Do Minimum Wages Really Kill Jobs?
University of California, Berkeley
The Issue:Democrats in the House and Senate have announced a bill to raise the federal minimum wage gradually from its current $7.25 to $15 by 2024. If inflation averages 2 percent between now and 2024, a $15 minimum wage in 2024 would be worth $12.50 in today’s dollars. This increase would place the federal minimum wage well above its previous highest real value, reached in the late 1960s, when the minimum wage was about $10 in today’s dollars. Advocates for the $15 minimum wage argue that it will help workers make ends meet and reduce inequality, improve child health and education outcomes, and stimulate the economy with more purchasing power for low-wage workers. Opponents argue that high minimum wages will kill jobs, hurt small businesses, and raise prices.
In 2016, the federal minimum wage of $7.25 was worth 25 percent less than at its peak value in 1968, after adjusting for inflation.
- The value of the federal minimum wage has eroded in real terms since the late sixties, as raises have not kept up with inflation. In 2016, the federal minimum wage of $7.25 was worth about 10 percent less than when it was last raised in 2009, after adjusting for inflation, and 25 percent less than its peak value in 1968 (see chart).
- Numerous states and localities have enacted their own minimum wages since the last federal increase in 2009. As of 2017, 29 states have instituted minimum wages higher than the federal minimum wage. Seven states have set minimums higher than $10 and California and New York, with about 20 percent of the U.S. workforce between them, have already passed $15 minimum wage legislation. Many cities and localities — including Los Angeles, Chicago, Louisville, Miami Beach, to name a few — have set minimum wages above those in effect in the rest of their respective states.
- In 2016, 2.2 million workers, representing 2.7 percent of paid workers, earned at or below the federal minimum wage of $7.25, according to the Bureau of Labor Statistics. Raising the minimum wage to $15 an hour would increase pay for 41 million workers, or about 29 percent of the workforce, according to a study from the Economic Policy Institute. The study estimates that such a raise would directly lift the hourly earnings of 22.5 million workers (who currently earn under $15), and another 19 million workers would benefit from a spillover effect as employers raise wages to attract and retain workers who used to make slightly above $15.
- The current minimum rate of $7.25 translates into less than $12,000 per year, given the current average of about 1600 work hours per year among low-wage workers. This amount falls short of the poverty line for single individuals and for single parents. Single parents and their children would still be in poverty even if the adult worked 40 hours per week and 52 weeks per year.
- Studies that estimate the amount that a household would need to make ends meet generally obtain thresholds that are above the federal poverty line. A full-time, full-year worker earning $15 per hour would earn more than what the Economic Policy Institute estimates is a basic budget for a single adult without children in all but the most expensive metro areas. Single parents with children would fall short of the basic family budget in almost every U.S. county — even with the help of food stamps and other public support programs.
- Economic theory suggests that minimum wages have both positive and negative effects on employment. Higher payroll costs will lead employers to automate some of their work and to raise prices, which reduces sales and therefore employment. On the other hand, quit rates fall when workers are better paid, reducing employee turnover costs faced by businesses, and better-paid workers are more productive since they value their employment opportunities more highly. Moreover, higher incomes generated by the increase in worker earnings create more purchasing power among households with higher propensities to spend their income, so boost demand, creating jobs. Adding up these negative and positive effects yields ambiguous theoretical predictions. The net effect of a minimum wage increase on employment therefore is a matter of empirical evidence.
- Empirical evidence to date clearly indicates small employment effects of past minimum wage increases, though there is no consensus whether the impact has been a small negative or a small positive effect (see here for a review). Earlier statistical studies found that minimum wage increases were associated with decreases in employment, but have been criticized for failing to take into account the tendency for the minimum wage to be raised in states and localities that would have had declining employment in low-wage jobs in any case. More recent studies that account for these differences in employment trends across regions, including a study coauthored by one of us, have not found that minimum wage increases substantially reduced employment. However, all of these studies considered smaller minimum wage increases than would be involved in a $15 federal minimum wage. Credible data to study effects at $15 in today’s dollars are only beginning to become available.
- Economists’ views on minimum wage effects have shifted substantially in recent years as new evidence has accumulated. A 2013 University of Chicago Business School survey of leading economists found that 34 percent believed that raising the federal minimum wage to $9 an hour would make it noticeably harder for low-skilled workers to find employment. Two years later, only 26 percent agreed that a notably higher $15 federal minimum wage would substantially reduce jobs for low-wage workers.
- Recent research has shown that minimum wages are also effective in improving a broad range of other important outcomes, including for the children of minimum wage workers. These include the ability to acquire a used car, reducing the cost of consumer credit, reducing poverty, reducing employee turnover, improving worker productivity and reducing reliance on public safety net programs, such as food stamps. They also lead to improved infant health outcomes and improved adult mental health. Moreover, the households of minimum wage workers have a high propensity to spend any additional income, thus raising demand for goods and services and stimulating the local and national economy.
What this Means:
The flurry of recent empirical research on the impact of an increase in the minimum wage has shifted professional views on its effects. Although the issue remains controversial, our reading of the research literature, and reviews by others, indicate that negative employment effects are very small. This evidence suggests that current debates should pay more attention to the positive effects of an increase in the minimum wage on living standards, on health and educational outcomes, on reducing inequality and on poverty reduction among low-wage households, rather than on employment effects.