Thursday, November 7, 2013

Some pitfalls in establishing the impact of minimum wage hikes

The debates on whether to, depending on the country, introduce, repeal, increase or lower the minimum wage are never going to cease because empirical studies have not been able to give a definitive answer about the impact of the minimum wage on employment. The issue is first that good data is difficult to come by, second that there are many confounding effects and unobservables that may vary from one labor market to the other in significant ways, and third that the true effect may actually be small.

Sylvia Allegretto, Arindrajit Dube, Michael Reich and Ben Zipperer analyze a common way to study minimum wage hikes (to be distinguished from their introduction), cross-state regressions for the US, as US states have the option to set a higher minimum wage than the federally mandated one. They use six techniques employed in the literature to compare outcomes with four datasets. The reason why you want to try so many methods is that a simple regression does not cut it. The level of the minimum wage, for example, is associated with different business cycle characteristics, that is, setting a minimum wage at a particular amount is endogenous with all sorts of things that can be associated with the labor market. Still, no matter how they look at the data, the authors find that the effect of minimum wage hikes on employment is small, if there is any. This increases the odds that the effect is actually small.

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