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An Increased Minimum Wage Is Good Policy Even During Hard Times

Recent Studies Point to Higher Pay but No Job Losses

SOURCE: AP/Jay LaPrete

A Wendy's employee serves a drive thru customer. Legislators in Illinois, Maryland, California, Maine, and Massachusetts have introduced bills to raise their state minimum wages. There is a growing consensus among economists and academics that raising the minimum wage does not kill jobs even during periods of recession.

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This year legislators in Illinois, Maryland, California, Maine, and Massachusetts have introduced bills to raise their state minimum wages. But policymakers may be reluctant to increase the minimum wage with unemployment hovering around 9 percent. Even during hard times, however, the minimum wage is good for the economy.

Increasing the minimum wage helps ensure employees are rewarded for their hard work and boosts the incomes of low-wage workers—something that is sorely needed to increase consumption and get the economy going. It reduces turnover and helps employers compete on a more level playing field, forcing firms away from a low-road, low-human capital investment model to one where workers stay attached to the workforce and employers make stronger investments in training. Taxpayers are better off because they have to bear fewer of the negative externalities from low-road employers—such as the costs of food stamps and Medicaid.

There is also a growing consensus among economists and academics that raising the minimum wage does not kill jobs even during periods of recession.

We reviewed academic research that examines the effects of minimum wage increases during a recession or stretch of time with high unemployment and found significant evidence that even during hard economic times, raising the minimum wage is likely to have no adverse effect on employment.

Two key articles released in the past year provide definitive evidence on the overall effects of the minimum wage on wages and employment. Additionally, they provide compelling evidence about the impact of raising the minimum wage during hard economic times.

The first study, published in November 2010 in the Review of Economics and Statistics by Arindrajit Dube of the University of Massachusetts, Amherst; T. William Lester of the University of North Carolina, Chapel Hill; and Michael Reich of the University of California, Berkeley, compared all of the adjacent counties that touch a state border where there is a difference in the mandated minimum wage in each state. Overall, the authors found that minimum wage increases raise wages for low-wage workers but do not reduce employment. Critically, this paper also demonstrated how previous research detected an erroneous “disemployment” effect by failing to control for broad regional growth trends.

Though the authors did not specifically focus on the minimum wage’s impact during economic contractions, their period of analysis spanned 1990 to 2006, during which there were several recessions. In addition, subsequent analysis by one of the co-authors finds that the overall results hold when only recession periods are considered.

The second recent study, published in April in Industrial Relations by Sylvia A. Allegretto of the University of California, Berkeley; Arindrajit Dube; and Michael Reich, focused on state-level data. The authors replicated the models of researchers whose studies of teen employment found that increases in the minimum wage create job losses and are often cited by minimum wage opponents. (Teen employment is often viewed by minimum wage scholars as an indicator of the impact on the lowest-skilled workers.)

Again, however, when the authors added appropriate variables to control for regional differences—variables that previous researchers had omitted—they found that minimum wage increases do not reduce teen employment levels. Allegretto, Dube, and Reich specifically included an analysis of the effect of the minimum wage during the recessions of 1990–1991, 2001, and 2007–2009 and again found no impact on hours worked or employment levels.

Our review covered studies from as far back as the early 1990s and included research based on state and local case studies as well as nationally representative data. While some of these studies were not focused on separating out whether the effect of a minimum wage increase was different during a recession, their analysis covered minimum wage increases during hard economic times.

University of California, Berkeley, economist David Card and Princeton economist Alan Krueger’s seminal study of the effect of the New Jersey 1992 minimum wage increase comparing fast food industry employment in New Jersey and Pennsylvania found no negative employment effect. In fact, it found stronger employment growth in New Jersey. While there was no national recession at the time, New Jersey’s unemployment rate was 8.7 percent in parts of 1992.

Similarly, Lawrence F. Katz, a Harvard economist, and Alan Krueger studied fast food employment in Texas from 1990 to 1991 and found that employment slightly increased when the minimum wage was raised. The study included a 1990 minimum wage increase that occurred just before the 1990–1991 recession and a second increase that occurred just after the recession officially ended.

Moreover, David Card’s study of the impacts on teen employment of the 1990 federal minimum wage increase using state-level data found no effect on teen employment. Most of the time period he studied included the 1990–1991 recession.

A more recent study by Arindrajit Dube, T. William Lester, and Michael Reich examines the impact of minimum wage changes on county-level employment and labor turnover from 2001 through 2008. Specifically, the authors’ analysis covered a period when there were two increases in the federal minimum wage during a recession, one in 2007 and one in 2008. This study’s finding of significantly reduced turnover among low-wage sections of the labor market offers a clear explanation for why they observed that employment does not fall in response to a minimum wage hike. Further, because their data was at the county level, there were numerous counties suffering high unemployment when minimum wage increases went into effect.

In short, the academic research suggests that even during hard economic times, raising the minimum wage doesn’t reduce employment.

Why is this the case? Studies generally find that policies that increase the compensation of low-wage workers significantly reduce turnover, boost worker effort, encourage employers to invest in training for their workers, and can increase demand for goods and services—all of which help balance out any potential negative effects.

There may be another factor that comes into play even more during hard times—economic power. Low-wage workers have very little of it, particularly during periods of high unemployment.

When the economy is doing poorly, employers have less incentive to raise wages, while workers, especially those making near minimum wage, have little ability to demand a raise because there is a ready supply of unemployed labor available to take their job. Even though these workers likely become more productive—labor productivity has almost always increased over time and productivity growth during the past two recessions was especially strong—they have less economic power to ask to be paid for their increased productivity. This suggests that during hard economic times, there is a critical role for government to raise the minimum wage to ensure workers are being paid for their economic contributions.

The reasons that increasing the minimum wage does not kill jobs warrants additional study. But it is clear that raising the minimum wage during bad economic times is good policy. Even on the heels of the Great Recession, policymakers should feel confident that boosting the minimum wage is the right thing to do and will have few, if any, negative effects on employment.

David Madland is Director of the American Worker Project at the Center for American Progress Action Fund. Nick Bunker is a Special Assistant with the American Worker Project.

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