February 13, 2013
Report Examines Adjustments to Increases that Explain Small Employment Effects
For Immediate Release: February 13, 2013
Contact: Dan Beeton, 202-239-1460
Washington, D.C.- A new paper from the Center for Economic and Policy Research finds that modest increases in the minimum wage – such as the one proposed by President Obama in his State of the Union address - have little impact on employment, due to adjustments by employers and workers. The paper, “Why Does the Minimum Wage Have No Discernible Effect on Employment?” by economist John Schmitt reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. It finds that the strongest evidence suggests the most important adjustments are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ("wage compression"); and small price increases.
“This is one of the most studied topics in economics, and the evidence is clear: modest minimum wage increases don’t have much impact on employment,” Schmitt said. “An increase to $9.00 per hour would be hugely important for the workers getting it, but the idea that this would lead to less employment is just not supported by the evidence.”
President Obama’s call for a minimum wage rise to $9.00 an hour would be a modest increase, and would keep the minimum wage below its peak, when adjusting for inflation. As CEPR’s Dean Baker and Will Kimball noted in a blog post yesterday, “The purchasing power of the minimum wage peaked in the late 1960s at $9.22 an hour in 2012 dollars. That is almost two dollars above the current level of $7.25 an hour.” They also noted that the minimum wage has not kept pace with productivity increases over the past 44 years, as it had from 1947-1969 – a period when economic “[g]rowth averaged 4.0 percent annually” and “the unemployment rate for the year 1969 averaged less than 4.0 percent.” But the link between productivity growth and minimum wage ended in the 1970s.
Baker and Kimball note that “If the minimum wage had kept pace with productivity growth it would be $16.54 in 2012 dollars.”
Schmitt’s paper notes that “two recent meta-studies analyzing [scores of separate studies] conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers.” The paper concludes that the most likely reason for this is that “the cost shock of the minimum wage is small relative to most firms' overall costs and modest relative to the wages paid to low-wage workers.”
The paper notes that employers have many channels of adjustment to a minimum wage increase, including reducing hours, non-wage benefits, or training; shifting the composition toward higher skilled workers; cutting pay to more highly paid workers; taking action to increase worker productivity (from reorganizing production to increasing training); increasing prices for consumers; or firms simply living with a smaller profit margin.
The paper notes that “Workers may also respond to the higher wage by working harder on the job. But, probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers.”