The effect of the minimum wage on the employment in the USA

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One of the chief measures sought and offered by those who fight for greater social equity is the minimum wage. According to them, it is the duty of the state to guarantee a certain minimum living standard for all its employed citizens. By legally decreeing a minimum wage, they believe they will force business owners to surrender a part of their profits and share it with their poorer employees. In this manner, the difference between their respective incomes would be reduced.

On the other hand, liberal economists argue against this, claiming that owners will not part with their profits, but will strive to keep them the same as before. Because of this, in order to keep their labour revenues at the same level as before, they will compensate the minimum wage by laying of some of their employees. They also claim that instituting a minimum wage will also mean harder employment for the low-skilled workforce, who, because of this, won't contribute enough to warrant the new, higher price for their labour. In other words, the minimum wage, according to them, will not lead to greater equality, but only towards greater unemployment.

Here, I shall briefly lay out the conclusions of two studies which research what effect raising the minimum wage has had upon low-paid employment in two different cases in the US. In October 1993, David Card and Allan Krueger, via the National Bureau of Economic Research in the US, publish one of the most cited studies on this issue. It is named: "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania". The study covers 410 fast food restaurants in New Jersey and Pennsylvania.

These two neighbouring states aren't coincidentally chosen. Namely, at the begging of that year, the minimum wage in New Jersey was raised from 4.25$ an hour, to 5.05$, while in Pennsylvania, it remained the same as the previous level in New Jersey. Because of this, comparing the employment in these two states presents an excellent and simple opportunity to gauge the effect of the minimum wage on the level of employment.

The authors also deliberately chose the fast food industry, as the largest employer of low-wage workers, and the new law would affect almost everyone in the industry. Additionaly, the products of the different restaurants in the industry are relatively homogeneous, which provides an easy and relevant comparison. The study began one month before the minimum wage was raised, in February 1992, via a telephone survey of fast food restaurants like Burger King, KFC, Wendy's and Roy Rogers. In the survey, employers were asked about the number of employees, their wages, the prices of their products, etc.

The survey was repeated in November 1992, about 8 months after the minimum wage was raised. Of the 410 businesses which answered the first survey, 404 answered the second. The other 6 had closed in the meantime. The study showed that every employee who received wages under 5.05$ per hour, now received this new minimum sum, but that increase had almost no spillover effect over those who received higher wages. It is interesting to note that, with regards to the employment rate, this study showed the opposite of what was expected, i.e, that the number of employed persons not only did not decrease, but even increased, while the employment decreased in Pennsylvania, where the minimum wage was not increased. The percentage of permanently employed (as opposed to temporarily) also went up in New Jersey. On the other hand, raising the minimum wage meant also raising the price of the meals which were served.

Because, during the same period, the employment in restaurants across Pennsylvania fell, while it rose in New Jersey, the total increase of employment in New Jersey, as opposed to Pennsylvania, was 13%. In the same time, the change in employment amoung the high-skilled workers was almost the same between the two states, which shows that the increase in low-paid employment was the result of the increase in the minimum wage. The other parameters, like the number of hours the restaurants were open, the number of active cash registers at 11 AM, the total number of cash registers, employee benefits (like free or discounted meals), had suffered no statistically relevant change. And yet, the average sales price for the same period had increased by 4%, in comparison with Pennsylvania.

This study shows contrary results to those expected: namely, that the number of low-paid workers had increased by raising the minimum wage. In part, but not wholly, these results can be explained by the aforementioned price raise. However, there are studies who claim the opposite of this one, going in line with Friedman's ideas. Such is the following study presented here, titled Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle”.

This is a more recent study, dated at June 2017, penned by a group of economists from the University of Washington. It analyses the effect of raising the minimum wage in the city of Seattle from 9.47$ to 11$ an hour in 2015, and then subsequently to 13$ in 2016 (a total increase of 37.3%), which was done as a result of the movement "Fight for $15", which advocates for a minimum wage of 15$ on the federal level.

The paper investigates whether there are any differences in the level of employment before and after the two respective raises of the minimum wage, and also compares the numbers in Seattle to those of the neighbouring King Country, as well as the nearby Snohomish, Kitsap and Pierce Counties. Without going into the complicated methodology used by the authors, it may be said that the study shows some quite interesting results. First, the results confirm the study of Card and Krueger that the minimum wage had no effect on the employment in the restaurant sector.

However, this study also shows that raising the minimum wage had an effect on low-wage employees in other sectors. There, the total number of work hours fell by 6.9%, meaning that about 5 000 work places had been lost. As the wages rose by 3.2%, and the number of work hours decreased by 6.9%, it follows that the demand of low-wage labour has an elasticity of about -2.6, which means that low-wage employees are an easily replaceable factor of production, most often by more skilled, better paid employees, or by automation.

This study also concludes that the average low paid worker had actually had his income decreased by the raise of the minimum wage. Namely, the study estimated that before the raise, the average monthly wage for these workers was 1,900$. By raising the minimum wage, their work hours had decreased, reducing the average wage by 130$. The increased wage compensated for this with an additional 56$, leaving a net loss of 74$ per month. That, of course, is not a small sum for these low paid workers.

Why do the results of the second study contradict those of the first? The authors of the second study give several reasons. First, the aforementioned fact that their study encompasses the entire economy, rather than separate industries like the previous study. Secondly, there is the fact that there is no way to know whether the employment had perhaps shifted to the suburbs or other areas nearby. The second study also analyses the effects of a law which increased the minimum wage to a much higher level than that of previous studies. Another novelty is that they analyse the elasticity of the labour demand in a city, which should de facto be higher than that of an entire state.

However, above all, neither study claims that their findings are definitive, nor that they can be generalised to all levels of government (local, state and federal), nor that they can be applied equally to all countries around the world. This is because every labour market has specific characteristics that differentiate it (such as industrial structure, quality of the labour force, geography, number of employees, etc.) and which could produce different results when the minimum wage is raised. Additionaly, the manner of raising the minimum wage itself (whether and how long it is announced beforehand, whether it is subsidised, how substantial it is, whether some form of relief exists, etc.) may drastically change the results.

However, to me, in this case it seems like the difference in the conclusions of these two studies is owed primarily to the amount by which the minimum wage was raised, which is quite higher in the second study. This, to me, suggests that the minimum wage cannot grow forever, without causing negative side-effects. For a specific economy, at a specific time, it has an optimal level, which, if surpassed, carries more harm than benefit to everyone, including low-wage employees.

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