New Study Shows Minimum Wage Hike Killed 1.4 Million Jobs for Low-Skilled Workers

Dec 18, 2014

A National Bureau of Economic Research study released late last month by economists with the University of California at San Diego found that mandatory increases in the federal minimum wage between 2007 and 2009 had “significant, negative effects on the employment and income growth of targeted workers.”  The study shows hikes in the federal minimum wage during the Great Recession led to the loss of approximately 1.4 million jobs held by low-skill and entry-level workers, thus hurting those the higher wage was intended to help.

The study, considered one of the most rigorous and comprehensive on minimum wage, examines the increase in the federal minimum wage from $5.15 to $7.25 that took place between July 23, 2007 and July 24, 2009 and analyzes the short-term and medium-term effects on the employment and income trajectories of low-skilled workers during the Great Recession and subsequent recovery.  The conclusion of the study:

“We find that increases in the minimum wage significantly reduced the employment of low-skilled workers…We find that this period’s binding minimum wage increases reduced low-skilled individuals’ average monthly incomes.”

Most telling is the study’s finding that the minimum wage increase not only reduced employment and incomes for low-skilled workers, these low-skilled workers experienced “significant declines in economic mobility” over time.  The impact was especially significant on low-skilled workers with no college education:

“We find that binding minimum wage increases significantly reduced the likelihood that low-skilled workers rose to what we characterize as lower middle class earnings.”

The study links this reduction in upward mobility to the reduction in access to opportunities for accumulating work experience.  Translation—as minimum wage hikes reduced entry-level jobs for low-skilled workers, the future earning potential of these workers was stunted since those workers could not gain the work experience and skills they needed to move up the earnings ladder.  This reinforces the face that entry-level, low-wage jobs are a key stepping stone to earning more later in life.

Several factors set this study apart from its predecessors.  The study did not focus on one demographic of minimum wage earners, such as fast food workers, teenagers, etc., rather focused on the impact of the higher mandated wage on all working-age adults.  The study observed the employment and earnings of low-skill workers earning the minimum wage for an extended length of time (four years), which allowed the researchers to track transitions of low-wage workers into middle and lower middle class earnings.  The study separated the impact of the higher minimum wage from the overall job losses of the Great Recession, and also adjusted for the differing state-level impact of the Great Recession.  And the researchers were able to use as a control group states that were not affected by the increase in the federal minimum wage because those states were already paying a mandated minimum wage that was higher than the federal minimum.

The study also included a comparison of the impact of minimum wage hikes with the Earned Income Tax Credit (EITC) as a policy for addressing poverty.  According to the study, the EITC does a much better job of helping the poor:

“Our estimates provide evidence that binding minimum wage increases reduced the employment, average income, and income growth of low-skilled workers over short-and medium-run time horizons.  By contrast, analyses of the EITC have found it to increase both the employment of low-skilled adults and the incomes available to their families.  The EITC has also been found to significantly reduced both inequality and tax-inclusive poverty metrics, in particular for children.”

This study is one of many that proves mandated increases in the minimum wage hurt most those the wage hikes are intended to help—workers with few skills or work experience—and are a poor solution to ending poverty.  Nearly a million and a half workers thought their lives and standard of living would improve when their wage increased from $5.15 to $7.25, only to find themselves with no job. 

As the City of Tacoma becomes the third city in Washington to consider a $15 minimum wage, let’s hope the Tacoma City Council and voters are paying attention.