Fact Gathering on the Minimum Wage: What do the meta-studies show?

Posted on April 29, 2015 by Tom McDonnell

Euro coin
Euro coin

Ireland set up a Low Pay Commission earlier this year with a mandate to (amongst other things) recommend to government on an annual basis on appropriate changes to the rate set for the National Minimum Wage (NMW).

The employment impact of changes to the NMW has long been hotly contested with numerous conflicting theories such as the competitive model, the monopsony model and the institutional model. Fortunately there is now a wealth of international research on the employment impact of changes to wage floors and the UK’s Low Pay Commission has been funding and conducting research in the area since 2000. The UK Commission’s 16th and most recent report can be found here. The UK LPC finds that “the employment performance of most groups of workers particularly affected by the minimum wage – women, older workers, disabled workers, ethnic minorities, and migrants – has been better since 2008 than that of others not so affected by the NMW.” The UK LPC also finds that

"research we have commissioned to inform our decisions – now totalling 140 projects – has generally shown that the NMW has led to higher than average wage increases for the lowest paid, with little evidence of adverse effects on employment or the economy. Firms appeared to have responded by: adjusting pay structures; reducing non-wage costs; making small reductions in hours; increasing some prices; and some squeezing of profits (although insufficient to  lead to an increase in business failure).

The lack of evidence for an adverse effect on employment is consistent with the general results from the New Minimum Wage Research methodology that has been popular since the 1990s. The New Jersey/Pennsylvania study by David Card and Alan Krueger is perhaps the most famous of these attempts to simulate natural experiments. It has been argued that the Card and Krueger findings are study specific and not generalizable. However, meta-analysis of 64 US minimum wage studies by Hristos Doucouliagos and T. D. Stanley corroborated the Card and Krueger finding of little or no evidence of a negative association between minimum wages and employment. Dale Belman and Paul Wolfson’s new book contains a meta-analysis chapter on minimum wage studies since 2000. They conclude that

moderate increases in the minimum wage have the effect that was intended by the original supporters of such action: raising the minimum wage substantially increases the earnings of those at the bottom of the income distribution and reduces wage inequality. Negative effects on employment resulting from increases in the minimum wage were too small to be statistically detectable in the meta-analysis. Such effects would be too modest to have meaningful consequences in a dynamically changing labour market.

The latest NERI inBrief: “Employment Impacts and the New Minimum Wage Research” looks at these issues. Overall the most comprehensive meta-studies on the minimum wage suggest that the employment effects of a moderate change in the NMW are likely to be small or non-existent. The NERI submission to the Low Pay Commission can be found here.

Posted in: JobsWages

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