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