[US] Positive and negative effects of post-pandemic minimum wage increase

The findings of a recent study show a mixed bag of positive and negative effects for US workers if the economic return after the COVID-19 pandemic includes minimum wage increases in some states. The Source reports on the research and shares feedback from its co-authors.

The research was led by scientists in the Olin Business School at Washington University in St. Louis. It suggests that minimum wage increases would have both positive and negative effects for US workers in the two years after implementation.

As a positive, the study shows that minimum-wage rises increase not just the wages of those workers but also create a positive “spillover” effect on the wages of other workers earning up to $2.50 above the minimum wage. These workers experience a wage increase and they additionally continue to keep their jobs as there is no increased likelihood of their firing.

On the flip side - for new entrants into the labour market - the study reveals that a higher minimum wage is bad news. The research shows that businesses, particularly companies producing tradeable goods like the manufacturing sector, reduce the rate of hiring new workers at low wages.

The study will appear in the Journal of Labor Economics.

“In general, minimum-wage increases following a crisis is not a good idea as it is likely to make a bad situation worse,” study co-author Radhakrishnan Gopalan - professor of finance in the Olin Business School - said, “We will have a tremendous number of individuals looking for jobs post-crisis, and our study indicates that a higher minimum wage is especially detrimental for this particular sub-population; folks looking for new low-wage employment.

“Given the important role of the minimum wage in ensuring that households have a living wage, it is essential to study its impact on workers and businesses. Furthermore, many have pointed to the minimum wage not keeping up with inflation as contributing to the worsening wage inequality and overall economic inequality in the U.S.” (Link via original reporting)

Co-author Barton Hamilton - the Robert Brookings Smith Distinguished Professor of Economics, Management and Entrepreneurship - added, “Our findings suggest that the impact of a higher minimum wage on income inequality depends on who you are. If you have a job that pays at or near the minimum, you are better off. If you do not have a job, such as many young workers just entering the labour force, employers will be less willing to hire you. So inequality might be reduced for older, more experienced workers, but may increase for younger, inexperienced workers.” (Link via original reporting)

Radhakrishnan Gopalan and Barton Hamilton together with two Olin PhD graduates - Ankit Kalda of Indiana University and David Sovich of the University of Kentucky - used Equifax data to study six states which enacted minimum-wage increases of between 75 cents and $1.25 per hour in the 2010-15 period and compared employees in border counties of neighbouring states without a minimum-wage increase. The 2010-15 study period reportedly covered 22.5 million active employee records in their overall sample.

The median personal income of the study group for 2015 was $34,970 - around $4,000 higher than the $30,622 US median that year but the median tenure of employees in the research sample was 3.5 years which is approximately three-quarters of a year less than the US median of 4.2 years.

The six studied states with a higher minimum wage were: California, West Virginia, Massachusetts, Nebraska, South Dakota and Michigan. The co-authors also examined data from bordering counties in Nevada, Wyoming, Kentucky, Pennsylvania, Virginia, New Hampshire, North Dakota, Iowa, Kansas, Wisconsin and Indiana.

Their findings did not show much evidence for labour reallocation, where businesses in states without minimum-wage hikes take on increased numbers of low-wage workers, to compensate for hiring decreases in states with wage hikes. Instead, the outcome was just a slower rate of hiring following voluntary turnover - for example, three employees leave and two new workers are taken on. The co-authors actually found high rates of turnover. On average, 54 per cent of workers paid below a state’s new minimum wage left within 12 months of being taken on.

Irrespective of the novel coronavirus crisis, pay inequity or imbalance has reportedly been considered an issue from the executive level to the manufacturing floor. Scrutinising the payroll data, the co-authors said that they discovered, on average, low-wage employees comprise 52 per cent of “establishment employment and 29 per cent of payroll.”

The economic crisis ensuing from the COVID-19 pandemic has led some cities and states to consider or - in the case of Virginia - publicly announced they want to rescind or postpone minimum-wage increases previously scheduled to go into effect in 2020. Additional states with upcoming increases scheduled include Arkansas, California (again), Connecticut, Illinois, Maryland, Massachusetts (again), Michigan, Missouri, Nevada, New Jersey, New Mexico, New York and Oregon.

Mr Gopalan said that the $600 weekly unemployment benefit under the CARES Act “is a pseudo wage increase” until the Act comes to an end. He continued, “This is because any business wanting to hire workers should match their unemployment benefit. Our paper would predict a slower new-hire rate in places where the wage rates were lower to start. The effect especially could be adverse in areas where employment is dominated by firms making tradeable goods, such as in the manufacturing sector.”

The findings of a recent study show a mixed bag of positive and negative effects for US workers if the economic return after the COVID-19 pandemic includes minimum wage increases in some states. The Source reports on the research and shares feedback from its co-authors.

The research was led by scientists in the Olin Business School at Washington University in St. Louis. It suggests that minimum wage increases would have both positive and negative effects for US workers in the two years after implementation.

As a positive, the study shows that minimum-wage rises increase not just the wages of those workers but also create a positive “spillover” effect on the wages of other workers earning up to $2.50 above the minimum wage. These workers experience a wage increase and they additionally continue to keep their jobs as there is no increased likelihood of their firing.

On the flip side - for new entrants into the labour market - the study reveals that a higher minimum wage is bad news. The research shows that businesses, particularly companies producing tradeable goods like the manufacturing sector, reduce the rate of hiring new workers at low wages.

The study will appear in the Journal of Labor Economics.

“In general, minimum-wage increases following a crisis is not a good idea as it is likely to make a bad situation worse,” study co-author Radhakrishnan Gopalan - professor of finance in the Olin Business School - said, “We will have a tremendous number of individuals looking for jobs post-crisis, and our study indicates that a higher minimum wage is especially detrimental for this particular sub-population; folks looking for new low-wage employment.

“Given the important role of the minimum wage in ensuring that households have a living wage, it is essential to study its impact on workers and businesses. Furthermore, many have pointed to the minimum wage not keeping up with inflation as contributing to the worsening wage inequality and overall economic inequality in the U.S.” (Link via original reporting)

Co-author Barton Hamilton - the Robert Brookings Smith Distinguished Professor of Economics, Management and Entrepreneurship - added, “Our findings suggest that the impact of a higher minimum wage on income inequality depends on who you are. If you have a job that pays at or near the minimum, you are better off. If you do not have a job, such as many young workers just entering the labour force, employers will be less willing to hire you. So inequality might be reduced for older, more experienced workers, but may increase for younger, inexperienced workers.” (Link via original reporting)

Radhakrishnan Gopalan and Barton Hamilton together with two Olin PhD graduates - Ankit Kalda of Indiana University and David Sovich of the University of Kentucky - used Equifax data to study six states which enacted minimum-wage increases of between 75 cents and $1.25 per hour in the 2010-15 period and compared employees in border counties of neighbouring states without a minimum-wage increase. The 2010-15 study period reportedly covered 22.5 million active employee records in their overall sample.

The median personal income of the study group for 2015 was $34,970 - around $4,000 higher than the $30,622 US median that year but the median tenure of employees in the research sample was 3.5 years which is approximately three-quarters of a year less than the US median of 4.2 years.

The six studied states with a higher minimum wage were: California, West Virginia, Massachusetts, Nebraska, South Dakota and Michigan. The co-authors also examined data from bordering counties in Nevada, Wyoming, Kentucky, Pennsylvania, Virginia, New Hampshire, North Dakota, Iowa, Kansas, Wisconsin and Indiana.

Their findings did not show much evidence for labour reallocation, where businesses in states without minimum-wage hikes take on increased numbers of low-wage workers, to compensate for hiring decreases in states with wage hikes. Instead, the outcome was just a slower rate of hiring following voluntary turnover - for example, three employees leave and two new workers are taken on. The co-authors actually found high rates of turnover. On average, 54 per cent of workers paid below a state’s new minimum wage left within 12 months of being taken on.

Irrespective of the novel coronavirus crisis, pay inequity or imbalance has reportedly been considered an issue from the executive level to the manufacturing floor. Scrutinising the payroll data, the co-authors said that they discovered, on average, low-wage employees comprise 52 per cent of “establishment employment and 29 per cent of payroll.”

The economic crisis ensuing from the COVID-19 pandemic has led some cities and states to consider or - in the case of Virginia - publicly announced they want to rescind or postpone minimum-wage increases previously scheduled to go into effect in 2020. Additional states with upcoming increases scheduled include Arkansas, California (again), Connecticut, Illinois, Maryland, Massachusetts (again), Michigan, Missouri, Nevada, New Jersey, New Mexico, New York and Oregon.

Mr Gopalan said that the $600 weekly unemployment benefit under the CARES Act “is a pseudo wage increase” until the Act comes to an end. He continued, “This is because any business wanting to hire workers should match their unemployment benefit. Our paper would predict a slower new-hire rate in places where the wage rates were lower to start. The effect especially could be adverse in areas where employment is dominated by firms making tradeable goods, such as in the manufacturing sector.”