Transcript Arin Dube: The impact of a minimum wage

00:00 I’m Aaron Dube, professor of economics at UMass Amherst, and I’ll be talking about the minimum wage.

00:15 1938 the United States passed legislation to introduce the first federal minimum wage. Since then the minimum wage has increased over time.

00:17 You might think that when wages go up employers demand less labour and unemployment rises. On the one hand you’re raising the wages, that’s a good thing, on the other hand if that leads employers to cut back on jobs you may end up hurting the very people you’re trying to help.

00:36 We actually look to see what happened when different jurisdiction in the United States raised their minimum wage, looking at the data to track what happens to various outcomes–jobs, wages and the like. We have found a particularly successful way of doing that is by looking at places that are right next to each other, tend to be very similar, but one side of the border you see an increase in the minimum wage and the other side did not.

01:03 The US-Israel laboratory for studying minimum wage policies, because here we have not just a federal minimum wage but different states and even cities with their own minimum wages. So anytime you’re studying the effect of a policy you need to answer the question what would have happened if the minimum wage did not rise?

01:22 One side of the border you see an increase in the minimum wage and the other side did not and then we track jobs, wages, and other outcomes over next several years to see what happened when the policy changed.

01:34 Fast-food restaurants in San Francisco have to pay a substantially higher minimum wage than just south of San Francisco, for example at Stanford. We found that while wages rose substantially for low-wage workers; people who work in fast-food or young workers, we did not find much effect on employment.

01:57 Overall, earnings of low-wage workers rose substantially which was an encouraging finding. One of the reason why employment does not fall when minimum wage rises is because employers are able to pass on some of the increased cost as increased prices. So consumers pay a little bit higher prices so that low-wage workers get a substantial increase in their earnings. When the minimum wage rises by about 10%, fast-food wages rise by about 2% with very little change in employment.

02:31 That means raising the minimum wage tends to raise the overall take-home pay of fast-food workers inclusive of any possible employment effects very substantially.

02:41 When the minimum wage rises it tends to raise earnings at the bottom. It tends to reduce inequality. It tends to reduce the Gini coefficient. It can also improve the functioning of the labour market by reducing turnover and making jobs more attractive for low-wage workers.

03:02 wAnytime the minimum wage rises, be it a 1938 or 2015, the argument that’s made by critics is that it increases the cost of hiring and leads to less jobs and higher unemployment. As an economist it becomes important to actually test these theories, to test what happens to employment when minimum wage rises, looking at the data.

03:30 A key takeaway is that minimum wage increases so far have raised earnings, reduced inequality, without substantially hurting job prospects for low-skilled workers.

03:40 But our job is not done, we have to keep studying what the effect of this policy is. We don’t know what’s going to happen when the minimum wage rise in a different context. So it’s important to keep looking at the data and keep studying its effects.