Building an Economy that Works for Everyone

Employment and the Minimum Wage

Opponents of the proposed increase in the minimum wage assert that raising the minimum wage will result in lost jobs and lost job opportunities. This is an old argument which may correspond with neoclassical economic theory, but which is not related to the reality of minimum wage increases. Here is the reason why:

The federal minimum wage increased in both 1996 and 1997. No studies have found statistically significant job loss that can be associated with these wage increases. In fact, it is just as accurate to assert job gains linked to the minimum wage increase. The Economic Policy Institute, an economics research and public policy institute of national reputation located in Washington, D.C., has conducted several tests which isolate the impact of the federal minimum wage increase.

  • The first test is a “difference-in-differences” test (DD), which looks at employment rates for low wage workers and young people in relation to the minimum wage increase. The statistical comparison is refined by isolating employment rates from seasonal employment factors and overall economic growth. This DD test reveals no change in the employment rates of low-wage workers and young people as a result of the federal minimum wage increase.
  • The second test is the Deere, Murphy, and Welch test which measures state employment levels across years before and after the minimum wage hike. This test reveals that the minimum wage increase raised employment for less-educated adult male workers and less-educated black workers, while impacts on other minimum wage workers were statistically insignificant.
  • David Card devised a cross-state test to measure the impact of the minimum wage on low wage states versus high wage states. The Card test finds that the 1996 and 1997 wage increases had a strong impact on wages for teenagers and less-than-high–school-educated adults, but no consistent, measurable impact on employment for these two groups.
  • Time-series tests also reveal the same statistically indistinguishable impact on jobs as a result of the minimum wage increases.

Closer to home, Oregon passed a minimum wage initiative in 1996, raising its minimum wage to $5.50/hour in 1997, to $6.00/hour in 1998, and to $6.50/hour in 1999. Since the minimum wage increase, job growth in the industries most effected by the minimum wage has been robust. Employment growth in retail trade, the industry with the highest proportion of minimum wage workers, followed the same healthy growth patterns as the overall Oregon economy.

The assumptions of job loss in the Employment Policies Institute study are false and dated. The job losses are predicted by a formula which ties a 2% drop in employment to a 10% increase in the minimum wage. Once you make the assumption, it is easy to calculate the numbers. But the initial assumption is wrong and the resulting numbers are deceiving. The job loss assertions made by the Employment Policies Institute (and repeated by John Carlson’s Washington Institute Foundation) are pulled from a calculation for labor demand elasticity reported in an unpublished manuscript by David Neumark and William Wascher. The same authors were published in a refereed article in the Journal of Business, Economics, and Statistics (1995, Volume 13 #2, p. 199-207) in a study which noted that there was no job loss from an increase in the minimum wage.

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