New Study: Minimum Wage Increases Do Not Boost the Economy

Research Shows Minimum Wage Increases Can Negatively Affect Some Industries’ Output
  • Publication Date: December 2010

  • Topics: Minimum Wage

WASHINGTON – Today, the Employment Policies Institute (EPI) released a new study by economist Dr. Joseph J. Sabia of the United States Military Academy at West Point which finds that—contrary to some advocates’ claims—minimum wage increases do little to stimulate the overall economy. The research also shows that wage hikes can have a negative effect on state Gross Domestic Product (GDP) generated by certain lower-skilled industries.

Using data from the Census Bureau and the Bureau of Economic Analysis, and controlling for state employment trends and other variables, Dr. Sabia finds that each 10 percent increase in the minimum wage is associated with a two to four percent decline in state GDP generated by lower-skilled industries. These are industries that provide work to less-experienced workers and include wholesale trade, durable manufacturing, warehousing and storage, rental and leasing services, and administrative and waste services.

Looking at overall GDP, Dr. Sabia finds no positive effect from minimum wage increases. A one-page policy brief describing the study’s findings is available here:http://epionline.org/studies/Failed_Stimulus_PolicyBrief_web.pdf.

“Although proponents tout minimum wage hikes as a form of stimulus or economic ‘shot in the arm’, the evidence shows otherwise,” said Michael Saltsman, research fellow at the Employment Policies Institute. “Minimum wage hikes not only fail to boost the economy, but can actually have a negative effect on businesses in certain industries.”

Dr. Sabia’s research has important implications, especially in states that have a history of considering wage increase legislation or aggressively raising their minimum wage. In addition to the well-established negative employment consequences from raising the minimum wage, policymakers must also consider the harm they can cause to certain industries and their ability to provide entry-level employment.

“This research suggests that in both good and bad economic times, raising the minimum wage is a bad idea,” Saltsman continued. “Legislators should carefully scrutinize proposals like minimum wage increases, which fail to improve the economy and will certainly cause further job loss.”

“Now is the time for legislation that will create jobs and boost the economy—not the opposite.”