December 15, 2016
New Minimum Wage Law. As described in our recent blog series, a law passed in 2016 specifies a sequence of increases in California’s statewide minimum wage. Under this law, the minimum wage will increase from $10 per hour to $10.50 per hour in 2017, eventually reaching $15 per hour. (The minimum wage will continue to increase along with inflation in subsequent years.) In this post, we discuss one of the most widely debated and heavily studied aspects of minimum wages—their effects on employment.
Basic Economic Models Predict Lower Employment. When the minimum wage goes up, workers’ wages increase, but employers’ costs also increase—giving them an incentive to hire fewer workers. As a result, basic economic models predict that minimum wages reduce employment. More complex models also predict negative employment effects for high minimum wages, but they make varying predictions for low minimum wages.
Effects on Employment Uncertain. The effect of the new law on employment in California is uncertain, mainly for two reasons. First, the most rigorous research has not arrived at a clear answer regarding the effect of historical minimum wage increases. Second, California’s new minimum wage likely will be higher than those studied—so historical findings will not be directly applicable. The rest of this post elaborates on these two issues.
Research Findings Vary Significantly. Research on minimum wages has advanced rapidly in recent years. New studies have provided ever-improving estimates by separating the effects of minimum wages from other economic trends that affect employment. In our view, two 2016 studies best represent the current research frontier. The first is a study by Evan Totty, an economist at the U.S. Census Bureau. Totty finds very small negative effects on employment of minimum wage increases within two low-wage groups—teenagers and restaurant workers. The second is a study by David Powell, an economist at the RAND Corporation. In contrast to Totty, Powell finds that minimum wage increases have significant negative effects on teenage employment.
Existing Estimates Not Directly Applicable to California’s New Law. Rigorous studies—such as those mentioned above—have estimated the effects of U.S. minimum wages from 1975 to the present. When California’s minimum wage increases to $15 per hour, it likely will be significantly higher (in real terms) than minimum wages from that time period. Consequently, we generally would not expect the statewide effects of California’s new policy to be similar to the effect of previous increases in the minimum wage.
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