A Third Try on the Minimum Wage

by Noah Daponte-Smith

Another day, another minimum-wage study.

This most recent study — the third in the past two weeks, after dueling studies on Seattle’s minimum wage hike from Berkeley and the University of Washington — centers on a curious situation in Denmark. The country ties the minimum wage to age: When individuals turn 18, their hourly wage increases by a dramatic 40 percent. Researchers can use this structure as a natural experiment, exploring how a dramatic and rapid increase in the minimum wage affects employment on both sides of the increase.

In this case, the results are predictable, at least for those approaching the issue from a conservative perspective. Employers cut jobs to save on wage payments. According to the researchers:

Employment . . . falls by 33 percent and total labor input . . . decreases by about 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old.

Those words are borne out by their main diagram, which demonstrates the rapid increase in wages and concomitant fall in employment at workers’ 18th birthdays:

            

Perhaps the study’s most interesting contribution is its estimate of the “elasticity” of youth employment with respect to the minimum wage. Elasticity, in economics terms, is a measurement of the responsiveness of one factor to changes in another — in the case of the minimum wage, a large-magnitude elasticity value would indicate that small changes in the minimum wage can have disproportionately large effects on employment.

The Congressional Budget Office currently maintains a low estimate of youth employment elasticity, -0.075, in the United States: Its figure means that a 10 percent increase in the minimum wage should reduce youth employment by 0.75 percent. The new study reaches a radically different conclusion for Denmark: a figure of -0.8, indicating that a 10 percent increase in the minimum wage should bring about an 8 percent reduction in youth employment.  

Why the difference between the estimates? According to the authors of the Danish study, the disparity largely hinges on the nature of the minimum wage in the U.S. and Denmark. In the former, variations occur only at the “global” level, meaning that changes in the minimum wage affect all workers in the labor market, not only those who have just turned a certain age; the minimum wage is the same for 16-year-olds as it is for 65-year-olds. In Denmark, though, the minimum wage increases as the worker gets older, narrowing its distortionary impact on the labor market as a whole but perhaps exacerbating it on a small sector. The researchers argue that the CBO’s analysis, by ignoring this crucial distinction, “may severely underestimate the effect on youth employment of changes in minimum wages for young people.”

There are other reasons to trust the Danish study as well. The researchers are in the unique position of possessing fine-grained and precise Danish monthly payroll data, allowing them to know employment status, earnings, age, and hours worked. Other studies — including that on which the CBO based its -0.075 elasticity estimate — have often been forced to rely on less precise survey data.

As a comparison to the American case, the picture is somewhat mixed. At purchasing-power parity, the minimum wage for adult Danes is roughly $15 per hour, similar to the figure liberals often tout as an ideal for American workers, and which cities such as Seattle and San Francisco are indeed on the path toward achieving. But whereas those cities are making the process a gradual one — phasing in a series of wage hikes over a multiple-year period — Denmark does it literally overnight. Comparing an extremely rapid change to a more lackadaisical one might distort the issue somewhat. Finally, it’s possible that the large impact seen by Denmark’s policy might apply at the $15 level, but not at the much lower levels seen in the United States, where the federal minimum wage remains at $7.25 per hour; at lower levels, the market might be better able to absorb the wage increase without seeing a large drop in employment or hours worked.

It thus seems that more research is needed, in a variety of domains — first, on the impact of minimum-wage increases generally, as was explored in the dual Seattle studies; second, on the speed with which increases take effect, and how such speed compounds or mitigates the possible negative impacts of an increase; and third, on the effect of minimum-wage increases on specific sectors of the labor force, such as restaurant workers or teenagers. This study should also force a reconsideration of our current estimates of the elasticity of youth employment relative to the minimum wage: The disparity between the authors’ estimates and that of the CBO is stark.

The three new studies are a good place to start. If they inaugurate a renewed period of investigating seriously at the minimum wage, it will all be for the better.

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