Jonathan Meer and Jeremy West: Effects of the Minimum Wage on Employment Dynamics

After my post “Isaac Sorkin: Don’t Be too Reassured by Small Short-Run Effects of the Minimum Wage,” I heard about Jonathan Meer and Jeremy West’s empirical paper on the same theme: “Effects of the Minimum Wage on Employment Dynamics.” They find evidence that an increase in the minimum wage doesn’t lead bosses to fire or lay off workers they already have, but does reduce the rate at which new workers are hired.   

Their abstract summarizes their results well:

The voluminous literature on minimum wages offers little consensus on the extent to which a wage floor impacts employment. For both theoretical and econometric reasons, we argue that the effect of the minimum wage should be more apparent in employment dynamics than in levels. Using administrative data in a state-year panel, we evaluate each employment margin directly. We find that the minimum wage reduces gross hiring of new employees, but that there is no effect on gross separations. Moreover, despite having an insignificant discrete effect on the employment level, increases in the legal wage floor directly reduce job growth. Neither labor force turnover nor the entry or exit rate of establishments are affected.

Taking all hires as a base for the percentage, not just hires into minimum-wage jobs, Jonathan and Jeremy’s estimates point to a 1.36% reduction in gross hiring when the minimum wage is increased by 10%. (The standard error on that number is .43%.) The percentage effect on hiring into minimum-wage jobs would be considerably higher. While there is no sudden effect on the level of employment, their estimates point to a reduction of .35% per year reduction in overall net job growth for all jobs from a 10% increase in the minimum wage. (The standard error on that number is .17% per year.) These two numbers are reasonably consistent with one another. They write about the base turnover rate that “on average about 29% of an establishment's current employment roster is filled by different employees from year-to-year.” A 1.36% reduction in the inflow to this 29% turnover should yield a .4% per year reduction in overall net job growth, which is well within the margin of error from the .35% per year they found from directly estimating effects on overall net job growth.

Based on my reading of it, Jonathan and Jeremy’s paper appears carefully done. But let me know if you see a flaw in their statistical methods. One loophole they identify themselves is that since they focus on number of jobs rather than hours, their data allow the logical possibility that an increase in the minimum wage could reduce the number of jobs, but lead to higher hours for the workers who remain. I am not aware of anyone championing the idea that minimum wages gradually reduce jobs but gradually raise hours for those remain. Does anyone want to seriously argue that case?

Update: Here is a link to Reihan Salam’s post on Jonathan and Jeremy’s work.