Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

Print Print Email Email Share Share Cite Cite
Style: MLA APA Chicago Close

loading...

Obama’s Minimum-Wage Hike Will Hit Employment

by Benn Steil and Dinah Walker
March 7, 2013

minimum wage

President Obama has proposed increasing the federal hourly minimum wage from $7.25 to $9.00, pointing out that 19 states already have minimum wages in excess of $7.25.  Only one state, however, Washington, has a minimum wage above $9.

So what impact would this have?

First, we calculate that this 24% federal hike would increase the effective minimum wage applicable to American labor-force participants, many of whom reside in states with above-federal minimum wages, by 19% on average.  This is substantial.

An important question which follows is what impact this would have on employment.  A recent paper by Texas A&M economists Jonathan Meer and Jeremy West found that whereas the immediate impact on unemployment of raising the minimum wage by 10% is very small, its impact on long-term job growth is more substantial: 0.35 percentage points.  The logic is that raising the minimum wage is a greater deterrent to hiring than it is a motivator for firing.

Using their findings, the 19% rise in the effective minimum wage proposed by President Obama would decrease long-run job growth by 0.7 percentage points.  Put in perspective, this is significant.  Over the past twelve months, average year-over-year job growth has been 1.8%.  Knocking off 0.7 percentage points would reduce it to 1.1%, which is barely more than the 0.9% average year-over-year growth in the labor force over the past twelve months.  As today’s Geo-Graphic shows, this could materially slow the fall in unemployment from its current high level.

Romer: The Business of the Minimum Wage
Salam: A Missing Dimension of the Minimum Wage Discussion
Kimball: Jonathan Meer and Jeremy West on the Effects of the Minimum Wage on Employment Dynamics
New York Times: Jobs to Fill, Employers Wait for Perfection

Post a Comment 4 Comments

  • Posted by Morgan

    David Card and Alan B. Krueger’s 1992 study shows these claims to be flawed and their book _The New Economics of the Minimum Wage_ stated there was publication bias…a claim that was confirmed in Doucouliago and Stanley’s 2009 “Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis.” In fact Doucouliago and Stanley concluded “Even under generous assumptions about what might constitute ‘best practice’ in this area of research, little or no evidence of an adverse employment effect remains in the empirical research record, once the effects of publication selection are removed.”

    Dube, Lester, and Reich (2010) and Allegretto, Dube, and Reich (2011) showed that OTHER factors were often overlooked and showed statistically that there was NO relationship between minimum wage and over all employment.

  • Posted by Lloyd Cata

    ….and when would be a ‘good time’ to address wages, since your Glorious Chairman has set the stage for massive inflation(QE-x)? What happens when $4T hits the streets? Or better still, what happens when the American people understand that Warren Buffet buying Heinz does not make an ‘economy’, nor create jobs.

  • Posted by MANDEL HOUSE

    The only issue I see is that every time an idea or a theory is made another idea or theory is introduced to go against it. We are not living in a theoretical world, and if we do not move pass the blueprint the infrastructure will never be created. I would like to say that in my eyes, the one fact that is over looked by those who oppose the minimum wage increase, is that if people are making more money, in some cases 3 dollars per hour more, they will take home bigger checks, that in turn means that there is a 50\50 chance maybe even greater that those same people will spend more. As people pour larger amounts of money into companies they will retain higher profits allowing them to balance out with what they are paying their employees and even have the funds needed to higher more workers to fit the workforce needed to accommodate the higher customer numbers. I see that maybe the only problem with the issue is that the rich are not the people getting the increase so of course they are against it. I say they because I have yet to find one person who is giving input on the issue that makes minimum wage or even close to it. I think maybe the studies should be taken by the the people who the results affect and maybe then we can see some honesty in them.

  • Posted by Jacob AG

    Economics aside, this looks like terrible politics. Dean Baker is in favor of an increased minimum wage, but it seems like exactly the kind of policy he described in “Loser Liberalism” — it distorts markets, is (probably) bad economics, and confirms the stories conservatives like to tell the public about liberals. This will come back to haunt Democrats in 2016…

Post a Comment

CFR seeks to foster civil and informed discussion of foreign policy issues. Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions. All comments must abide by CFR's guidelines and will be moderated prior to posting.

* Required

Pingbacks