“We all know the arguments that have been used against a higher minimum wage. Some say it actually hurts low-wage workers — businesses will be less likely to hire them. But there’s no solid evidence that a higher minimum wage costs jobs.”
–President Obama, remarks on economic mobility, Dec. 4, 2013
The Fact Checker generally hesitates to wade into messy economic debates. As the Atlantic memorably noted earlier this year, “If a meteor ever smashes into the earth, leaving the planet a dark lifeless wreck, there will still be two economists walking down a desolate post-apocalyptic Connecticut Avenue arguing about whether minimum wage laws kill jobs.”
But here’s the president of the United States, essentially saying that the debate has been settled. Is that really the case?
The president’s comments are striking because, as any student of Economics 101 can tell you, it flies in the face of basic economic theories about the impact of higher costs on employment. Here’s how economist Paul Krugman, a fan of the president’s proposal to boost the minimum wage, put it in 1998:
So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces.
In a more recent column on the minimum wage, Krugman again referred to basic economic principles:
Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook — mine included — lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, $20 an hour would create a lot of problems.
The White House, in support of the president’s comment, pointed to a section of the 2013 Economic Report of the President (pages 120-121). The report noted that most economists had once believed an increase in the minimum wage would reduce employment but that “the consensus view among economists has since shifted as more evidence has accumulated.” It also cited a 2009 meta-analysis of 64 studies of the minimum wage that found “no evidence of a meaningful adverse employment effect” of the minimum wage.
The problem is that while there may be a new consensus emerging on the left-leaning side of economic theory, there is an equally fierce response from other economists.
In 2006, economists David Neumark and William Wascher published a survey of more than 100 studies, and came to an opposite conclusion, directly contradicting the results of the so-called New Minimum Wage Research. They found that the majority of the studies showed that “raising the minimum wage leads to economic distortions and often has unintended adverse consequences for the employment opportunities of low-skilled workers.”
The Fact Checker obviously is not going to take a stand on this debate, only to note that it exists. Each side can find fault with the methods of the other. Neumark and Wascher were faulted for making judgments about different studies, while the meta-analysis was criticized for treating each study as equal in quality.
Economist Arindrajit Dube and others came up with a new approach in 2010, looking at the impact in counties adjacent at different states, that bolstered the findings of the new minimum wage forces. But economists Jonathan Meer and Jeremy West this year fired back with a study that found that minimum wage hikes reduce net job growth because of the effect on expanding companies. (In October, Dube responded that their supposed job losses were occurring in the sectors without minimum wage workers, which in turn prompted this rebuttal by Meer and West.) And a 2011 study from economists at the London School of Economics and the Central Bank of Turkey found higher minimum wages increased unemployment.
In any case, it’s wrong to suggest the debate is settled. Economists remain sharply divided about the issue. Daniel S. Hamermesh, an economist at the University of Texas at Austin who supports indexing the minimum wage to inflation, said the president is making a sharp distinction when the real question is whether the impact will be large or small:
The statement is absolutely incorrect. There is substantial evidence that jobs are lost. The relevant question is how many: And that depends on how high you push the minimum wage. An increase from the current low level (low compared to other rich countries) will cost a few jobs, but not very many. An increase to $15, a la living wage proponents, would either cause very large job losses or lead to substantial price inflation.
Update, Feb. 18: The Congressional Budget Office analyzed the proposal to increase the minimum wage to $10.10 and concluded that, under a mid-range estimate, it would lead to a loss of 500,000 jobs because of two key reasons: consumers buy fewer goods because of higher prices resulting from a minimum wage and because employers hire fewer workers because the cost of labor has increased. This is not an exact science, and CBO said the full range of the impact on employment was a very slight decrease in jobs to as many as 1 million fewer jobs.
The Pinocchio Test
The president is making a bit of a judgment call when he uses a phrase such as “no solid evidence.” But at the same time he appears to be dismissing the research and findings of a significant part of the economic academy.
A few tweaks to his sentence would have made it more accurate. He could have referred to “mixed evidence.” Or he could have said that increasingly economists are turning up evidence that, especially if the minimum wage just keeps up with inflation, the impact on jobs likely is negligible.
But to flatly declare the debate is over is misleading. He did not quite say there was no evidence–but he came close.
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