New Study: Minimum Wage Increases Hurt Vermont’s Economy

  • Author: Michael Saltsman

  • Publication Date: December 2010

  • Newspaper: Brattleboro Reformer

  • Topics: Minimum Wage, Teen Unemployment

A new year and a new legislative session approach. And with the new year comes a new minimum wage: Indexed to inflation, Vermont’s minimum wage will increase to $8.15 an hour on Jan. 1.

Advocates for a higher minimum wage will often tell you that increases have no effect on the employment rates of low-skilled workers and that these wage mandates act as a “shot in the arm” to the economy.

The first claim has long been known to be false. A comprehensive examination of two decades of research on the minimum wage by Drs. David Neumark (University of California – Irvine) and William Wascher (Federal Reserve Board) concluded that 85 percent of the best studies on the subject indicate that minimum wage hikes were met with job losses.

What about the second claim regarding economic growth? In a sluggish economy it is good rhetoric, and it makes a certain amount of sense; more disposable income leads to more spending which means a more robust economy, right?

Wrong. A new study from labor economist Dr. Joseph J. Sabia (United States Military Academy at West Point) suggests that increases in the minimum wage have a negligible effect of the Gross Domestic Product (GDP) of the overall economy–and can actually have a negative effect on the GDP generated by certain low-skilled industries.

Sabia starts with employment data from the Census Bureau, and – adding to decades of empirical consensus – finds that each 10 percent increase to the minimum wage decreased employment for low-skilled employees like teenagers by 3.6 percent. Sabia finds little evidence that these lost jobs were accompanied by increases in school enrollment, so he turns to Bureau of Economic Analysis data to see if there’s a negative effect on the businesses where those jobs existed.

Controlling for economic performance and state employment trends, he finds that a 10 percent increase in a state’s minimum wage is associated with a two to four percent decline in state GDP generated by low-skilled industries like wholesale trade, manufacturing of durables, warehousing and storage, rental and leasing services, and administrative and waste services

When he widened the scope of the study to look at national GDP, Sabia discovered that increases in states’ minimum wages from 1997 to 2007 had a small (but statistically insignificant) negative effect on the national economy. Where is this promised shot in the arm?

It doesn’t exist. It’s nothing more than a talking point put forth by activist groups who don’t have a leg to stand on, statistically. And it’s an especially devious talking point considering not only the state of the national economy but also the fact that low-skilled workers are hurt the most by increases to the minimum wage.

Facts are stubborn things, and the reduction in employment that follows increases to the minimum wage is one of the most stubborn. No matter how activists wish to spin it, increasing the cost of labor decreases the demand for that labor. It’s ECON 101.

If you don’t buy this simple, common sense theory — and the research that supports it — then trust your own eyes: Why do you think that self-checkout lanes have replaced manned lanes in grocery stores? Why do you think you clear your own tables and pour your own soda at fast food restaurants? Paying someone to do all of those tasks for you simply costs too much money in an age of higher minimum wages.

Given the precarious state of the economy in Vermont, Sabia’s research is especially relevant when it comes to talk of increasing the minimum wage – it’s a bad policy in both good times and bad, a double whammy that decreases the GDP generated by certain low-skill industries and hurts employment opportunities for low-skill workers, the most vulnerable portion of the workforce.

Michael Saltsman is the research fellow at the Employment Policies Institute, a research nonprofit dedicated to studying public policy issues surrounding entry-level employment.