Could This Paper Be a Paradigm Shift for Minimum Wage Thinking?

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According to a new working paper by Texas A&M economists Jonathan Meer and Jeremy West, raising the minimum wage may have little or no effect on the level of employment, but it does hurt growth in employment for years after the increase goes into effect. In a recent column in the Washington Post, Robert Samuelson put it this way: “In the short run, even sizable increases in mandated wages may have moderate effects on employment, because businesses won’t abandon their investments in existing operations. But companies that think themselves condemned to losses or meager profits won’t expand.”

The new paper will, I am sure, be cited by opponents of current proposals to increase the federal and various state minimum wages. But, there are important reasons to be skeptical about the findings. (Apologies in advance for the long post!)

Two Red Flags

The first red flag is that the negative effect of the minimum wage estimated by Meer and West applies to the entire workforce (not just workers affected by the minimum wage) and appears to lie well outside the range of almost all earlier research on the minimum wage. Meer and West find that “a real minimum wage increase of 10 percent reduces job growth in the state by around 0.53 percentage points (during these years, the average state employment growth rate was 2.0 percent annually).” (p. 16) So, according to Meer and West, a 10 percent increase in the minimum wage would reduce the growth rate in total state employment by about 25 percent, roughly from an average of 2 percent in the absence of the minimum wage to 1.5 percent after a 10 percent increase. This is a very large effect. Economists typically treat policies that might raise or lower economic growth by 0.1 or 0.2 percentage points as a very big deal.

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