February 28, 2013

Raising The Minimum Wage Will Hurt Job Creation, Say Researchers At Texas A&M

President Obama’s State of the Union Address proposal to raise minimum wage from $7.25 an hour to $9, with annual increases for inflation, has fired up both sides of the issue with proponents arguing that all workers should earn a good living and opponents saying the increase will cost jobs.  Research at Texas A&M University shows that raising the minimum wage will reduce job creation, but not affect employee turnover or layoffs.

Jonathan Meer and Jeremy West

Jonathan Meer and Jeremy West

In the study “Effects of the Minimum Wage on Employment Dynamics,” Jonathan Meer, an assistant professor of economics at Texas A&M who specializes in public economics, and Jeremy West, a graduate student in economics, “focused on employment dynamics – job creation and job destruction directly, rather than just net employment,” Meer explains. “We very carefully controlled for a number of factors that could conflate increases in the minimum wage and changes in employment, and found that job creation was reduced substantially, but job destruction did not increase. Net job growth falls in response to an increase in the minimum wage, but employee turnover is unaffected.”

So it’s not that working people would lose their jobs if the minimum wage went up, rather, fewer people would be hired in the future.

“This makes intuitive sense: firing people is unpleasant and costly, so adjustment takes some time as employers reduce their hiring of new or replacement workers,” Meer explains. “Some previous studies, especially ones with shorter time horizons, have failed to find an effect on the level of employment because it takes time for these effects to be reflected in total employment.”

He says there are numerous reasons not to increase the minimum wage or to even have one at all, and his reasoning is simple: “when something costs more, people purchase less of it. Low-skill labor is no different.

“If workers are providing more value to employers than they cost, then they will be hired. If they aren’t, then they will not be hired. If you’re never hired and get the chance for some job experience, you can never move up the ladder. While some people may get slightly higher pay and be somewhat better off, being unemployed is really, really bad, and there’s no reason why we should be focusing on the people who currently have these jobs (and will keep them) rather than those who are trying to get these jobs but can’t.”

In Obama’s address, he spoke of “a family with two kids that earns the minimum wage still lives below the poverty line.”

Meer contends that this hypothetical family is very different from the typical minimum-wage earner.

“According to the Current Population Survey from the Bureau of Labor Statistics, in 2009 fully half of minimum-wage earners were 25 years or younger, about two-thirds were working part-time, and only a fifth were heads of household with dependents,” he notes.

And for those who earn the minimum wage, it’s not for long, Meer insists.

“There’s strong evidence that people make relatively rapid transitions out of the minimum wage. About two-thirds of workers who earn the minimum wage in one year and are still in the workforce a year later, earn more than the minimum wage ― on average, $1/hour more.”

Bottom line, says Meer, raising the minimum wage has a negative effect on hiring and the number of people it would help is so small, the notion that an increase would stimulate the economy is “nonsense.”

“This money just represents a transfer from employers to workers (or possibly from consumers, through higher prices in response to the higher labor costs). So someone somewhere else will be spending less. Business owners – many of them small business owners – are consumers too, and now they’ll have less money to spend,” he contends.

Meer says Obama in his speech completely ignored the Earned Income Tax Credit (EITC) “which provides as much as a 45 percent subsidy for low-income earners,” he notes, ”not to mention the slew of other income-support and transfer programs at both the federal and state level. A single parent with two children earning $14,500 would receive $5,236 in the EITC alone, before any other transfer programs.

“People who support increasing the minimum wage are often well-intentioned, but it’s quite likely that the minimum wage does more harm than good for low-income people. There are other policies, like the EITC, that do a much better job of alleviating poverty.”


Media Contact: Lesley Henton, News & Information Services at Texas A&M University;

(979) 845-5591; lshenton@tamu.edu

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5 Comments to Raising The Minimum Wage Will Hurt Job Creation, Say Researchers At Texas A&M

  1. Did you account for any third variables? For example the economy now (job creation) compared to the last time minimum wage was increased (job creation)

    Also “Low-skill labor” – that sounds like research bias.

    “workforce a year later, earn more than the minimum wage ― on average, $1/hour more”
    So they went from 7.25, to 8.25. How do they live off that? Do they live at home? Do they live in a tent? can they support a family?

    ” A single parent with two children earning $14,500 would receive $5,236 in the EITC ”
    So after the single parent has only earned 14500 in a year, while trying to support two children, they would get a tax break of $5236.

    “The EITC, that do a much better job of alleviating poverty”
    I think the researchers have lost touch with reality. I’m ashamed for them.

  2. Rachel E Kusama on March 2nd, 2013
  3. If you provide a 20% price wage inclease to millions of employess and the result is a loss of jobs by attrition then you must factor in jobs created by the added consumption. If the employer offsets wage increases by hiring less then the employers level of consumption would continue at the same level. Inflation is also a factor. The minimum wage is usually eroded over time and much quicker when inflation is far above norms. Finally to conclude that the ETIC is the solution is to also conclude that taxpayers should subsidize the cost of labor. Full time employment should pay enough to keep a worker out of poverty. Workers are not commdies like grain, whereby a surplus drives down prices and leads to spoil. I guess we lost perspective when the Personnel Department became Human Reources.

  4. BrotherMan on March 2nd, 2013
  5. Most Regulations have potential to become impediment to free market. Improper, Excessive and Selective Regulations are impediment to free and civilized society.

    If the Regulations of wages is within the domain of the State/Government, then the selective Regulations on minimum wage, without upper limit on wages, corporate bonuses and CEO salaries is only class warfare.

    Such Selective regulations may hit hardest on the small business.

    Initiating Discussion on State’s authority to Selective Regulation of Professionals

  6. Rehan Sheikh on March 3rd, 2013
  7. The statement, “when something costs more, people purchase less of it. Low-skill labor is no different.” is a blanket statement that holds no fact. Many products and services increase in cost all the time due to many factors and their consumption rate remains unaffected or is offset by other variables. An example is rising gas prices. While many Americans complain of the price of gas, most do not drive less, evident through the consistent consumption of gasoline and record-high oil company profits. In fact, many markets or trends can be spurred on by high-cost or limited availability for products, and the inverse actually becomes true.
    If the statement can also be taken to mean that reducing the costs of goods or services increases their consumption, then it is much clearer how false either idea is. Would reducing the the wage of carpenters, masons, or mechanics increase the amount of them we have? Of course not, we would most likely just got much worse versions of each. Eliminating a minimum wage doesn’t allow a foreman to hire ten times the workers, it just allows him to hire the same amount and turn larger profits. That’s why companies outsource their labor costs in the first place.

    We should have morale obligations to give every working American citizen to not live in poverty and provide themselves and their families with their basic needs for life. If 9.00$ is required to make that happen, then so be it, and economists and politicians should tap the plethora of other variables that affect job creation/destruction, net growth, stability, quality etc. to make that happen.

    This is pretty basic stuff…

  8. nicholas budsberg on March 4th, 2013
  9. At the very least, minimum wage needs to be directly tied to the cost of living, so that they increase side by side. We can always raise the minimum wage directly later when the economy is more stable, but tying it to the cost of living is something that should have been done decades ago.

  10. Sterling Ericsson on March 5th, 2013
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