Opinion

Raising the minimum wage does not destroy jobs

Both economic theory and evidence demonstrate no correlation between the two

February 11, 2014 11:00AM ET
Fast-food workers and supporters organized by the Service Employees International Union protest outside a Burger King in Los Angeles last year.
Patrick T. Fallon/Bloomberg/Getty Images

What could be more intuitive than the idea that raising the national minimum wage would mean fewer jobs?

You don’t have to take an economics course to know that when apple prices rise, people buy fewer apples and that when prices fall, people buy more.

Yet as intuitive and simple as this concept seems, it is false. Neither economic theory nor a large and growing body of empirical evidence supports the idea that a higher minimum wage means fewer jobs. Nor does it mean decimated profits for small-business owners or for big companies that rely on low-wage workers. 

Theory

Let’s start with economic theory. The principle of equilibrium says that prices rise when supplies are short and fall when they are plentiful. Right now we have more workers than jobs, so at first blush it may seem to follow that a lower minimum wage would mean more jobs.

All economic models, however, are built on assumptions. In this case, the assumption is that all else is equal. Or, to put it in the dreadful language of the dismal science, no exogenous (outside) factors affect price.

Imagine apples are in short supply, which means high prices, all else being equal. Then bumper crops of apricots, nectarines, peaches, pears and other delicious fruits flood the market.

The availability of these cheap fruits would tend to drive down apple prices.  

However, sellers could also decide to put the apples in cold storage and sell them later, since apples have a much longer shelf life than stone fruits. Or they could turn the fresh apples into dried fruit, juice, jelly or applesauce.

Over long periods, if apple prices remain low, orchardists may plant fewer trees, sell more land to developers and otherwise restrict the supply of apples in an effort to raise prices.

In these and many other ways, those external forces can upset the simple equilibrium model for apple prices.

Now let’s apply this theory to workers. Workers are not apples, as labor economist John Schmitt likes to point out.

“You don’t have to recruit apples, you don’t have to motivate them to work, you don’t have to train apples, and you don’t have to integrate them into a team, and once they get good working as a team, you don’t have to retain them or face more recruitment and training costs,” he told me.

Unlike apples, poorly paid workers are also more likely to quit without notice — say, just before the noon rush at the drive-through.

“Only if you assume that there is no cost of hiring people and no cost of training and that you can costlessly replace those who leave does the simple apple model apply,” Schmitt added when we talked about his new paper for the Center for Economic and Policy Research, a liberal think tank. 

When it comes to the debate on the minimum wage, there are powerful business interests deploying PR strategies to confuse the public.

Even when large numbers of available workers have experience in, for example, fast food, costs for recruitment, training and team integration endure. A Big Mac is not a Whopper, and teaching how to do it Burger King’s way means unteaching McDonald’s way.  

Empirical evidence

Now let’s look at the empirical evidence.

Two decades ago, a simple study by economists David Card and Alan Krueger examined fast-food employment in New Jersey, which had raised its minimum wage, and neighboring Pennsylvania, which had not. Card and Krueger found zero evidence of reduced employment in New Jersey.

The best criticism of that study is that it was a one-off and for a specific year. What happens long term and in other places?

Since then a large study of restaurant and bar workers in multiple states covering multiple years — by economists John Addison, McKinley Blackburn and Chad Cotti — found no job loss where the minimum wage was raised.

They took into account overall changes in local economies too. That matters because a surge of high-end hiring or layoffs could affect restaurant spending and thus the number of restaurant jobs and the tips people earn, just as an external factor such as a bumper crop of stone fruits can affect apple prices.

This study buttressed findings by three other economists, who carefully examined restaurant jobs and pay in 318 paired counties. The counties were in states bordering each other but with different minimum wages.

Employment and wage data were collected for 1990 through 2006 — long enough to capture any subtle, long-term changes due to higher minimum wages.

The data showed a strong increase in earnings and no evidence of fewer jobs, economists Arin Dube, T. William Lester and Michael Reich reported in 2010.

Another economist, Sylvia Allegretto, then joined Dube and Reich in a study of teen employment from 1990 to 2009 — again, a period long enough to detect any subtle shifts in the data caused by higher minimum wages. This study also took into account other effects, such as recessions and expansions.

Allegretto, Dube and Reich found no negative effects. They also found only slight positive economic changes due to higher minimum wages.

PR propaganda

There is one pair of researchers, economists David Neumark and William Wascher, whose work shows that raising the minimum wage is harmful. However, their work has serious shortcomings.

For starters, Neumark and Wascher ignored many studies that came to different conclusions and did not review some of the most thorough studies. They considered 102 studies, of which 52 looked at American workers, and then rejected all but 19 of them as not credible. Five of the studies Neumark and Washer found credible were by … Neumark and Wascher.

This is known as cherry-picking the data rather than following the evidence wherever it leads. That should be more than enough to discredit their work, yet it gets cited often in news reports and opinion columns because the Employment Policies Institute touts their work.

That name suggests a research organization. But in fact, the Employment Policies Institute operates out of the same Washington offices as a big public relations firm run by Richard Berman. The institute’s disclosures show Berman is its leader. Berman and his firm are advocates for the restaurant industry, the leading economic force arguing against a higher minimum wage.

The idea that a higher minimum wage would destroy jobs is powerfully simple and intuitively appealing. The problem is that it is contradicted both by economic theory and the facts. When it comes to the minimum wage, all else is not equal. Myriad other factors are at play, including how the current minimum wage raises taxpayer costs for food stamps, Medicaid and other welfare.

And when it comes to the debate on the minimum wage, all else is not equal either. Apart from the abundant evidence and economic theory, there are powerful business interests deploying PR strategies to confuse the public. 

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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