August 19, 2022

Economix: How to Create Jobs and Cut the Deficit

Today's Economist

Casey B. Mulligan is an economics professor at the University of Chicago.

Another federal minimum-wage increase would not, as some proponents promise, create jobs, but would reduce employment.

A few months ago, The New York Times editorialized that America’s minimum-wage workers “need a raise.” The Center for American Progress said a higher federal minimum wage “encourages spending, investment and economic growth.”

Many economists expect the minimum wage, if it has any effect, to raise employer costs and thereby reduce employment, especially among people who are likely to work in minimum-wage jobs, like part-time workers.

Federal and state minimum wages have changed a number of times over the years, and each of those instances provides an opportunity to test the employment-reducing hypothesis. For the episodes before 2007 (which I’ll refer to as the historical minimum-wage increases), many statistical studies of minimum-wage effects are summarized in books by David Neumark and William L. Wascher and David Card and Alan B. Krueger.

Not everyone interprets the historical evidence the same way. The New York Times and the Center for American Progress cited some of that evidence to alleviate concerns that a minimum-wage increase would reduce employment.

Even those who believe that historical minimum-wage increases did little, if anything, to reduce employment are still likely to appreciate that a minimum wage that was high enough — a hypothetical $100 an hour, for example — would significantly depress employment. The real disagreement is whether historical minimum wages were high enough, and the economic situations right, for those increases to destroy a large number of jobs.

The most recent federal minimum-wage increase, on July 24, 2009, had the potential to have different effects than its predecessors. Adjusted for inflation (and deflation), by 2009 the real federal minimum wage had been raised to a level 32 percent higher than it had been in 2006 — nowhere near our hypothetical height, which we all agree would be destructive — but perhaps high enough to have some of those effects.

In addition, during a recession hiring decisions may be especially sensitive to employment costs, though some economists say recessions make employment less sensitive to wages.

It’s also easy to exaggerate the effects, good or bad, of the federal minimum wage, because seasonal workers, employees who rely on tips and others are exempt from it, and a few states have minimum wages above the federal minimum.

For these reasons, I have been studying the 2009 federal minimum-wage increase by itself and trying to separate the effects of the recession from the effects of the wage increase (see this recent publication for more details; my next posts will point to some other findings from the 2009 increase).

Part-time and teenage employees are especially likely to have hourly wages near the federal minimum. The red line in the chart below displays seasonally adjusted national part-time employment by month, from the Census Bureau’s monthly household survey. Before July 2009, part-time employment increased by about three million during the recession and that month reached the peak level of part-time employment.

To investigate the possibility that the July 2009 wage increase stopped further increases in part-time employment and perhaps affected other employment categories, I estimated a monthly model of national part-time and full-time employment per capita for each of 12 demographic groups distinguished by race, gender and age (white and nonwhite, male and female, and 16 to 19 compared with 20 to 54 and 55 and over), using data from before the increase.

I used the model to forecast part-time and full-time employment for each demographic group for August 2009 through December 2010. The aggregate deviation of the part-time predictions from the actual was added to the red line to arrive at the aggregate part-time prediction shown as the chart’s blue line.

After falling 9.3 million during the recession through July 2009, aggregate full-time employment fell another 1.8 million by the end of the year and remained below July 2009 levels at the end of 2010. Some people dismissed from their full-time jobs probably had trouble finding another suitable one, and some of them worked part time while they searched.

Consistent with this story, my estimates predicted that part-time employment would have continued to increase during the second half of 2009 because, before the increase, part-time employment tended to increase with full-time job losses.

The actual and predicted data depart dramatically beginning in September 2009, with actual part-time employment 1.2 million below predicted part-time employment by December and averaging 975,000 part-time positions below what was predicted over the months August 2009 to December 2010.

A small number of these job losses were offset by possible increases in full-time employment (relative to what it would have been – more on this next week). I find the total job loss from the July 2009 minimum-wage increase to be about 800,000.

If raising the minimum wage reduced employment by 800,000, cutting it back to its early 2009 level is likely to increase employment by 800,000. That would add a bit to government revenue as some of those people moved from unemployment benefits to tax-paying workers.

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