Data Suggest Higher Minimum Wage Has Surprisingly Broad Economic Impacts

Direct and ancillary benefits from raising the minimum wage were surprisingly broad - and strong - countering the arguments of those claiming it would hurt employment. JL

Andrew Van Dam reports in the Washington Post:

The local effect of more than 130 minimum-wage increases since 1979 showed the fall in jobs paying less than the new minimum wage had been fully offset by the jump in new jobs paying just over it. Raising the minimum wage leads consumers to spend more. Researchers also found “reduced total debt among households and increased access to credit.” $1 increase in the minimum wage led a typical employee to sell 4.5% more per hour. Employers did not reduce benefits and poverty rates declined. A 50-cent rise in the minimum-wage reduces the likelihood someone will return to prison within a year by 2.8%.

The central question in the minimum-wage debate has shifted. Where economists once asked, “Will raising the wage floor kill jobs?” they now ask, “Just how transformative could a higher minimum wage be?”

They can move onto bigger questions now that new, high-quality research has pushed economists to acknowledge that raising the minimum wage hasn’t, in recent decades, destroyed jobs by making workers too expensive.

But there’s a notable holdout. On Monday afternoon, the Congressional Budget Office estimated that raising the minimum wage to the $15 level proposed by many Democratic candidates could cost 1.3 million jobs, while raising the earnings of 27.3 million workers.

But even the CBO included scenarios in which no jobs would be lost. Economic Policy Institute economist Ben Zipperer says it’s an acknowledgement that raising the minimum wage hasn’t proven to be as dangerous as researchers once feared. He added that the CBO’s median estimate nonetheless appears overly pessimistic.

“While they are acknowledging some of the research,” Zipperer said, “I think they are drawing on older research that the new research has pointed out is problematic.”

According to Berkeley economist Michael Reich, the CBO appears to have picked a grab bag of high -quality and now-discredited studies, and weighted them all the same in their analysis. It “reveals an unwillingness to recognize the major differences in scientific quality among studies,” Reich said.

The CBO relies on a variety of questionable assumptions, UMass Amherst minimum-wage expert Arindrajit Dube said. Many have been rebutted by the wave of minimum-wage research, which includes a new working paper from Reich and his colleague Anna Godoey, who measured the local effect of 51 changes in the minimum wage since 2007. Their work is some of the first to address hikes as large, in magnitude, as those that we’d see if the U.S. adopted a $15 minimum wage.

“We don’t find job losses in places where the local impact of existing minimum wage is similar to what we estimate the impact of a $15 federal minimum wage would be, even in low-wage states,” Godoey said.

The Berkeley team builds on a tradition of headline-making, mind-changing research dating to the work of David Card, now of Berkeley, and the late Alan Krueger, in the 1990s. Minimum-wage effects are so fiendish to disentangle given available data, prominent MIT economist David Autor said, that they have pushed scholars to pioneer multiple innovative statistical methods now widely used in economics and related social sciences.

[Jared Bernstein: One reliable way to raise wages is to … you know … raise wages]

In the most definitive study to date, published this year in the top-rated Quarterly Journal of Economics, economists Doruk Cengiz and Dube as well as Attila Lindner of University College London and EPI’s Zipperer evaluated the local effect of more than 130 minimum-wage increases since 1979 and showed the fall in jobs paying less than the new minimum wage had been fully offset by the jump in new jobs paying just over it.

Unlike previous work cited by the CBO’s 2014 report, which typically focused on high-risk groups such as high-schoolers and restaurant workers, the new analysis measured effects across the entire labor market, Zipperer said. Autor called it “the most important work on minimum wage effects since Card and Krueger’s work” and said that it should win over some skeptics and “shift the weight of consensus.”

As such scholarship has freed up researchers to look beyond wage and employment effects, we have seen an explosion of new research, all of it published after the CBO last addressed the minimum-wage question in 2014. A few notable findings:

Suicides fall. As we first reported in April, raising the minimum wage by 10 percent could reduce suicides by 3.6 percent among adults with a high school degree or less, according to a team which included both Godoey and Reich.

Criminals break the cycle. A 50-cent rise in the minimum-wage reduces the likelihood someone will return to prison within a year by 2.8 percent, according to an analysis of records for almost 6 million offenders released between 2000 and 2014. It was circulated in September 2018 by the National Bureau of Economic Research. The finding should help allay fears that a higher minimum wage will make entry-level employers less willing to hire the recently incarcerated.

Consumer spending rises. All else being equal, raising the minimum wage leads consumers to spend a bit more, especially in areas where the minimum wage affects the most workers, according to an analysis from Boston Fed and MIT economists to be published in the Journal of Money, Credit and Banking. The researchers also found “reduced total debt among households with low credit scores, higher auto debt and increased access to credit” in the wake of minimum-wage hikes.

Workers are more productive. In another working paper, researchers tracked 10,000 workers at about 200 department stores and found a $1 increase in the minimum wage led a typical employee to sell about 4.5 percent more per hour. For a worker earning the minimum wage, the increase could be almost 20 percent. “These productivity gains arise mostly during periods of high-unemployment where workers are afraid of losing their jobs,” said author Decio Coviello, an economist at HEC Montreal.

Wage increases ripple upward. The landmark Quarterly Journal of Economics analysis mentioned above also confirmed findings that a rising minimum wage ripples through the organizational chart, helping workers who earn as much as $3 an hour more than the new minimum wage. About 40 percent of its wage benefits go to workers who aren’t directly affected.

Employers do not cut benefits. In a previous working paper, UMass Amherst’s Cengiz used artificial intelligence to identify workers most likely to be hit by wage increases and showed that — contrary to popular belief — employers did not reduce benefits such as employer-sponsored health insurance to free up money to cover higher wages.

Poverty rates fall. After minimum-wage increases, Reich and Godoey also found that poverty rates declined for two groups that are most likely to earn minimum wage: teens and folks with a high school diploma or less.

Job-hopping falls. In a 2016 analysis in the Journal of Labor Economics, Dube and Reich, along with T. William Lester of the University of North Carolina, analyzed federal job-switching data to show low-wage workers switch jobs less often after a minimum-wage increase is passed.

Older folks work longer. In an analysis to be published in the journal Industrial and Labor Relations Review, researchers found a higher wage floor was associated with a modest rise in employment of older workers.

The CBO addressed these secondary effects only in passing, as part of a bibliography which cited much of the research listed above.