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Tuesday, October 12, 2010

Does a Higher Minimum Wage Reduce Jobs?

Arin Dube is interviewed about his research on the effects of the minimum wage (link to academic paper):

Here's a description of the interview:

Does Higher Minimum Wage Reduce Jobs?: ...In an interview with The Real News, Arindrajit Dube, labor economist and Assistant Professor of Economics at University of Massachusetts, said that increasing the minimum wage in some areas has not reduced jobs as expected by the conventional theory. 

Dube’s research looks at the effects of minimum wage differentials across state borders where the minimum wage is higher on one side of the border than the other. His research looks at the service industry, which he said employs the majority of minimum wage workers. According to his findings, both the short and long term effects of the increased wage on unemployment were negligible. 

“And that, I think, is an important factor to keep in mind for policymakers as they consider raising the minimum wage,” he said.

Dube said the conventional wisdom surrounding minimum wage comes from research done before the early ‘90s. ... Dube told TRNN that around the early to mid ‘90s some economists realized these studies were badly flawed, and began looking at local evidence instead of just national evidence. The famous work of labor economists David Card and Alan Kruger looked at the border of New Jersey and Pennsylvania when New Jersey raised its minimum wage. Within a year, he said, not only had employment in New Jersey not decreased, it had actually risen in some groups. 

He said the report received strong criticism from the economic community, but Dube’s studies apply this technique across borders of all the states, over a twenty year period to track the effects in many cases, and for a much longer period. 

“In that sense, we build on, but really generalize the Card and Kruger approach, and really address some of the serious criticisms that were made. And at the end of the day our results are actually strikingly similar to the original Card and Kruger finding, even though we were able to respond to pretty much all the criticisms that were levied against the single, case study approach.” 

Dube’s findings indicate that a higher minimum wage helps service retailers attract and retain employees, increasing their productivity. He said that a restaurateur, for example, is likely to reduce his employees when the wage goes up if only one restaurant raises their wage, but if most of them raise it, the added cost is passed on to the consumer who is likely to absorb it without decreasing their demand. 

Dube’s findings are specific to the service industry, which is generally tied to a specific market and does not have the mobility that manufacturing jobs have. However, he said there are very few Americans left in manufacturing that receive the minimum wage. ...

He said the ‘spillover effect’, where rising the minimum wage pushes up other wages, has only been found to affect those earning up to 25 per cent more than the minimum wage. 

Finally he added that work done by economists at the Federal Reserve showed minimum wage increase led to significant increases in purchases of durable goods. “From a perspective of stimulating demand, minimum wages will tend to increase demand by increasing the purchasing power of those workers.”

    Posted by on Tuesday, October 12, 2010 at 12:12 AM in Academic Papers, Economics, Unemployment | Permalink  Comments (115)


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