Jonathan Meer & Jeremy West:
Our findings are unequivocal: higher minimum wages lead to lower rates of job growth. Indeed, a ten percent increase in the minimum wage causes roughly half a percentage point reduction in the rate of job growth, a very large effect. The effect of this hypothetical increase is not permanent, though, since it is eroded by inflation and increases in the state’s comparison group. Our calculations show that this ten percent increase in a state’s real minimum wage, relative to its regional neighbours, causes a 1.2% reduction in total employment relative to what it would have been. We further find that this appears to be driven primarily by reductions in job creation by expanding establishments, not by increases in job destruction by contracting establishments. Essentially, then, the intuition is that employers respond to the minimum wage by growing more slowly.
Judging whether the effect we find is large or small is not necessarily simple. Some might point to a 1.2% reduction in the level of employment after five years and argue that is relatively small – it represents about 23,000 fewer jobs for the average state – and that those who earn the minimum wage and remain in the labour force would earn more. But that argument seems coldly indifferent to those who remain outside of the labour market, unable to take advantage of the relatively rapid transitions out of minimum-wage jobs. At a broader level, it is important to note that, in contrast to much of the previous literature and the dismissiveness of some advocates, we document that the minimum wage does, in fact, affect employment.
