More on the minimum wage

By Paul Walker 14/01/2015


The seemingly never ending debate on the effects of the minimum wage continues with a new NBER working paper out on The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers by Jeffrey Clemens and Michael Wither.

The abstract reads:

We estimate the minimum wage’s effects on low-skilled workers’ employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a “target” group, whose baseline wage rates were directly affected, and a “within-state control” group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation. Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage’s effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.

In short, the demand curve for labour really doed slope downwards. For low-skilled workers the effects on employment and income are negative. The effect on an economy-wide basis is relatively small, as you would expect, but the effect for those in the effected groups is still devastating.