An op-ed in today’s WSJ debunks shoddy evidence used by President Obama to claim that raising minimum wages increases growth. If raising wages truly stimulated demand, then larger increases should produce more growth. The research found the opposite: Of “the 13 states that raised their minimum wage in January [the states used as evidence by the president], those that raised it the most had, on average, lower job growth than did those that raised it the least.” In fact, the three states that raised it the most—Connecticut, New Jersey, and New York—had worse job growth than the 37 states that did not raise their minimum wage at all.
The president’s evidence joins a long list of questionable research claiming minimum wages have little, if any, effect on employment rates. Most of this research looks at a single industry—typically fast-food—rather than lower-skilled workers more broadly. It compares hiring trends in contiguous counties across state lines with two different minimum wages, sometimes only a handful of counties, over fairly brief periods of time.
There are numerous problems with this approach. Most importantly, it fails to capture compositional shifts in the workforce in response to higher wages. Companies can adapt to having to offer higher wages by replacing lower-skilled workers with higher-skilled workers. They trade higher wages for higher productivity, lower turnover, and subsequently lower training and recruiting costs. Overall employment may not fall because higher-skilled employment increases at the expense of lower-skilled employment—the workers who most often need minimum wage work.
Another problem with this approach is that contiguous counties are often rural, incomparable, and unrepresentative. It’s much more logical, for example, to compare counties with similar demographics and economies even if they are not contiguous—one urban community to another, for example.
Studies that make these more rigorous comparisons, consistently find that raising the minimum wage reduces lower-skilled employment.
With this in mind, look at Alan Krueger, The president’s former chairman of the Council of Economic Advisers, answering questions about the minimum wage:
Tom Keene: Is a fifteen-dollar minimum wage … a … condition that Seattle … and, for that matter, any other cities just cannot handle?
Alan Krueger: Frankly, I think that it would be better to have a more reasonable national minimum wage … that would … prevent some of these local movements. … But … Seattle … can handle a relatively high minimum wage as long as … it doesn’t go too much beyond the prevailing wages for those workers.
Erik Schatzker: Alan you wrote the seminal paper on studying the impact of higher wages on fast food workers in New Jersey and you found that it did not, in fact, destroy jobs.
Alan Krueger: We found fast food restaurants … can adjust by … improving productivity, by seeing turnover decline, and by reducing recruiting costs.”
Krueger recommends minimum wages not deviate much from prevailing market wages for low-skilled workers to minimize job losses and to prevent movements advocating higher wages that would. And he tacitly admits that fast food restaurants make compositional changes to their workforce in response to higher minimum wages—not exactly a ringing endorsement for higher wages.