A new report from the conservative-leaning American Action Forum, shared exclusively with FOXBusiness.com, shows hiking the minimum wage hurts hiring.
The study looks at the 19 states that have minimum wages above the national rate of $7.25 an hour, as well as the 31 states in which the minimum wage is equal to the national average. The report finds that in 2013, a $1 increase in the minimum wage was associated with a 1.48 percentage point increase in the unemployment rate.
What’s more, this $1 hike also led to a 0.18 percentage point decrease in the net job growth rate, a 4.67 percentage point increase in the teen unemployment rate and a 4.01 percentage point decrease in the teenage net job growth rate. Overall, the AAF reports that high state minimum wages increased unemployment by 747,700 workers and reduced job growth by 83,300 jobs.
The study, “How Minimum Wage Increased Unemployment and Reduced Job Creation in 2013,” is published on AAF’s website.
I’ve read it, and I don’t think it’s persuasive, for two reasons: First, it’s an outlier, and second, its methodology compares apples and oranges, because it compares entire states rather than economically similar regions.
1) In 2009, Hristos Doucouliagos and T. D. Stanley – both PhD economists who are published experts in meta-analysis (they literally wrote the book on the subject, har har har) – “conducted a meta-study of 64 minimum-wage studies published between 1972 and 2007 measuring the impact of minimum wages on teenage employment in the United States. When they graphed every employment estimate contained in these studies (over 1,000 in total), weighting each estimate by its statistical precision, they found that the most precise estimates were heavily clustered at or near zero employment effects.”1
Doucouliagos and Stanley concluded, “Two scenarios are consistent with this empirical research record. First, minimum wages may simply have no effect on employment… Second, minimum-wage effects might exist, but they may be too difficult to detect and/or are very small.” Here’s their graph:
So this AAF study is, at best, an outlier. The evidence from 64 minimum-wage studies shows that the minimum wage either has no effect on teen unemployment, or that whatever effect it does have is extremely small.23
2) In 2010, in a study published in The Review of Economics and Statistics (pdf link), Arindrajit Dube, T. William Lester, and Michael Reich showed that minimum wage studies “that do not account for local economic conditions tend to produce spurious negative effects due to” regional effects in employment “that are unrelated to minimum wage policies.”4
In other words, if you don’t control for regional differences in employment, it will look as if the minimum wage is correlated with higher unemployment; but the moment you account for regional differences, that finding disappears.
This is why the best studies of the minimum wage compare contiguous counties in neighboring states. The counties used to test minimum wage effects are, as much as possible, within a single economic region, except that one is in a state that has just raised its minimum wage. In other words, good studies compare apples with apples. The AAF’s hamhanded study, in contrast, simply compares entire states, as if the only significant economic difference between (say) Oregon and George were minimum wage levels. They’re comparing apples and oranges.
(To be fair, the AAF study also controls for high school graduation rates. But that is literally the only confounding factor they consider. Nothing else – not region, not college graduation rates, not industry – is controlled for.)
How did they make such an amateur mistake? Possibly because this study was conducted by an amateur. Ben Gitis, who conducted the AAF study, graduated from college (undergraduate) less than a year ago, according to his AAF bio. Gitis majored in econ, but he’s not an economist, and he doesn’t know how to objectively measure effects of the minimum wage.
- I’m quoting John Schmitt’s excellent overview of the debate; pdf link. [↩]
- Another recent meta-analysis, by Dale Belman and Paul Wolfson (pdf link), had similar results, concluding “that there is a negative and generally statistically significant employment effect which is between small and vanishingly small.” [↩]
- To be fair, economists themselves seem to be split on the question of what effect the minimum wage has. However, a majority agreed that the minimum wage’s positive effects outweighed any negative effects. [↩]
- In 2011, Dube and Reich replicated their finding using a different dataset, this time focusing on teen unemployment. Allegretto, Sylvia A., Arindrajit Dube, and Michael Reich. 2011. “Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data.” Industrial Relations, vol. 50, no. 2, pp. 205-240. [↩]