07/24/2014 11:10 am ET Updated Sep 23, 2014

What Does the Minimum Wage Do? An Interview With Author/Economist Paul Wolfson

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To celebrate the fifth anniversary of the last increase in the federal minimum wage and to call attention to the fact that the federal wage floor has not risen in five years, the US Department of Labor has declared July 24th to be a "Day of Action."

Coincidentally, a new book surveying the scholarly literature on the effects of the minimum wage, What Does the Minimum Wage Do? came out earlier this month, written by Dale Belman and Paul Wolfson. Below, I interview Mr. Wolfson (who's an old friend, btw).

JB: What does your work suggest about the Fair Minimum Wage Act (FMWA): the proposal to raise the federal minimum wage from its current value of $7.25 to $10.10 in three annual steps and then index it to inflation?

PW: First, our work: in our book, we surveyed more than 70 analyses of the effect of the minimum wage on employment. By and large, the strongest studies in terms of statistical rigor reported an effect on employment that ranged between negligible and none. In addition, we performed our own meta-analysis, a procedure that combines the results of different studies in a statistically rigorous way, and this confirmed the result of "negligible to none."

How does this relate to the FMWA? The proposal would increase the federal minimum in three $0.95 steps of 13%, 12% and 10% each. In the last 35 years, increases in the Federal Minimum Wage have ranged between 7% and 14%, with an average increase of 11%-12%. Thus, the proposed increases are quite typical of historical experience, and this suggests that if there is any effect on employment it will be too small to be detectible.

JB: At least as interesting as the question of the minimum wage and employment is "What is the effect of the minimum wage on low income families?" What can you say about this?

PW: We discovered in the course of writing the book that there's actually little useful work that addresses this issue. Nearly all of the studies in this area instead ask whether the minimum wage has reduced the percentage of families whose income places them below the poverty line. For several reasons, this turns out not to be an interesting question. First, the poverty line was developed about a half century ago and is widely regarded as an out-of-date measure of economic well-being. Second, it leaves out a variety of government programs that effectively increase family income.

A more interesting question asks whether the minimum wage has a noticeable effect on the incomes of low income families, some of whom are officially poor, some of whom are not.

Economist Arin Dube of the University of Massachussetts-Amherst recently completed a statistically sophisticated analysis of the effect of the minimum wage on different parts of the income distribution, from the incomes of very poor families all the way up to those we might call the lower middle class or solidly middle class. He reports that "the evidence clearly points to moderate income gains for low income families as a result of minimum wage increases."

JB: Your book is titled: What Does the Minimum Wage Do? How about giving us the elevator ride answer to that question.

PW: Limiting my answer to the historical experience, it does not have much or any effect on either the level of employment or on the unemployment rate. It appears to reduce churn in the labor market, both the amount of hiring and the amount of quits and firings. In fact, this may be one way in which the wage increase is absorbed: by lowering costs to low-wage employers of turnovers, vacancies, and training new workers.

The minimum wage increases wages for the lowest paid 10% of all employees and perhaps as much as the lowest paid 30% of women. This is pretty much all that we can be fairly confident about, and it is these effects that led my co-author to say that the American experience of the minimum wage is largely one of intended consequences. Despite the hundreds of studies in just the last 25 years, much remains unknown or known with insufficient certainty: the effect of the minimum wage on low incomes, on prices and output, on the different employment and unemployment experience of men and women, on the people's choices to remain in or leave school, to name just a few. Work has been done in each of these areas, but either too little to be yet confident of the results or too much of what exists turns out to be plagued by statistical problems of one sort or another.

JB: So, if it's not through cutting jobs, how do low-wage firms absorb the increase in labor costs?

PW: Again, we don't know for sure, but one possibility mentioned above is the reduction in turnover. This has two effects. One is a more experienced labor force (since employees hang around longer). The second is lower hiring costs, perhaps low enough to encourage firms to expand slightly since they expect to have a longer period for amortizing these expenses. In addition to the reduction in turnover, there is mixed evidence that restaurants (and other firms) respond by increasing prices, somewhat more evidence in favor than against. Similarly, studies that look for the response in lower levels of firm profits also report mixed evidence, generally considerably weaker than that for prices. Finally, there are hints that the higher minimum wage draws people into the labor force who had been sitting it out, leading to an increase in the average quality of prospective employees and thus more efficient firms. All of these things may be in play, each individually too small to be easy to detect in the available data with current techniques.

This post originally appeared at Jared Bernstein's On The Economy blog.