States' minimum-wage hikes could cost them employment

Fast-food workers and supporters organized by the Service Employees International Union protest outside of a Burger King Worldwide Inc. restaurant in Los Angeles,  Aug. 29, 2013.
Patrick T. Fallon | Bloomberg | Getty Images
Fast-food workers and supporters organized by the Service Employees International Union protest outside of a Burger King Worldwide Inc. restaurant in Los Angeles, Aug. 29, 2013.

In the continued absence of action from Congress, more than a dozen states raised their minimum wages this month.

More than half of states currently have minimums above the $7.25 per hour federal level. States behaved similarly during the last lull in congressional action between 2005 and 2007, when the average state wage was about $1 higher than the federal minimum.

In effect, state legislation has kept hourly wages closer to cost-of-living increases since the 1960s and '70s, while federal rates have lagged.

But wage hikes don't come without certain costs. Economic theory suggests that raising wages should put pressure on employers to hire fewer low-skilled workers.

The real-world effect has been far from clear, driving a decades-long debate among economists that often spills over into politics.

Some studies, especially those that measure low-wage employment in narrower geographical areas across state borders, have suggested that differences between state wage floors may instead lower the number of unfilled positions, reduce wages for higher earners or raise prices.

Other recent national studies have found unemployment increases of several percentage points linked to higher state minimum wages, but economists argue about how best to control for other factors. For example, a very simple comparison of employment growth between states with low and high minimum wages suggests a difference, but that difference also could reflect economic differences that have nothing to do with wage policies.

"As recently as 2004, no state in the South had a state minimum wage," pointed out the authors of a 2010 working paper that found no employment effect. "Yet the South has been growing faster than the rest of the nation, for reasons entirely unrelated to the absence of state-based minimum wages."

In a recent round-up of the research, labor economist David Neumark for the San Francisco Fed, wrote that among studies that find an effect, a reasonable estimate is that employment falls 0.1 to 0.2 percent for every 1 percent increase in the wage floor. That comes out to about 100,000 to 200,000 jobs lost nationally from wage hikes since just before the Great Recession.

"This is a small drop in aggregate employment that should be weighed against increased earnings for still-employed workers because of higher minimum wages," Neumark wrote. "Moreover, weighing employment losses against wage gains raises the broader question of how the minimum wage affects income inequality and poverty."

In Neumark's view, much of the benefit of raising the minimum wage does not go to poor families. (Consider that 46 percent of poor workers have hourly wages above $10.10, and that many minimum-wage workers are non-breadwinners from wealthier families). Other policies, like the earned income tax credit, may be a better way to help lift families out of poverty.

In the end, it's possible that the ultimate effects of state minimum-wage hikes could differ between states and over time, so it's hard to know exactly what economic trade-offs state legislatures are making.

2015 was the year of the raise
2015 was the year of the raise