New Study Finds a High Minimum Wage Creates Jobs

MAY 13, 2023 By Eric Levitz, features writer for Intelligencer who covers politics and economics

Photo: Tayfun Coskun/Anadolu Agency via Getty Images

A decade ago, conventional wisdom held that raising the minimum wage would not necessarily benefit low-income workers. The logic of this view went like this: Although some workers would benefit from the government forcing their pay up by fiat, others would find themselves effectively locked out of the labor market. After all, if one lacked the skills necessary to produce $15 worth of economic value in an hour of labor, then a law forbidding employers from paying anyone a lower rate than that would render you unhireable. Indeed, rather than improving the lot of “low-skill” workers, a high minimum wage would inspire businesses to automate their roles out of existence, condemning such proletarians to jobless penury. (Conservative economists who pushed this line always had to paper over the dissonance between their ostensible support for increasing productivity and their opposition to a government policy that would, by their account, yield new labor-saving technologies.)

2010 op-ed from Michael Saltsman of the Employment Policy Institute provides a characteristic rendition of the argument. Saltsman warned that if state legislatures raised the minimum wage for fast food workers, “The BurgerTron 3000” would soon take their jobs.

“In addition to pushing businesses toward automation, increasing the minimum wage makes it less likely for businesses to take a chance on employees without previous experience,” Saltsman explained. “Already feeling the pinch from the continuing economic downturn, the only way businesses will hire new employees is if they are skilled enough for the new, higher wage. Say goodbye to entry level jobs and hello to permanent double digit unemployment.”

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Over the next thirteen years, a long list of cities and states enacted minimum wage increases of unprecedented size. Between 2014 and 2022, California increased its minimum wage by 56 percent in inflation-adjusted terms. Over a similar time period, New York raised its wage floor by 72 percent.

Permanent double digit unemployment did not ensue.

In fact, not only did these historically large minimum wage hikes fail to put all fast food workers out of job, but a new study indicates that they actually induced job growth.

In “High Minimum Wages and the Monopsony Puzzle,” a team of economists at the University of California, Berkeley examined 47 large U.S. counties where the minimum wage had reached $15 an hour by the first quarter of 2021, and compared their wage levels and employment figures to those of similar counties that hadn’t raised the minimum wage since 2009. They focused specifically on fast-food workers, so as to avoid the complexities introduced by the tipped-wages common among servers at more upscale restaurants.

Their results will shock Saltsman and his ideological sympathizers. First, raising the minimum wage successfully increased hourly pay for workers in the bottom 10 percent of the income distribution without reducing wages for those in the middle. Had New York and California failed to pass minimum wage increases, this narrowing of the gap between the bottom and middle rungs of the income ladder would not have occurred. Second, the implications for employment were very slightly positive: Counties that enacted minimum wages saw more job growth, not less.

Now, a conservative economist might counter that one reason why these minimum wage hikes didn’t increase unemployment is that New York City, San Francisco, and Los Angeles already had fairly high market wages, and saw considerable “natural” wage growth over this period. If researchers had focused narrowly on the impact of state-level minimum-wage hikes on relatively low-wage counties in upstate New York or inland California, they probably would have discovered substantial employment effects.

Happily, the Berkeley economists thought of this. To correct for the possibilities 1) that high-wage cities are disproportionately likely to enact large minimum wage increases and 2) that high market wages attenuate the employment implications of high minimum wages, they isolated the impact of state-level minimum wages on counties that had neither enacted local minimum wage increases nor enjoyed above-average market wages.

When they narrowed their lens, the researchers did in fact find that the employment impacts of minimum wage hikes became more profound: Rather than producing a slight increase in job growth, high minimum wages were associated with substantial increases in employment.

In truth, this finding is not all that surprising. Economists have long recognized that, under conditions of “monopsony” — which is to say, when there are just a small number of employers in a given labor market — modest increases in the minimum wage will not kill jobs and might even create them. And liberal analysts had been arguing for decades that monopsony was far more common than generally appreciated.

Under conditions of monopsony, businesses do not need to offer competitive wages, since workers have few other employers they can turn to. Therefore, the market wage may substantially underprice the value that a given hour of labor actually provides to a firm. When the government steps in and forces wage rates up, businesses can afford to weather the increase in labor costs without slowing hiring, automating roles, or raising prices. Rather, they’re simply forced to divert a bit of their earnings away from ownership and towards staff.

That redistribution of income away from business owners to workers can, in turn, have a stimulative effect. Low-wage workers often live paycheck to paycheck and spend a high percentage of their earnings. Affluent business owners, by contrast, can often afford to stow away excess earnings. Thus, when you move dollars from the latter to the former, that money becomes more likely to circulate in the local economy. Which translates to higher demand for goods and services, such as fast food, which gives fast food restaurants an incentive to add more staff. This dynamic would of course break down if you raised the minimum wage to $1,000 or what have you. But the past decade of economic history indicates that there is far more scope to increase wages by government statute than previously thought.

Economic life is full of genuine tradeoffs. And there are times when progressives refuse to prioritize between competing goods in a counterproductive manner. But there are also many instances in which the only real tradeoff is between maximizing profits for owners and improving conditions for workers. In those cases, owners have an incentive to promote theories that posit a different, specious tradeoff — one that hurts a more sympathetic constituency. It is now apparent that the debate over a $15 minimum wage was one such case.