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A better understanding of which approach is more rigorous is required to make reliable inferences about the effects of the minimum wage. This paper argues that: |
Labor market policy analysts strongly prefer studies that match “treatment” with “comparison” cases in a defensible way over studies that simply include controls and fixed effects in a regression model. |
The studies using the most rigorous research designs generally find that minimum-wage increases have little or no effect on employment. |
Application of these findings to any particular minimum-wage proposal requires careful consideration of whether the proposal is similar to other minimum-wage policies that have been studied. If a proposal occurs under dramatically different circumstances, the empirical literature on the minimum wage should be invoked w... |
Introduction |
President Harry Truman famously joked that he wanted to hire a one-armed economist because all of his staff economists would resort to “on the one hand… but on the other hand…” formulations when giving policy advice. Truman just wanted a straight answer. Today, policymakers and the public also seem to want a one-armed ... |
There are many criteria that could be used to make sense of the empirical literature on the employment effects of the minimum wage. This report focuses on the distinction between studies that use what I will refer to as “matched comparison groups” to estimate these effects, and those that do not. The term “matching” is... |
The first section of this report reviews the two major approaches to studying the minimum wage—studies with and without matched comparison cases—and compares the major findings from these two approaches. The second section makes an argument for preferring studies that use matching over studies that do not. The report c... |
Two approaches to studying the minimum wage |
The empirical literature on the impact of the minimum wage is large, but much of it (and all important recent studies) can be classified into one of two categories: one, studies that match and compare cases involving an increase in the minimum wage with a similar control group, and two, studies that do not match cases ... |
Matching studies |
Analyses of the minimum wage that use matching first received wide attention with David Card and Alan Krueger’s 1994 paper on an increase in New Jersey’s state minimum wage from $4.25 to $5.05. Card and Krueger were concerned with distinguishing changes in employment at fast food restaurants that would have happened an... |
The Card and Krueger study concluded that there was no evidence that the minimum-wage increase in New Jersey reduced employment in that state relative to the comparison group of Pennsylvania restaurants. Criticisms of the quality of the study’s phone survey data were raised at the time, which led the authors to analyze... |
The matching approach pioneered by Card and Krueger has been applied with increasing sophistication and stronger data sources than the initial phone survey data in the 20 years since the New Jersey analysis. The most notable advance in matching has been in the work of Arindrajit Dube with several coauthors, which uses ... |
Dube and his colleagues consistently find no evidence for reduced employment as a result of regular increases in the minimum wage using the county pair match. In fact, even before using county pairs, as Dube, Lester, and Reich (2010) add increasingly more precise geographic matching into their models, the negative impa... |
Table 1 Percentage change in employment for each percentage change in earnings due to a change in the minimum wage All county sample County pair sample No matching -0.784* -0.482** No matching, control for Census division differences -0.114 — No matching, control for state differences 0.183 — No matching, control for M... |
** Statistically significant at the 5 percent level. Source: Estimates drawn from Dube, Lester, and Reich (2010), Table 2 (this is not a reproduction of their Table 2) Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image |
The first row in Table 1, which presents results when no matching is done, is representative of most study designs before Dube, Lester, and Reich (2010), and many since. When no matching is done, the minimum-wage increase is estimated to have a negative effect. However, as the comparison is increasingly narrowed to mor... |
One possible critique is that by over-parameterizing (i.e., adding too many controls to) their models, Dube, Lester, and Reich (2010) are mistakenly attributing true employment-discouraging effects of minimum-wage increases to other variables in their model, or that statistical significance is lost due to the difficult... |
There are many different explanations for the lack of substantial disemployment effects in matching studies. One suggestion is that employers exercise “monopsony power,” or bargaining power associated with being one of a small population of buyers in a market (an analog to the monopoly power exercised by sellers). Just... |
The most comprehensive and best known matching studies find that a higher minimum wage does not have a negative impact on employment, but this finding is not unanimous. Some matching studies do find disemployment effects. For example, Sabia, Burkhauser, and Hansen (2012) find negative effects on employment when they co... |
Each of these studies is open to criticism. Hoffman (2014) shows that rectifying questionable data choices eliminates Sabia, Burkhauser, and Hansen’s (2012) negative result. Finally, all of these analyses use state-wide data, which arguably provide a weaker match than Card and Krueger (1994), Dube, Lester, and Reich (2... |
Studies without matching |
The alternative to a matching approach is to run a model using state-level or individual-level panel data (i.e., data collected over time) on employment levels to estimate how employment changes after states enact a higher minimum wage. These models have a number of valuable features, most notably their ability to cont... |
Notably absent from the fixed-effects models is any matching of comparison cases to treatment cases. While Dube, Lester, and Reich (2010) used counties immediately across a state border as comparison cases, the fixed-effects models implicitly treat every state not experiencing a minimum-wage increase as a coequal compa... |
This sort of bias is very plausible in practice. Many states in the South and Central United States are experiencing rapid population and economic growth. In contrast, communities in the Midwest and Northeast are already densely populated and in many cases undergoing a structural transition associated with the decline ... |
The economists most closely associated with the fixed-effects model approach to studying the minimum wage are David Neumark and William Wascher. In 2007, Neumark and Wascher conducted a thorough review of 102 minimum-wage studies, covering policies implemented both inside and outside the United States, and at the feder... |
A typical state-level fixed-effects approach is offered by Neumark and Wascher (1992), published two years before the great disruption of the Card and Krueger (1994) study. This research estimated that a 10 percent increase in the minimum wage reduced teenage employment by 1 to 2 percent and young adult employment by 1... |
Neumark and Wascher (1996), Neumark (2001), and others soon extended the fixed-effects modeling framework to individual-level data to understand the impact of the minimum wage on specific vulnerable groups. The authors find in both cases that increases in the minimum wage reduce employment for the population of interes... |
The most comprehensive exploration of the sensitivity of the fixed-effects model results to their ability to control for differences among states is by Allegretto, Dube, and Reich (2011). This study uses Neumark and Wascher’s preferred fixed-effects modeling framework, but includes controls for Census division and stat... |
The method has also been extended beyond standard employment outcomes for the United States. Couch and Wittenburg (2001) use a fixed-effects model to assess the impact of the minimum wage on hours worked, while Neumark and Wascher (2004) use these techniques to understand how labor market institutions are relevant for ... |
Which approach makes more sense? |
Matching cases of minimum-wage increases to a control group is essential because it is often the closest social scientists can get to the gold standard of an experiment using random assignment. Although the minimum-wage literature as a whole is divided on the question of the impact of minimum-wage increases, the strong... |
It is difficult to overstate how uncontroversial it is in the field of labor market policy evaluation to assert the superiority of matching methods to the nonmatching approaches described above. The seminal evaluations of the effects of job training programs, work-sharing arrangements, employment tax credits, education... |
Given the unanimity of the evaluation literature on the importance of these methods, how is it possible that so many minimum-wage studies use only state-level fixed-effects models? One possible answer is that unlike many of the programs studied in the evaluation literature, everyone is subject to the minimum wage. The ... |
Potential signs of progress |
In the immediate aftermath of the Card and Krueger (1994) study, many critics simply dismissed the finding as an abandonment of sound economic theory. Fortunately, today these reactions are less common (though still not unheard of), and the major voices in the discussion seem to be developing a mutual appreciation for ... |
The most important development in this recent work is not that it has resulted in agreement on the impact of the minimum wage. Numerous econometric disagreements remain, and of course Neumark, Wascher, and others continue to defend fixed-effects studies on the grounds that the biases in these analyses are not substanti... |
What do we need to keep in mind in applying research to policy? |
Study design offers a means of arbitrating between studies in the often conflicting minimum-wage literature. The strongest designs seem to consistently find little or no evidence of disemployment effects associated with increases in the minimum wage. However, when applying this research to policymaking, these findings ... |
First, we can only make inferences about the impact of a minimum-wage increase if it is relatively similar to the sorts of minimum-wage increases that have been studied. Dube, Lester, and Reich (2010, 962) caution that their “conclusion is limited by the scope of the actual variation in policy; our results cannot be ex... |
The recent bill introduced by Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.) to increase the minimum wage to $10.10 represents a 39.3 percent increase above the current federal minimum wage of $7.25, to be implemented over the course of three years. The typical increase in the legal minimum wage associated ... |
Table 2 Proposed and past federal minimum-wage increases Nominal minimum-wage increase Harkin-Miller proposal 39.3% in three steps 2007–2009 40.8% in three steps 1996–1997 21.2% in two steps 1990–1991 26.9% in two steps 1978–1981 45.7% in four steps 1974–1976 43.8% in three steps 1967–1968 28.0% in two steps Source: EP... |
The increase in Harkin and Miller’s proposed Fair Minimum Wage Act of 2013 is typical of the federal minimum-wage increases since the late 1960s. The largest increases during this period (i.e., 1974–1976 and 1978–1981) came at a time of considerable inflation, so their magnitude to a large extent reflects an effort to ... |
Figure A presents the distribution of all percentage changes in effective minimum wages for all states from 1980 to 2011 using data from the University of Kentucky’s Center for Poverty Research. The “effective” minimum wage is defined here as the highest of either the federal or state minimum wage in a given state. Alm... |
Figure A “Effective” one-year minimum-wage increases for all states, by percent change, 1980–2011 One-year increases 0-5% 85 5-10% 153 10-15% 219 15-20% 14 20-25% 5 25-30% 4 30-35% 5 35%+ 0 Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: The “eff... |
The relative size of any proposed increase does not necessarily imply that the results from the matching literature are irrelevant, but these findings should be invoked with caution in cases that depart from historical norms. Ultimately, what matters is not the absolute increase in the minimum wage, but whether or not ... |
Finally, policymakers need to remember that even the best national studies, such as Dube, Lester, and Reich (2010) or Allegretto et al. (2013), provide only average effects of the minimum wage across a wide sampling of counties. The effect of a federal minimum-wage increase in any given local labor market is likely to ... |
Ultimately, even skeptics of the matching literature reviewed here need to consider total effects of the minimum wage, and not simply whether or not a disemployment effect can be identified. The disemployment effects identified in the weaker empirical strategies are still small, and the earnings gains for minimum-wage ... |
Conclusion |
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