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The evidence on the effects of minimum wage

On January 14th, President Joe Biden announced a sweeping $1.9 trillion Covid-19 relief stimulus plan. Among other things, the plan includes funding for Covid-19 testing, vaccine rollout, grants to small businesses affected by the virus, and additional checks to households. The plan also includes a proposal to raise the federal minimum wage to $15 in order to fight poverty.

The fight for a higher minimum wage is not new, although it has been intensified by current events. Among calls for social justice and providing a “living wage”, there is indeed also evidence showing that the consensus on the negative effects of the minimum wage has been waning among researchers in recent years.  More and more research has come out in favor of raising the minimum citing little to no negative effects of minimum wage on employment.

However, this phenomenon, as it turns out is less about rigorous research actually supporting minimum wage. It is, instead, more about misinterpretation or misrepresentation of some evidence. Upon closer inspection, evidence supporting a higher minimum wage tends to be either overstated or mistaken, as illustrated by Cato. The reality remains that robust evidence exists showing the negative effects of the minimum wage.

The literature on minimum wage

Historically, researchers have used variations in state minimum wage laws to analyze the impact of minimum wage on employment. Generally, disagreements exist among researchers on their findings. While some researchers report little to no effect of minimum wage on employment, others report significant negative impacts. This is also true among studies that summarise studies detailing the effect of the minimum wage.

However, according to the authors of a new  NBER paper, this lack of consensus is largely due to studies “discarding” or “ignoring” most of the evidence on the negative effect of the minimum wage, and not about actual effects. The authors, David Neumark and Peter Shirley, who utilize preferred estimates instead of reported estimates, instead, find that most evidence largely supports a negative relationship between minimum wage and employment.

To explain further, reported estimates are usually all findings that authors include in their findings. These, sometimes, may include results that even the authors do not view as credible. On the other hand, preferred estimates are essentially conclusions that an author of a study drew and would likely report as their core finding. Preferred estimates are able to capture the main finding of a study; at least its unique contribution to literature.

And based on this approach, the authors conclude that;

(i) there is a clear preponderance of negative estimates in the literature; (ii) this evidence is stronger for teens and young adults as well as the less-educated; (iii) the evidence from studies of directly-affected workers points even more strongly to negative employment effects; and (iv) the evidence from studies of low-wage industries is less one-sided.

This is directly in contrast to proponents of the minimum wage that tend to pick studies or parts of studies to support their view. The fact remains that the minimum wage is harmful especially to low skilled workers. And doubling it to $15 should be expected to be even more harmful.

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