October 23, 2013
The Steep Cost of a $10 Minimum Wage
There has been widespread discussion of an increase in the minimum wage, sparked by President Obama’s State of the Union address proposal to raise the federal minimum wage to $9.00 and index it for inflation. To date, however, the only tangible policy change occurred on September 25, when California Governor Jerry Brown signed into law a rise in the state’s minimum wage from $8 per hour to $10 per hour (effective in 2016).
The new law is intended to increase the welfare of low-wage earners, however it raises the question of whether the hiring of low-wage workers will be impeded. While there is an ongoing controversy regarding the impact of the minimum wage in the level of employment, new research by Meer and West (2013) suggests that a negative impact of the minimum wage can be isolated by focusing on employment dynamics. Specifically, they find that a 10 percent increase in the real minimum wage is associated with a 0.53 percentage point decrease in the net job growth rate.
This paper uses these recent research results to look at the employment implications of the California minimum wage increase. Our analysis finds that for California, this wage increase means a loss of 191,000 jobs. If every state followed suit, over 2.3 million new jobs would be lost across the country.
This analysis estimates the loss in job growth in every state if each increased its minimum wage to $10 per hour. The data for employees on nonfarm payrolls for each state are from the Bureau of Labor Statistics’ Regional and State Employment and Unemployment report and net job growth rate for each state is calculated using the difference between August 2013 and August 2012 job figures. The report calculates the percent change in the minimum wage resulting from increasing it to $10 using the minimum wage currently law in each state (for a state with no minimum wage or a minimum wage below the $7.25 federal level, the federal minimum is used).
The percentage increases are substantial. While California’s increase is 25 percent, the national average would be 33.6 percent; ranging from a low of 8.1 percent in Washington to 37.9 percent in several states. These increases are combined with Meer and West’s research to yields the percentage point declines in job growth rates and consequently new net job growth rates in each state. From this, one derives the loss in current annual job growth from a $10 minimum wage by finding the difference between the currently reported net job growth and the net job growth with a $10 per hour minimum wage.
Loss of Job Growth by State
Table 1: Reduced Hiring with $10 minimum wage
Loss in Job Growth
|District of Columbia||8.2|
Table 1 reveals that setting the minimum wage at $10 would currently cost 2.3 million new jobs per year nationwide. The reduction in hiring ranges from 2,600 in Vermont to 219,400 in Texas. California, which actually plans to increase its minimum wage to $10, would be one of the hardest hit states, losing 191,400 new jobs annually. Washington, which is currently considering raising its minimum wage to $15 for select individuals in Seattle, would lose 13,400 thousand new jobs if increased to a $10 minimum wage.
Not only would a $10 minimum wage reduce the hiring rate, it would actually decrease employment in the majority of states. Table 2 breaks down the current net job growth rates and what they would be with a $10 per hour minimum wage.
Table 2: Minimum wage Net Job Growth Comparison
|No Minimum Wage Adjustment||Minimum Wage at $10|
|State||Net Job Growth Rate (%)||Net Job Growth (thousands)||Net Job Growth Rate (%)||Net Job Growth (thousands)|
|District of Columbia||0.19%||1.4||-0.93%||-6.8|
One can also observe in Table 2 that the net job growth rate for every state would decrease with a $10 minimum wage. Simultaneously, most states would have negative net job growth rates, indicating that the number of jobs would actually decrease. In particular, 32 states and the District of Columbia (in red) are currently experiencing positive employment growth and would face a decrease in employment if the minimum wage were $10 per hour. As a result, employment nationwide reduces by 0.22 percent or 291,800 jobs. Some of the hiring changes are very drastic. For instance, while the number of jobs in New York increases by 92,500 annually, it would decrease by 84,800 if the state increases its minimum wage to $10 per hour. Ohio would go from a job growth rate at 32,500 thousand to losing 42,500 jobs a year.
While policymakers intend minimum wage to improve the welfare of low-income workers, often overlooked is how minimum wages restrict access to the job market. This analysis finds that a $10 minimum wage would cause job growth to shrink in every single state and cost up to 2.3 million jobs nationwide. Clearly, the cost of a $10 per hour minimum wage is quite high, especially for the 11.3 million unemployed persons currently looking for work.
 Jonathan Meer and Jeremy West, “Effects of the Minimum Wage on Employment Dynamics,” (July 2013), available at http://econweb.tamu.edu/jmeer/Meer_West_Minimum_Wage.pdf