Reconsider That Happy Narrative About Minimum Wages

by Don Boudreaux on August 20, 2014

in Data, Myths and Fallacies, Work

One of George Mason University’s star PhD economics students, Ms. Liya Palagashvili, along with a GMU undergrad student, Ms. Rachel Mace (who was taught recently in a GMU econ class by Liya), weigh in in tomorrow’s Wall Street Journal to debunk a happy narrative about the minimum wage.

This narrative made the rounds this summer; even Pres. Obama joined the eager-to-believe chorus.  But the narrative was based on a remarkably sloppy interpretation of employment data.  Liya and Rachel set the record straight.  A slice:

Why would firms hire more workers when government raises the cost of hiring workers? The progressive answer is that hiking the minimum wage raises the incomes of poor workers, causing them to spend more. This additional spending, in turn, is so great that firms hire even more workers. When you raise the minimum wage, as Mr. Obama said in Denver, “that money gets churned back into the economy. And the whole economy does better, including the businesses.”

This theory is dubious for many reasons, not least because minimum-wage workers make up about 2% of the workforce, a percentage much too small to have such an effect. Yet if this theory were valid—and if these data reveal useful information—then job growth should be greater the higher the minimum-wage boost.

Not so. Of the 13 states that raised the minimum wage, Connecticut, New Jersey and New York were the three that raised it most, with increases ranging from 5% to 14%. These three states also experienced the worst job growth between January and May, an average of 0.03% compared with an average 1.28% for the other 10 states. Indeed, job growth was worse in each of these three states than it was, on average, in the 37 states that did not raise their minimum wage at all. Moreover, in New Jersey, the state that hiked minimum wage the most—to $8.25 an hour from $7.25—employment actually fell by about 0.56%.

Washington experienced the largest job growth at 2.1%, but the state only raised its hourly minimum wage by 13 cents. A full-time minimum-wage employee in Seattle now earns, before taxes, a whopping $23.80 more a month. That’s barely enough to cover dinner for two at a chain restaurant. Consider also that between December and May the price of gasoline rose by more than 20 cents a gallon, according to Gasbuddy.com. Minimum-wage workers would need a big chunk of their higher pay to cover the increased cost of driving. There’s no way there was enough left over to spark extra job growth.

We conducted a statistical analysis of the Bureau of Labor Statistics’ data called a two-sample “t” test for comparing two means. We found, for this time period, no difference in the job-growth trend in the states that raised their minimum wages from states that did not. In other words, the correlation cited as debunking the economic case against the minimum wage is not statistically significant.

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