The Agenda

A Missing Dimension of the Minimum Wage Discussion

My recent discussion of President Obama’s call for raising the federal minimum wage neglected an extremely important aspect of the larger minimum wage debate. Arpit Gupta noted the possibility that while an increase in the minimum wage might not have a discernible impact in the aggregate level of employment, it might nevertheless have an impact on the composition of the employed population. It is also possible that while an increase in the minimum wage might not lead to layoffs of existing employees, it might discourage firms from hiring new employees. Last year, two economists at Texas A&M University, Jonathan Meer and Jeremy West, explored this latter possibility in a working paper on “Effects of the Minimum Wage on Employment Dynamics”:

To date, nearly all empirical studies of the minimum wage and employment have focusedon how a legal wage oor aects the employment level, either for the entire labor force ora specic employee subgroup (e.g. teenagers or food service workers). We argue that, in a Diamond (1981)-type worker search and matching framework, an effect of the minimum wage should be more transparent in employment dynamics. The basic intuition is that, while a minimum wage is unlikely to affect employment in an abrupt, discrete manner, it may act on the job creation margin to alter the long-run rate of net job growth. We additionally document several empirical reasons for the minimum wage to be more likely to impact job growth than the employment level.

Meer and West exploit differences in state-level minimum wages to gauge their potential impact on gross job creation, gross job destruction, total employment, net job growth, and the reallocation rate. (Reallocation is a particularly interesting phenomenon, as the reallocation of workers from declining firms to growing firms appears to play a significant role in driving productivity growth. This is one reason why efforts to prop up declining firms might prove counterproductive.) They also gauge whether or not state-level minimum wages have an impact on the entry and exit of establishments, which are best understood as discrete places of business (one firm can have one or more establishments, e.g., factories or retail outlets, etc.). 

We find that the minimum wage signicantly reduces gross hiring of new employees but that it has no effect on gross separations. While increases in the legal wage floor insignificantly affect the employment level, they directly reduce job growth. Employee reallocation does not appear to be affected, nor does entry or exit of establishments. These results have several implications. Most importantly, we show that, in a particular way, the minimum wage does aect employment.

Given that the minimum wage debate has attracted the intense interest of labor economists, one assumes that this won’t be the last word on the minimum wage and employment dynamics. But Meer and West’s findings deserve to be part of the ongoing empirical discussion. That an increase in the statutory minimum wage won’t necessarily decrease employment levels is not terribly comforting news in light of the persistence of high unemployment, particularly if it is likely to reduce net job growth. Policymakers would instead be well-advised to pursue policies that will tend to actually increase net job growth.

Meer and West’s findings regarding gross separations make sense if we consider the “stickiness” of employment, i.e., the cost of training workers and integrating them into the operation of an establishment might be high enough that employers are reluctant to let go of employees unless it’s absolutely necessary, hence the interest among policymakers in Kurzarbeit and other work-sharing schemes that are designed to mitigate the private and the social cost of separations. 

Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

Most Popular

Culture

Cold Brew’s Insidious Hegemony

Soon, many parts of the United States will be unbearably hot. Texans and Arizonans will be able to bake cookies on their car dashboards; the garbage on the streets of New York will be especially pungent; Washington will not only figuratively be a swamp. And all across America, coffee consumers will turn their ... Read More
National Security & Defense

The Warmonger Canard

Whatever the opposite of a rush to war is — a crawl to peace, maybe — America is in the middle of one. Since May 5, when John Bolton announced the accelerated deployment of the Abraham Lincoln carrier group to the Persian Gulf in response to intelligence of a possible Iranian attack, the press has been aflame ... Read More
Elections

The Democrats Made Two Joe Biden Miscalculations

I think it's safe to say that there are many, many progressive Democrats who are more than a little surprised -- and a lot chagrined -- at Joe Biden's polling dominance. Look at FiveThirtyEight's polling roundup. Aside from a few high and low outliers, he leads the race by a solid 20 points (at least). Even ... Read More