Fraser Forum

Minimum wage hikes negatively affect employment: new evidence

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Every provincial government (except New Brunswick) increased their minimum wage last year, and further increases are scheduled to take place. This is despite ample evidence showing that increasing the minimum wage harms low-skilled workers by reducing job opportunities. A study published by the National Bureau of Economic Research in December 2015 provides new evidence confirming the adverse employment effects of minimum wage hikes on low-skilled workers.

The study, authored by University of California economics professor Jeffrey Clemens, measures the impact of a series of increases to the U.S. federal minimum wage, from $5.15 per hour in 2007 to $7.25 in 2009. The paper largely focuses on the group of people who are most likely to be harmed by a minimum wage hikes: low-skilled workers, which are defined as individuals aged 16 to 30 with less than a high school diploma.

The study takes advantage of a feature of minimum wage policy in the United States, where an increase in the federal minimum wage can impact states differently. This is because states (and even cities) can have a minimum wage that is higher than the federal minimum, but not lower. When the federal government increases its minimum wage, some states may experience the full increase, while others may experience only a partial increase, and others still may experience no increase at all.

For instance, in 2008 the federal minimum wage went from $5.85 to $6.55 per hour. States with a minimum wage of $5.85 were fully bounded by the federal hike. States with minimum wages less than $6.55 but more than $5.85 were partly bounded. And states with minimum wages higher than $6.55 were not bounded at all.

The study, while controlling for other factors such as differences in the severity of the housing market decline, compares the changes in employment between the bounded, partly bounded, and fully bounded states to measure the impact of the federal minimum wage hike.

It finds that increasing the minimum wage had a significant negative impact on the employment rate of low-skilled workers. In fact, hiking the minimum wage reduced the employment rate among this group by 5.6 percentage points from 2006 to 2012 (the employment rate for low-skilled workers in December 2006 was 40 per cent).

In addition to a drop in the employment rate, the study finds that minimum wage hikes had other negative employment effects. For example, the minimum wage hikes led to a drop in the average number of hours per week worked by low-skilled workers of between 1.7 hours and 1.8 hours, the latter representing a 17 per cent decrease. Even workers who kept their jobs saw a decrease of 1.3 hours worked per week. Another consequence is that the average weekly earnings of low-skilled workers fell by $15 in the short-term (one year) and $13 in the medium-term (a little more than three years).

Overall, this study provides important evidence that should help guide the debate about minimum wage hikes. Governments planning further minimum wage increases should consider this and other evidence showing that minimum wage hikes reduce job opportunities for low-skilled workers.


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