August 21 2014

Behind President Obama's Claim that Raising the Minimum Creates Jobs

Charlotte Hays

President Obama and much of the media assert that raising the minimum wage will create more jobs.

President Obama said in June that since he first “asked” Congress to raise the minimum wage, thirteen states have done so, even though Congress has not. These states, the president said, have seen more job creation.

According to a piece in today’s Wall Street Journal, the president bases this contention on a report from the Center for Economic and Policy Research that claimed that the thirteen states in question had higher than average employment growth from January 2014.

Liya Palagashvili,a fellow of the Classical Liberal Institute at the NYU School of Law, and Rachel Mace, a student of economics at George Mason University, have taken a closer look at the study:

Of the 13 states that raised the minimum wage, Connecticut, New Jersey and New York were the three that raised it most, with increases ranging from 5% to 14%. These three states also experienced the worst job growth between January and May, an average of 0.03% compared with an average 1.28% for the other 10 states. Indeed, job growth was worse in each of these three states than it was, on average, in the 37 states that did not raise their minimum wage at all. Moreover, in New Jersey, the state that hiked minimum wage the most—to $8.25 an hour from $7.25—employment actually fell by about 0.56%.

Washington experienced the largest job growth at 2.1%, but the state only raised its hourly minimum wage by 13 cents. A full-time minimum-wage employee in Seattle now earns, before taxes, a whopping $23.80 more a month. That's barely enough to cover dinner for two at a chain restaurant. Consider also that between December and May the price of gasoline rose by more than 20 cents a gallon, according to Gasbuddy.com. Minimum-wage workers would need a big chunk of their higher pay to cover the increased cost of driving. There's no way there was enough left over to spark extra job growth.

We conducted a statistical analysis of the Bureau of Labor Statistics' data called a two-sample "t" test for comparing two means. We found, for this time period, no difference in the job-growth trend in the states that raised their minimum wages from states that did not. In other words, the correlation cited as debunking the economic case against the minimum wage is not statistically significant.

But can’t minimum wage hike advocates claim that raising the minimum wage at least does not hinder job creation? The authors point to their finding that states that raised their minimum wage the most saw, on average, lower job creation. That seems to refute the notion that a minimum wage hike has a neutral effect on job creation.

Advocates of hiking the minimum wage often say that if there is more money in the pockets of minimum wage workers, then they will spend more and there will be more money in circulation, leading to a demand for more goods and services—and—presto—more hiring.

But, as the authors note, only 2 percent of the American workforce is made up of minimum wage workers. That is too small a segment to significantly boost the economy. So the hard truth remains: if we make it more expensive to hire new workers, fewer will be hired.

 

  

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