Monthly Archives: October 2013

Minimum Wages and Job Growth: a Statistical Artifact

In a recent paper, Jonathan Meer and Jeremy West argue that it takes time for employment to adjust in response to a minimum wage hike, making it more difficult to detect an impact by looking at employment levels. In contrast, they argue, impact is easier to discern when considering employment growth. They find that a 10 percent increase in minimum wage is associated with as much as 0.5 percentage point lower aggregate employment growth. These estimates are very large, as John Schmitt explains in a recent post, and far outside the range in the existing literature. But are they right?

As I show in a new paper, the short answer is: no. The negative association between job growth and minimum wages is in the wrong place: it shows up in a sector like manufacturing that has few minimum wage workers, but is absent in low-wage sectors like food services and retail. In other words, it is likely a statistical artifact, and not a causal relationship.

Meer and West do not study the impact across sectors. The Business Dynamics Statistics (BDS) dataset that they use only allows them to study aggregate employment. This is a problem because there are many factors affecting overall job growth like sectoral shifts, demographic changes, etc., that vary across states with high versus low minimum wages. For this reason, most scholars in the literature control for overall employment, while Meer and West choose to use it as their key outcome.

The good news is that we can use richer datasets to study the relationship between minimum wages and employment growth. In my paper, I use data from the Quarterly Census of Employment and Wages between 1990 and 2011 to look at not only aggregate employment growth, but also growth in different sectors.

First, I show that the negative association between aggregate employment growth and minimum wages can also be found using the QCEW data, especially since mid-1990s. (I do find that controlling for population growth, which Meer and West do not, diminishes the estimates by around a third). This means there isn’t anything special about the BDS data or the sample that they use. But here is the surprising finding: this negative association is particularly strong in manufacturing, a sector with virtually no minimum wage workers. And yet, the negative association is absent in both retail and accommodation and food services, two low wage sectors that together account for nearly 2/3 of all minimum wage workers. In other words, minimum wages are indeed associated with lower employment growth, but exactly in the wrong places for the correlation to reflect a causal impact.

Why would we expect a statistical artifact like this to contaminate the study? In a recent IZA Discussion Paper (written with Sylvia Allegretto, Michael Reich and Ben Zipperer), we show that states with higher minimum wages have had deeper recessions, and greater reduction in routine-task jobs—factors that could explain the spurious manufacturing results. Complicating things further, minimum wage hikes are much more frequent in the latter part of economic expansions, making the timing non-random as well. Secular and cyclical differences across states with different minimum wage policies makes it particularly important to have reliable control groups. In our previous work, we have shown that contiguous counties make for good controls. And it turns out that the negative association between aggregate employment growth and minimum wages indeed disappears when I compare bordering counties with different minimum wages.

Together, the results indicate that the statistical association reported in Meer and West does not represent a causal effect of the policy. Rather, the correlation reflects the kind of heterogeneity between high and low minimum wage areas that we have documented elsewhere. The findings here also provide added external validity for our argument that a credible research design like comparing bordering counties can filter out such artifacts, and produce reliable estimates.

PS. If you want to a learn about employment dynamics and minimum wages, especially how hiring, separation, and turnover respond, ready my paper here.