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Studies question effects of minimum wage on employment

By Ma Zhe, Zhao Zhong | 2014-08-25 | Hits:
(Chinese Social Sciences Today)

In April, 2013, an employee stood in front of a MacDonald’s restaurant, striking for wage increase.


The aim of a minimum wage, a measure widely implemented in labor markets around the world, is to protect the fundamental right of laborers to a basic level of income. At the end of the 19th century, the first legislative attempts to regu­late a minimum wage were seen in New Zealand and Australia. Later, other countries, such as the United States and the United Kingdom, also passed minimum wage laws. Early minimum wage systems ap­plied only to special groups like women, young workers and ethnic minorities. After a century of de­velopment, many countries around the globe have established their own minimum wage systems, with policies that set minimum wages at multiple levels, from national to provincial and even municipal.


Limited negative effects

The conventional wisdom in economic theory suggests that the imposition of a minimum wage, whether in a perfectly competi­tive or monopolistic market, will affect employment in the low-income labor market. As a result, the minimum wage system has remained a controversy for a long time. In 2013, senior economist John Schmitt combed through the following empirical studies on the minimum wage.


As early as the 1970s, the Mini­mum Wage Study Commission formed by the U.S. Congress ob­served that the negative effects of the policy on employment were quite limited, with only young peo­ple being affected. In the 1990s, the New Minimum Wage Research was established. Some scholars resorted to natural experiments in their studies on the minimum wage, among which the most influ­ential was the empirical analysis of the effects on the fast food industry conducted by David Card and Alan Krueger in 1994.


According to their analysis, in­creasing the minimum wage did not adversely affect the employ­ment rate in fast food restaurants. Based on the analysis of Card and Krueger and combined with the arguments of the New Minimum Wage Research and its critics, three economists —Arindrajit Dube, T. William Lester and Michael Re­ich—compared the growth of em­ployment rates in different areas in 2010.


Their empirical investigation revealed that increases in mini­mum wages successfully raised the incomes of low-wage workers but had no effect on employment. They also noted that the fact that the employment expanded more rap­idly in areas with lower standards of minimum wages was mainly due to variations in employment trends in different areas and had nothing to do with the minimum wage system.


Apart from this, some scholars used the methodology of literature review to study the effects of the minimum wage. In 2009, Hristos Doucouliagos and T.D. Stanley conducted a meta-analysis of 64 research papers completed from the year 1972 to 2007 about the impact of minimum wages on youth employment. After weight­ing these documents by means of statistical precision, they found that the estimated value of the im­pact of minimum wages fluctuated around zero.


Wolfson and Belman analyzed 27 studies finished since the year 2000 in the same way. Moreover, they controlled factors, such as the objects of study and researchers, and also found that the negative in­fluence of minimum wage policies on employment was not statisti­cally significant.


David Neumark and William Wascher achieved different results in the year 2006 and 2007 when they conducted a qualitative study of the papers on minimum wage laws written since the 1990s, through which they found a nega­tive effect on employment. How­ever, critics contended that they used subjective criteria in selecting documents, hence their research results are controversial.


Missing targeted people

Though a large number of empirical studies show that the minimum wage has not exerted negative effects on employment, it is important to note that sev­eral key factors were neglected in the research process. In 2013, Landsburg observed that the Mc­Donald’s Corporation did not lay off employees after the increase of the minimum wage standard, but it is essential to consider how often the company recruited new staff, how many local McDonald’s res­taurants it operated and whether it adjusted the mode of production to reduce employment demand. A number of empirical studies on the fast food industry indicate that this sector usually experiences high staff turnover, but when the minimum wage was increased, fast-food restaurants, even if they did not induce a round of layoffs, were likely to postpone hiring new staff, thus reducing employment opportunities in the low-skill labor market.


Johnson and Browning conclud­ed in 1983 that low-wage workers commonly came from low-income families and that increasing the minimum wage as a social policy hardly changed the economic sta­tus of low-income families.


According to their empirical studies, a 22 percent increase in the minimum wage succeeded in regulating the household income distribution. Under the circum­stance, the incomes of the poorest families increased by less than 1 percent. Some 80 percent of low-income families suffered a loss because of the minimum wage system, while more than 10 per­cent of high-income families ben­efited from the system. In 2007, Burkhauser and Sabia found that, of all the benefits brought by the increase of the minimum wage, 87 percent went to the higher-income families while only 3.8 percent went to poor single mothers. These data support the argument that reducing poverty through a mini­mum wage is not viable since it cannot be assured that the benefits accrue to targeted groups.


In the United States in particular, most of the beneficiaries of the minimum wage are young students who, facing higher opportunity costs in education, are encouraged to give up the opportunity of hu­man capital investment and enter the labor market. Nonetheless, because the minimum wage is low, the potential long-term benefits of education may far outweigh the short-term benefits brought to these young people.


Incoherent welfare policies

The minimum wage system in China, which has been in place for only about 20 years, faces many of the same controversies. In 2012, scholars like Ma Shuang found in empirical research that every 10 percent increase in the minimum wage would bring a 0.61 percent boost to the average wage in labor-intensive industries and 0.28 per­cent in other industries. However, the overall amount of employees hired by enterprises decreased by approximately 0.6%.


In 2007, Luo Xiaolan investigated the impact of the minimum wage on rural migrant workers in Shanghai city and inferred that in monopolis­tic markets, increasing the minimum wage standard would promote employment among migrant work­ers. In another study done in the same year, Luo Xiaolan detected a threshold for the effects of the minimum wage on the rural migrant workforce: the minimum wage, when reduced below the threshold, will increase employment and when higher than the threshold, will de­crease employment.


Moreover, research showed that the effects of the minimum wage vary in different sectors and districts. In the same year, Han Zhaozhou and An Ningning con­ducted similar research on Shen­zhen’s (a Special Economic Zone in the south of China’s Guangdong Province) minimum wage, during which they also failed to find evi­dence that the rise in the minimum wage could increase unemploy­ment.


In addition, as Luo Xiaolan point­ed out in 2011, in China, the ben­efits of the minimum wage system mainly went to married young and middle-aged male migrant work­ers who, in monopolistic markets, remained free from the adverse effects the system caused.

In 2008, Du Yang and Wang Meiyan found that when minimum wage is set on a monthly basis, it did not work as intended. Urban workers tend to be paid hourly unlike their migrant counterparts. In 2007, Luo Xiaolan studied the minimum wage system and the subsistence security system in Shanghai, concluding that the for­mer increased employment, while the latter decreased employment.


What’s worse, a lack of coher­ence in the two systems amplified the negative effects on employ­ment. Likewise, Han Zhaozhou and Wei Zhangjin noted in 2006 that our national social welfare policies were incoherent and recommend­ed that roles and responsibilities be clarified among welfare systems such as the minimum wage, the subsistence security and the un­employment insurance system.


Ma Zhe and Zhao Zhong are from the School of Labor and Human Resources at Renmin University of China.

The Chinese version appeared in Chinese Social Sciences Today, No. 609, June 18, 2014.          

The Chinese link is:


Translated by Ren Jingyun