Looking at the descriptive statistics, there is no reason to believe that minimum wage increases are the cause of labor market distress in the Northwest, or elsewhere. But should we expect them to be?
The claim that higher minimum wages are the reason for labor market problems in the Northwest is an extreme version of a particular economic theory, namely that mandatory minimum wages cause employers to reduce the number of employees they hire. This assertion is based on an overly simple model that assumes that wages are set in the marketplace the same way as the price for tee-shirts or bananas.15 When applied to the real world of low-wage work, this model makes several unrealistic assumptions, including:
Workers and employers have many options available to choose from.
Employers do not incur cost when hiring and firing.
Workers can enter the job market, leave the job market, change jobs, or get fired without incurring loss.
All employers have perfect knowledge of the productivity and ability of all workers.
All workers have perfect knowledge of the options available and the tastes and needs of all employers.
Each worker’s productivity is identical and all workers work to their full potential without the need for guidance or supervision.
From the standpoint of an economist, this can be a useful way to simplify thinking about labor markets. However, it is far less useful for policy makers weighing a minimum wage increase. While the “competitive model” may be an apt descriptor of the job market faced by some workers under some conditions, it fails to account for realistic situations. As Alan Manning, an economist from the London School of Economics puts it:
What happens if an employer cuts wages by one cent? Much of labor economics is built on the assumption that all the workers will quit immediately (Manning 2003, p. 3).
Clearly, Manning’s scenario is not likely to happen. An alternative, more realistic model of the low-wage labor market states that:
Employers have power to set wages because workers incur substantial personal cost during unemployment.
Employers exercise that power by paying their employees less than what they would earn in a truly competitive market.
By paying lower wages, employers may cause higher turnover and incur higher costs to recruit, train, and supervise their workers.
While these assumptions may seem like common sense to the average worker, economists have only recently begun to incorporate them into analyses of low-wage labor markets. Using these assumptions, an increase in the minimum wage may not have a substantial impact on employment (and may even increase employment over some ranges) because workers are being paid less than what they are really worth economically to the firm. Rather than cause job loss, minimum wage increases would therefore correct a market imbalance by forcing employers to pay a fair wage. And by decreasing recruitment, training, and supervisions costs, increases to the minimum wage may not have a substantial impact on the cost of doing business for employers.
[…]
The most famous studies regarding the impact of the minimum wage on employment are a set of three studies that analyzed the impact of the New Jersey minimum wage increase in 1992. The 1992 increase in the New Jersey minimum wage created fecund ground for economic research for a number of reasons. First, the increase occurred during a stagnant labor market, making it unlikely that the disemployment effects of the increase were swamped by a growing economy. Second, there was a natural experimental situation because the economy of New Jersey is closely linked to the economy of eastern Pennsylvania, where the minimum wage did not increase. Finally, a series of political events lessened the probability that employers were preparing for the minimum wage increase ahead of time (Card and Krueger 1994, p. 773).
These studies of New Jersey and Pennsylvania are particularly important because instead of using broad aggregate data, they use data collected at the firm level. In addition, these are the studies most frequently cited in the public policy debate. Taken as a whole, the evidence from these studies clearly shows that the minimum wage increase in New Jersey did not yield the negative effects predicted by some. Yet opponents of minimum wage increases continue to focus on the one study that did claim to find a negative impact, despite the fact that highly questionable data render such a claim fatally flawed. The studies reaching the opposite conclusion, however, are based on data of much higher quality. […]
Based solely on their own research—using highly questionable data—Neumark and Wascher concluded that the minimum wage had a negative impact on employment. They did, however, acknowledge that many of their results are not statistically significant. Even more telling, after reviewing the results of the second Card and Krueger study that used government data and combining that with their own findings, Neumark and Wascher hedge by saying that they can only decisively conclude that “New Jersey’s minimum wage increase did not raise fast-food employment in that state” (Neumark and Wascher 2000, p. 1,391). From the point of view of a voter or policy maker, this is not an indictment of increased state minimum wages because the rationale for raising the minimum wage is improving the lives of minimum wage workers, not increasing employment at fast-food establishments.
Ultimately, the difference between the final Neumark and Wascher conclusion and that of Card and Krueger may be of interest to labor economists and statisticians, but not to low-wage workers and policy makers. Even if, based on Neumark’s and Wascher’s research, the suggestion of “a small positive effect” is removed from Card and Krueger’s findings, the evidence still suggests that states can raise minimum wages without hurting employment in fast-food restaurants. That being the case, it is even more difficult to believe that a state’s minimum wage can be the cause of statewide labor market distress in industries far less affected by minimum wages than the fast-food industry.