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Hiking Minimum Wage is All About Creative Destruction

Seattle (TheStreet) -- Minimum-wage laws destroy jobs, right? That's what you hear, and that's what you'd expect because demand curves slope down. Put in a wage floor, and businesses will hire less. Makes sense.

Strange thing is, it's not true. Look at sixty four studies of the subject, and all the ones with high statistical significance put the employment effect right at zero -- no job loss.

(se is standard error; 1/se is a measure of statistical significance. Employment elasticity is the employment response to minimum wage increases; -.1 means a 10% increase results in 1% less jobs.)

Given that demand curves do, indeed, generally slope down, how do you explain this?

The most impressive recent work on minimum wages and employment compares adjacent counties across state lines, with the states' different minimum wages and changes to minimum wages. It exploits hundreds of controlled natural experiments across the country, across decades. Almost no previous studies have had that rigor, or those controls, and none have had the sample size.

The seminal work using this method was made by Arindrajit Dube. He found little or no employment effect (within the limited range of minimum wages we've seen over the decades) but significant earnings effect. Somewhat unsurprisingly to many, higher minimum wages mean poor people earn more.

But the most fascinating findings may be contained in a November 2013 study using the same methodology, by three researchers at the Chicago Fed: Firm Dynamics and the Minimum Wage. Their findings on restaurant employment:

When you increase the minimum wage,

  • "Small net employment changes in the restaurant industry may hide a significant amount of firm level churning"
  • "...greater firm exit, a result consistent with many existing models. However, more surprising, we find a simultaneous and roughly offsetting increase in firm entry"
  • "Employment changes arising from entry and exit are an order of magnitude larger than the net employment change among continuing firms."
  • "Inflexible incumbents are replaced by potential entrants who can optimize on input mix"

In two words, "Creative Destruction." It's a pretty sensible and satisfying explanation for the befuddling missing employment effect. But it took some serious doing to suss it out.

Yes, some firms struggle and even go out of business when you raise the minimum wage. But new firms replace them, and their jobs. The whole economy moves to a higher equilibrium in which workers earn more, and firms that can flourish in that environment, do.

And you can be sure that the owners of those new firms are quite aware that...demand curves generally slope downward.

Steve Roth edits the Web site from Seattle, Washington.

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