Have minimum wage increases raised US unemployment historically?

In their study, Cengiz et al. (2019) investigate whether changes in the US minimum wage from 1979 to 2016 affected the domestic employment rate. Their findings suggest that employment levels were not impacted, while worker earnings increased through higher payments and wage spillover effects.

How do minimum wage raises affect employment?

Minimum wage raises may increase unemployment, due to decreased competitiveness and labor substitution. This unemployment effect only impacts workers close to the minimum wage line, which is why Cengiz et al. (2019) focus on this worker subgroup for their study.

The authors use a dataset of 138 US state-level minimum wage increases over the 1979 to 2016 period. Then, they compare the number of excess jobs paying at or slightly above the new minimum wage to the missing jobs paying below it. This enables the identification of the actual employment effects caused by an increase in the minimum wage. This approach allows for the analysis of the following:

1. the direct employment effect on the policy target population,

2. the policy impact on total wage earnings.

Minimum wage increases have not historically reduced employment

The paper found that minimum wage raises do not cause significant changes in overall low–wage employment. In fact, the authors calculate the missing jobs just between $4 below the new minimum wage and the new minimum wage and the excess jobs at or slightly above it, namely up to $5 dollars above. The difference between them is statistically insignificant, even four years after the policy was introduced.

Figure 1: Historically, minimum wage increases created around as many jobs as they destroyed

Source: Cengiz et al. (2019)

Moreover, the authors examine the employment effect across different sectors. Interestingly, employment levels remained unchanged for the retail sector and restaurants, which are highly affected by minimum wage policies.

Additionally, it is estimated that the state’s entire wage distribution reacts to minimum wage increases. The authors point out that an increase in the minimum wage, apart from a direct increase in earnings for the ones paid below the minimum, also increases earnings for the workers paid up to $5 in excess of the new minimum wage. This effect is called a wage spillover, and it relates to how a higher minimum wage may lead companies to also increase the payment of unaffected employees.

Cengiz et al (2019) estimated that in the US over the 1979 to 2016 period a rise in minimum wages increased total earnings by 6.8%. Of this, 60% benefits directly the workers paid at or below the minimum wage, whereas the rest is the ripple effect for higher earners.

Conclusion

The study supports that minimum wage raises have not had a negative impact on US employment. However, one needs to be careful about overgeneralizing these findings into other settings. At the same time, the paper highlights that fears surrounding the impact of higher wages on unemployment may be exaggerated.