Hiding Link Between Higher Minimum Wage, Job Loss

Original Article:

  • Author: Michael Saltsman

  • Publication Date: January 2013

  • Newspaper: Orange County Register

  • Topics: Minimum Wage

More than 800 new laws took effect in California at the start of 2013, but a mandated higher minimum wage wasn’t one of them. This year, however, Assemblyman Luis Alejo, D-Watsonville, intends to introduce a bill to hike the state’s minimum wage to $9.25 over three years, and link it to rise with future inflation.

Legislators concerned about foisting new costs on the state’s hard-hit employers have been directed to a comforting pair of studies originally released by a labor-aligned research outfit at UC Berkeley. These studies claim – contrary to decades of economic research – that higher minimum wages do not reduce employment for less-skilled employees.

The Berkeley studies, however, are wrong. According to a new report from minimum-wage expert David Neumark at UC Irvine (co-authored with UCI Ph.D. student J.M. Ian Salas), the Berkeley studies irresponsibly used a flawed research design and produced flawed conclusions.

Economists have traditionally looked for minimum wage-related job loss using state variation in minimum wages, with states that do not raise their wage acting as a “control group” for states that do. But the authors of the Berkeley studies – several economists at UC Berkeley, University of Massachusetts-Amherst, and the University of North Carolina – have argued that any declines in employment were actually due to unrelated changes in states’ economies that just happened to coincide with dozens of state minimum-wage increases.

They restricted their analysis either to the counties along state borders, or to states in the same Census division. Unfortunately, they provided no direct evidence to justify this highly restrictive approach, other than speculating that nearby states or counties are ideal control groups to use in measuring the effects of the minimum wage.

Neumark and Salas show that this premise is wholly incorrect: Closely examining the characteristics of nearby counties and states (which the authors of the original papers failed to do) reveals that they’re actually a very poor match. For instance, as a control state for Connecticut – a state with 3.5 million people and $237 billion in annual economic output – the authors of the Berkeley studies used Vermont, a state with roughly one-sixth the population and a tenth of the economic output.

When the analysis is not restricted to these inappropriate groupings, the data show that wage hikes do cause job loss. However inconvenient for advocates, that’s a result consistent with 85 percent of the most credible economic research on this subject from the last two decades.

These flawed studies have gained prominence among minimum wage advocacy groups due in part to the efforts of the economists who authored them. One of the authors even said explicitly in 2010 that this research should “help to pave the way” for higher mandated wages – an unusual claim for a supposedly neutral academic.

Neumark and Salas close their paper with an admonishment to these economists and others, cautioning them that “a much stronger case” must be made before making bold claims about wage increases not causing job loss. It’s a warning that California’s policymakers should heed as well. In a state where more than 30 percent of interested young adults can’t find work, a vote to make them even more expensive to hire is only going to make things worse.