Despite convincing results from the Seattle minimum wage study, which found a net decrease in monthly earnings of $125 for low-wage workers, many continue to doubt the negative effects of minimum wage increases.
Arindrajit Dube, an Associate Professor of Economics at University of Massachusetts at Amherst, argues that the methodology and use of data by the researchers at the University of Washington misrepresent the actual results and overstate the level of concern for minimum wage increases.
This is not the first time an argument regarding methodology has incited disagreement about the effect of a minimum wage increase.
In a new working paper published by the National Bureau of Economic Research, University of California professor David Neumark addresses the reasons for why this debate still occurs. In summary, the debate stems from whether demand and supply for low-skilled workers are sensitive to changes in income.
Basic economic theory predicts that a price floor, in this case the minimum wage, placed on a good or service will lead to a surplus of supply, i.e. workers. With more workers wanting to work than firms wanting to hire, we see unemployment.
However, some academics argue that the labor market for low-wage workers is more akin to a monopsony, or a one-buyer market, which could lead to an increase in employment.
The goal of minimum wage studies is to determine whether theory holds in practice. As Neurmark states, this is where the debate arises.
Academics attempt to model occurrences in such a way as to account for all relevant variables that would describe the present situation if the phenomenon had not happened. In the case of the minimum wage, econometric models are used to show how the change in the minimum wage affects employment or earnings holding all other factors constant.
The type of model academics choose can lend to variations in results. Although the statistical components are important, Neumark argues, there will undoubtedly be factors, such as strength of results, that suggest questionable conclusions.
Instead of focusing on statistics, which inevitably will not be perfect, Neumark wants the academic world to focus on the economic factors that lead to variation. He mentions some factors such as the effects on jobless workers, rate of entry into employment, and the labor-labor substitution effect.
Studies, including the Seattle study, have found a labor-labor substitution effect. So, rather than increasing the wages of the firm’s low-skill workers, the employer switches to hiring higher-skilled labor, which leaves these lower-skill workers out of work.
Although some support for these economic factors has been found, Neumark calls for more emphasis on these factors. By narrowing down which economic factors yield variation, researchers can focus on designing studies on the same types of workers such that results can be more comparable.
These suggestions are important because in order to form proper wage policy there must be agreement on its various effects in the labor market. As Neumark states, “there is not one minimum wage effect.” This is true, and all the effects have life-altering consequences.
Currently, we are seeing long term changes in teenage employment and labor force participation rates. The larger decreases tend to coincide with the increase in the minimum wage.
When the minimum wage was increased in 2006 to 2008, teen labor force participation declined from 43.7 percent to 40.2 percent. Now, 10 years later, the share of teens employed or looking for work is 35.2 percent.
While academia continues the minimum wage debate, its consequences are being played out in the labor market. As more cities and states raise their minimum wages above the federal minimum, our knowledge on the issue will expand and inform policy decisions in the future.
Emily Top is a research associate at Economics21. Follow her on Twitter @EmilyKTop.
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