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Study: The 2007 minimum wage hike cost more than 1 million jobs during the recession

Does a higher minimum wage kill employment?
Does a higher minimum wage kill employment?
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When Congress last passed a bill raising the minimum wage in 2007, Democrats hailed it as a win for low-wage workers, with little downside. "Raising the federal minimum wage will not harm the economy or employment," senators said in a statement, noting that after the prior increase, the economy had averaged 248,000 new jobs per month for four years.

A higher wage with no downsides was what proponents promised, but a new study says it didn't happen. When the wage went from $5.15 to $7.25 in the span of two years, it kept more than 1 million people out of work, according to a new working paper from Jeff Clemens and Michael Wither of the University of California at San Diego.

What they studied

Clemens and Wither used data from the Census Bureau's Survey of Income and Program Participation to estimate the degree to which the minimum wage bumps affected "targeted" workers — those most likely to be affected by these bumps. They were able to take advantage of the fact that many states set their minimum wage higher than the federal minimum, so when a federal minimum wage hike takes effect the actual impact varies state by state. By comparing outcomes in states with large minimum wage hikes to those with small ones, they calculated how much the higher minimum wage affected the labor market.

What they found

The authors determined the minimum wage increases lowered the employment-population ratio (the share of working-age adults who were employed) by 0.7 percentage points from 2006 to 2012. During that time, the ratio fell by almost 5 percentage points, from 63.4 percent in December 2006 to 58.6 in December 2012. So while that decline may look like it was all recession, in reality it was around 15 percent due to the minimum wage, according to this paper. As of December 2012, when the working-age population was around 201 million, those 0.7 percentage points would have equaled around 1.4 million fewer people working.

Those effects were far bigger in states whose minimum wages changed more. In the states with the bigger changes, those workers most affected by the change saw their employment rate fall 8 percent more than those in states whose wages didn't change much.

In addition, the authors found that the new minimum wage rates contributed to lower levels of economic mobility, in particular making it harder for people to climb into the lower-middle class (in this study, defined as climbing above earnings of $1,500 per month). The authors say their paper has "the first direct estimates of the minimum wage's effects on medium-run economic mobility."

What it means

Lower employment seems like a logical effect of a higher minimum wage. A very simple economic model says that putting in a price floor (in this case, on labor) makes consumers of that good (employers) buy less of it, leaving more workers waiting to be picked up.

Except take this within the context of many, many other minimum wage studies, and it's all way more complicated. Deakin University's Hristos Doucouliagos and Hendrix College's T.D. Stanley showed in a 2009 paper that taken together, nearly 1,500 estimates of minimum wage effects on employment clustered right around zero effect, but with more of those estimates showing a slight downward pressure on employment.

minimum wage

Source: Doucouliagos and Stanley 2008

As they write, "with sixty-four studies containing approximately fifteen hundred estimates, we have reason to believe that if there is some adverse employment effect from minimum wage raises, it must be of a small and policy-irrelevant magnitude."

Likewise, economists are split, according to a 2013 survey of economists conducted by the University of Chicago's Booth School of Business.

IGM minimum wage

Source: Chicago Booth IGM Forum

So this study provides ammunition for opponents of a higher wage, but there are explanations for why a higher minimum wage wouldn't hurt job creation. For example, it would mean more pay to low-wage workers, who would be likely to spend any extra cash you give them. It's also possible that it would make businesses more efficient, as it lowers worker turnover.

Likewise, there are differences of opinion on the minimum-wage-mobility question. While this study suggests a correlation between a higher wage and lower mobility, the evidence likewise appears cloudy at best. For example, a 2008 paper from Seth Zimmerman at the Urban Institute finds that a higher minimum wage can help boost absolute mobility — a person's chances to end up better off than her parents — but to the degree it hurts the job market can hurt absolute and relative mobility (that is, a person's ability to move up in income rank).

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