Five Ways Minimum Wage Studies Fail - Counterfactuals
The first post on the Mere Economics blog revisited a post I'd written over at the Independent Institute. Here's part 5.
When do legislatures pass minimum wage increases? Most likely, not in the troughs of a depression. At least some politicians know that the minimum wage can cause job loss. Some minimum wage advocates will acknowledge that (some) job loss is an acceptable trade-off in return for higher incomes for (some) workers. But to be seen as responsible for causing that job loss by supporting a minimum wage increase may be political suicide. This suggests that there are better and worse times, from a politician’s perspective, for tinkering with the minimum wage.
Hiking the minimum wage during boom periods is more politically palatable because favorable macroeconomic conditions can mask some of the resulting unemployment. During the boom, overall prices and wages are rising, which means the real (inflation-adjusted) minimum wage rate is falling. That, in turn, means it’s less binding, and there will be less job loss than otherwise.
To therefore capture the total effects of minimum wage legislation on jobs, it’s necessary to deploy counterfactual reasoning. Yes, unemployment is low in a boom. But unemployment would have been even lower but for the minimum wage increase. If a study simply compares “before” and “after” where “before” is a “normal” period or even a downturn, while “after” is a boom, then it will be difficult to accurately assess the impact of the minimum wage on job loss.
If it hasn’t been done already, someone should overlay the dates of minimum wage hikes on NBER recession data, as reported by the St. Louis FRED database. My prediction is that hikes tend to occur during booms, rarely during recessions.
These five ways that studies can fail to detect minimum wage-induced employment effects are far from exhaustive, nor does this essay plumb these five exhaustively. Further, how these five reasons play out, how they interact, and which are relevant to which studies are questions that must be evaluated on a case-by-case basis. But we’d all do well to keep these five points in mind the next time we see a study touting that when it comes to the minimum wage there is, in fact, a free lunch.