impact on jobs.

    • Red says:

      And, of course, ceteris are rarely paribus. So while there may be some merit, in theory, to not raising the MW, in reality a raise is overdue.

  5. Fred Donaldson says:

    It is time to wake up to the fact that other countries have a low minimum wage for those 16-18, higher for 18-21 and highest for older than 21. Australia is below $10 for very young, but goes up to about $15 for those over 21. That defuses the GOP argument permanently. Some nations also have minimum wages, lower than the standard, for apprentices and higher wages than the minimum for those who complete their apprenticeship.

    Why isn’t this being proposed by the Dems in Congress and the WH? The GOP wants to continue one minimum wage rate so it can cry about college students and teens making too much money. Compromising between the 16 year-old rate and the over 21 rate to come up with some watered down rate is not fair to the adults in the room, who have families to feed.

    We have been trapped in this argument for decades, simply because we ignored the value of tiered minimum wages. Check minimum wage proposal for Germany ($12), where their sharpest minds are on the path to a tiered system, similar to other industrialized countries.

    Instead of progressive change, the Dems and Repubs advocate more Earned Income Tax Credits to workers who are not paid a living wage, which is just a redistribution of middle class earnings into a business subsidy so that the underpaid can afford food and shelter to continue in jobs that obviously don’t pay poverty wages for an American family.