Monday, December 15, 2014

Did the Minimum Wage Cause the Great Recession to Last Longer?

Economists and historians will be debating well into the future as to what caused the Great Recession. What is a comparably amusing debate to watch is what caused the Great Recession to linger on as long as it has. My money has been on unemployment benefits being the primary culprit (see here and here), and yet another theory comes along to complement the "unemployment benefits" theory: minimum wage laws. Shortly before the Great Recession began, Congress passed the Fair Minimum Wage Act of 2007, which gradually raised the federal minimum wage from $5.85 to $7.25 per hour. Minimum wage proponents like to think that gradual and "minute" minimum wage increases cause negligible economic harm at best, but recent research continues to add to the evidence that the minimum wage is nowhere as benign as proponents would have us believe. According to Professors Jeff Clemens and Michael Wither of the University of San Diego, the minimum wage hikes caused a net job loss of 1 million (Clemens and Wither, 2014).

Since there were states that were already paying a minimum wage that was higher than the proposed federal minimum wage, Clemens and Wither were able to measure the effects with a legitimate control group, which is no easy task in the world of social sciences. By doing so, the authors found that the employment-population ratio, i.e., the share of employed, working-age adults, decreased by 0.7 percentage points, which accounts for 15 percent of the overall decrease during the Great Recession. This helps make the study more credible because plenty of other minimum wage studies like to focus only on certain demographics (e.g., fast food workers, teenagers) instead of the macro effects of the minimum wage legislation.

This research also points out the significant declines in economic mobility (Clemens and Wither, Table 6), which is important because it reemphasizes the importance that low-skilled work has a stepping stone for upward mobility: five percentage points less likely to acquire a middle-class job. The other point that this research makes is how the minimum wage does not do nearly as good of a job of targeting low-skilled workers as the earned income tax credit does (Clemens and Wither, p. 33). The disemployment effect caused more educated workers to take on internship (p. 26), whereas less-educated workers were subject to increased odds of simply being unemployed (p. 27).

The fact that minimum wage increases unemployment and decreases economic mobility does not shock me in the slightest. While it is true that some individuals have the positive impact of an improved quality of life because of a minimum wage, let's not forget that it comes with the cost of depriving other individuals of the opportunity to gain experience and achieve higher-paid jobs in the long-run, which did nothing to help ameliorate the economic conditions of the Great Recession. This will hardly be the end of the minimum wage debate because it has become such a hot-button topic over the years. Nevertheless, if we want to help the poor, we should come up with policy alternatives that actually helps them, and spoiler alert, the minimum wage is not such an alternative.

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