Obama’s Minimum-Wage Hike Will Hit Employment

President Obama has proposed increasing the federal hourly minimum wage from $7.25 to $9.00, pointing out that 19 states already have minimum wages in excess of $7.25.  Only one state, however, Washington, has a minimum wage above $9.

So what impact would this have?

First, we calculate that this 24% federal hike would increase the effective minimum wage applicable to American labor-force participants, many of whom reside in states with above-federal minimum wages, by 19% on average.  This is substantial.

An important question which follows is what impact this would have on employment.  A recent paper by Texas A&M economists Jonathan Meer and Jeremy West found that whereas the immediate impact on unemployment of raising the minimum wage by 10% is very small, its impact on long-term job growth is more substantial: 0.35 percentage points.  The logic is that raising the minimum wage is a greater deterrent to hiring than it is a motivator for firing.

Using their findings, the 19% rise in the effective minimum wage proposed by President Obama would decrease long-run job growth by 0.7 percentage points.  Put in perspective, this is significant.  Over the past twelve months, average year-over-year job growth has been 1.8%.  Knocking off 0.7 percentage points would reduce it to 1.1%, which is barely more than the 0.9% average year-over-year growth in the labor force over the past twelve months.  As today’s Geo-Graphic shows, this could materially slow the fall in unemployment from its current high level.

Romer: The Business of the Minimum Wage

Salam: A Missing Dimension of the Minimum Wage Discussion

Kimball: Jonathan Meer and Jeremy West on the Effects of the Minimum Wage on Employment Dynamics

New York Times: Jobs to Fill, Employers Wait for Perfection