Minimum Wage Employment
It’s amazing how any discussion of the minimum wage brings out all kinds of discussion and comments.
We have a school of thought that believes very strongly that increases in the minimum wage causes firms to fire minimum wage workers, so higher minimum wages harm the very people it is designed to help.
I am a reasonable man, and understand the theory very well. But my problem is that I’m a semi-retired business economist — one that does not forecast –and for my entire career I have been driven by what the data says. But the data does not support the theory that increasing the minimum wage leads to a decline in minimum wage employment.
Contrary to what a lot of people seem to believe the Bureau of Labor Statistics does publish data on the number of minimum wage employees. It is only available on an annual basis and it is not all at one location. You have to dig it out. But here is where you can start:
The datastarts in 1979 and this chart compares minimum wage employment to the minimum wage since 1979.
Since 1979 their have four periods when the minimum wage was increased.
The following table shows what happened.
The way to read the table is that from 1979 to 1981 the minimum wage was raised from $2.90 to $3.35. That was a 15.5% increase and over this period minimum wage employment rose 13.2% while total wage and salary employment rose 1.1%.
We have four examples of minimum wage increases and the average increase was 14.7%. At the same time the average increase in minimum wage employment was 22.2% versus a 2.1% gain in total wage and salary employment.
Part of the gain in minimum wage employment is due to wage compression at the bottom. When the minimum wage is increased from $5.50, for example to $6.00 it is not only the people who were earnings $5.50 that receive a wage increase. The people earning between $5.50 and $6.00 will also have their wage increased to at least $6.00. Moreover, some people earning $6.00 will not get a pay raise. So when the minimum wage was $5.50 minimum wage employment consisted of those earnings $5.50. But when it is $6.00 some people that were earning more then $5.50 will now be added to the number of minimum wage workers earning $6.00.
I have no idea how much of the 22.2% average gain in minimum wage employment was due to wage compression. I’ve tried to work some different scenarios and concluded it probably was not the dominant factor.
Does anyone know of any papers that have calculated how significant this wage compression is?
But here is my bottom line. I see this great theory that minimum wage increases cause minimum wage workers to lose their jobs. But I look at the data on minimum wage employment and it tells me that the theory can not be right.
Ok, Mark Perry, Don Boudreaux or any of the others teaching their students that minimum wage increases cause minimum wage workers to lose their jobs, can you explain to me why I should reject this data and accept your theory.