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.
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.”
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