RDP 2018-06: The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss 2. Previous Literature

Most credible studies on the effects of minimum wages on employment have been conducted for the United States. Starting with the seminal contribution of Card and Krueger (1994), these US studies tend to focus on state variations in minimum wages. In these studies, estimates of the effect of minimum wages on employment vary in magnitude as well as in direction (Doucouliagos and Stanley 2009; Dube, Lester and Reich 2010; Sawhill and Karpilow 2014). In saying that, there has been some convergence in the range of estimates over time, with most studies finding a small negative effect of minimum wages on employment, or zero effect. In light of this large body of evidence, the US Congressional Budget Office (2014) adopts a ‘central estimate’ that a 10 per cent increase in minimum wages reduces employment among affected workers by up to 1 per cent. Nevertheless, some prominent researchers maintain that minimum wages have significant adverse effects on employment and hours worked (e.g. Neumark 2014; Jardim et al 2017).

Leigh (2003) adapted this identification strategy to Australian data. He uses the fact that between 1994 and 2001 there were six changes to Western Australia's (WA) minimum wage, of between 3.5 and 9.3 per cent, that occurred out-of-step with other states. Leigh compared changes in the employment-to-population ratio in WA with those for the rest of the country around each of these changes. Across the workforce as a whole, he found an elasticity of employment with respect to the minimum wage of −0.29. He also found that the effects were greatest for workers aged 15–24, who had an employment elasticity of −1.0. However, there are some concerns about the methodology and robustness of Leigh's results (Junankar 2004; Watson 2004), and scepticism about the magnitude of these effect sizes (Neumark and Wascher 2006).

Research on the effects of minimum wages in the United Kingdom has tended to use different control strategies, given the lack of variation in minimum wages across geographic areas. Studies typically compare workers directly affected by changes in the NMW with a ‘control’ group of workers not directly affected – notably, those higher up the wage distribution (e.g. Dickens and Draca 2005; Dickens, Riley and Wilkinson 2009, 2012; Bryan, Salvatori and Taylor 2013). These studies find little evidence that either the introduction of the NMW in 1999 or subsequent increases to the NMW had an adverse effect on employment. The Productivity Commission (2015a) has since applied a similar identification strategy to Australia.^[3] Using administrative data for the period 2008 to 2013, they studied employment transitions around FWC decisions using a difference-in-differences strategy. Their approach was similar to the UK research, with workers earning wages higher up the wage distribution used as a control, and workers ‘captured’ by the increase used as the treatment group. They found that adverse employment effects from minimum wage increases are felt more by ‘would-be employees’ (that is, the unemployed and those outside the labour force). For those in jobs, the main effect was a reduction in hours worked rather than job loss. However, the Productivity Commission has expressed concerns about the robustness of these results.

Footnote

There have been several other Australian minimum wage studies. These studies often have data or other limitations that make their findings difficult to interpret (see Borland (2018) or Productivity Commission (2015b, Appendix C) for a review). [3]