Minimum wage increases may have less of an effect on employment than previously thought
Oct. 6, 2008
BLOOMINGTON, Ind. -- Some economists argue that increasing the minimum wage has adverse effects on employment. However, a new study from the Indiana Business Research Center at Indiana University's Kelley School of Business reveals that decreased employment may not be so easily tied to higher minimum wages.
The study by Michael F. Thompson, an economic research analyst at the IBRC, appears in the latest issue of the
The study compares employment in Midwestern states. Thompson used Illinois, the primary Midwestern state to increase its minimum wages between 2003 and 2005, as a test case in determining the effects, if any, that increasing the minimum wage has on employment growth.
While employment declined in 2003 in Illinois, all Midwestern states saw a decline during this time, when none had higher state minimum wages than the federal $5.15 level. A year later, Illinois stayed in line with nearly all other Midwestern states by achieving marginal employment growth.
This employment growth in Illinois was realized despite its state minimum wage increase of $0.35 per hour; meanwhile, all other Midwestern states effectively remained at the federally mandated $5.15 per hour, Thompson said. Illinois' rebound did not offset the losses of the previous year, but an increased minimum wage did not prevent an uptick in jobs. Moreover, in 2005, after increasing minimum wage by a full $1 per hour, Illinois saw job growth near 1 percent, enough to close the gap with its Midwestern neighbors.
Michael F. Thompson
"Of course, Illinois' improvement in employment may not be due to increases in minimum wage," Thompson said."It is important to consider the impact of growth in state GDP and even population growth, both of which have major effects on employment change."
Once these impacts are accounted for, Thompson's statistical analysis found that minimum wage increases had no significant impact -- positive or negative -- on employment growth during the study period. He also took a look at employment along the Indiana-Illinois border and found little to suggest that increasing minimum wages reduced employment, even for the low-wage accommodation and food service industry.
The empirical analysis in Thompson's study strongly challenges the traditional mindset that increasing minimum wages decreases employment. More in-depth analysis may be necessary for specific regions and industries to seriously evaluate the potential benefits and drawbacks of increasing the minimum wage. The full study is available at www.ibrc.indiana.edu/ibr/2008/fall/article1.html.
Established in 1925, the IBRC is an information outreach service of the Kelley School of Business. It provides and interprets economic, demographic and social information needed by business, government, educational and other nonprofit organizations, and individual data users in the state and throughout the nation. Its research can be found online at www.ibrc.indiana.edu.