Study: Minimum wage is not a huge driver of wage growth

Proponents of minimum wage laws often claim that the laws are responsible for increasing incomes of low-wage workers. In that case, employers are assumed to have significant market power, while workers have no bargaining power. This makes it possible for employers to exploit workers; that is, until the government steps in and demands high wages.

A lot of real-life experience disproves this reasoning. Between 2016 and 2019, for example, wages rose for numerous Americans due to a well-performing economy. Due to high levels of growth, incomes rose for all groups of Americans, while poverty fell to historic levels. In this case, economic trends, as well as the labor market, were important drivers of wage growth.

The idea that the economy and labor market trends play a more important role in growing wages than do minimum wage laws is something that is supported by a new NBER study. Researchers Jeffrey Clemens and Michael R. Strain utilized survey data between 2010 and 2019 to find that the majority of low-wage workers saw wage gains regardless of whether the state raised the minimum wage or not.

As the authors describe,

Around 71 percent of minimum wage workers in states that did not increase their minimum wage at any point in the 2013–2018 period got a raise in any given year, compared to around 79 percent of minimum wage workers in states that did increase their minimum wage. Wage increases for minimum wage workers is the norm in both groups of states

Moreover, wage hikes were more likely to be influenced by other factors like economic trends, demand for labor, and the progression of a worker’s career. More specifically, workers see their wages increases when they change jobs. Workers also see their wages rise when they are in a tight labor market — that is, when the demand for labor is high compared to supply.

Overall, the authors estimate that minimum wage accounted for just 8 percent of wage gains realized by minimum wage workers. The other 91 percent was attributable to other market factors.

A lesson for lawmakers

The best way to raise wages is to enact pro-growth policies. Wages in the job market are largely a factor of demand and supply. When the economy is growing, jobs get created, which increases the demand for labor. This in turn raises wages. Minimum wage laws do not create jobs or increase the demand for labor, but in fact decrease labor demand and may stifle job creation.

One need only look at how costly efforts to raise the minimum wage have been in St. Paul and Minneapolis, as evidence from the Minneapolis Federal Reserve Bank shows.