The evidence on the effects of minimum wage

On January 14, 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 current events have intensified it. Among calls for social justice and the provision of a “living wage,” there is also evidence showing that the consensus on the negative effects of the minimum wage has been waning among researchers in recent years.  More research has come out in favor of raising the minimum wage, citing little to no negative effects of the minimum wage on employment.

However, this phenomenon, as it turns out, is less about rigorous research actually supporting a minimum wage and more about misinterpretation or misrepresentation of 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

Disagreements exist among researchers on the minimum wage. 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 effects of the minimum wage, and not about actual effects.

The authors, David Neumark and Peter Shirley, who utilize preferred estimates instead of reported estimates,  find that most evidence largely supports a negative relationship between minimum wage and employment.

To explain further, reported estimates are usually all the findings that authors include in their findings. These may sometimes 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 can capture the main findings of a study, at least its unique contribution to the 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, who 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. Doubling it to $15 should be expected to be even more harmful.