New(est) Evidence on the Minimum Wage

by Michael R. Strain

University of California, San Diego economists Jeffrey Clemens and Michael Wither released a novel working paper about a year ago in which they estimated the effect of the minimum wage increases enacted during the Great Recession on lesser-skilled workers’ income and employment trajectories. They found that workers who were “bound” by minimum wage increases saw their employment and income prospects significantly diminished. In fact, Clemens (my friend) and Wither find that minimum wage increases following the Great Recession diminish employment among lesser-skilled workers to the point that they influence the economy’s aggregate employment rate.

Dr. Clemens builds on this paper in a new working paper, released today, designed to further explore the evidence from his paper with Wither. I quote from the new paper’s summary of its findings:

From 2006 to 2012, the average effective minimum wage rose by $1.72 across the United States. The differential change between fully and partially bound states was $0.62. Extrapolating from in-sample estimates to the full effect of the $1.72 increase comes with standard caveats, which are discussed in section 4. My baseline estimate is that this period’s minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school degree by 5.6 percentage points. This amounts to 43 percent of the decline in this group’s employment between 2006 and 2012. Further, it accounts for a 0.49 percentage point decline in the employment to population ratio across all individuals ages 16 to 64.

(Bold mine.)

There is much in this paper that will interest economists and the policy community. I will call attention only to one additional item: new graphs that show us what’s been going on at the low end of the labor market over the past decade or so. Here is one of the graphs:

From the paper:

Sustained U.S. employment declines were particularly dramatic for low-education, low-experience individuals. Figure 6’s Panels A and B [Note: Panel A is presented above, in the embedded tweet] provide detailed looks at the evolution of the employment and wage distributions of individuals ages 16 to 30 with less than a high school education between 2002 and 2014. Between 2006 and 2010, this skill group’s employment rate declined by 13 percentage points, from 40 percent to 27 percent. It remained down by 13 percentage points through 2014. Panel A reveals that the profile of this group’s real wage distribution either shifted down or was stagnant from 2002 to 2006, from 2006 to 2010, and again from 2010 to 2014. […] For present purposes, these developments’ most relevant implication is that the minimum wage has become more binding on the distribution of low-education, low experience individuals’ wages over time. The federal minimum wage’s rise from $5.15 to $7.25 occurred over the same time period as a 20 percent downward shift in the profile of this group’s real wage distribution.

I would also point out that the figure shows that many lesser-skilled Americans have been willing to work at real wages below the current federal minimum.

Finally, take a look at the graph and ask yourself this question: Would the world be a better place if there were a horizontal line set at fifteen dollars per hour marking 2017’s new minimum wage?

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