Minimum wage increases and employment: a review of the evidence

Introduction

Few questions in applied economics have generated as much evidence, or as much disagreement, as the employment effect of minimum wages. The standard competitive model predicts that a wage floor set above the market-clearing level reduces employment. Yet a substantial body of empirical work since the early 1990s has found employment effects close to zero for moderate increases. This review examines that literature thematically, organised around the empirical methods used, because much of the disagreement can be traced to differences in how studies construct their counterfactual.

The review focuses on evidence from the United States and the United Kingdom, where both the policy variation and the research base are largest. It concludes that the weight of recent evidence supports small or negligible employment effects for increases up to around 60% of the median wage, but that evidence on higher bites, and on effects on hours rather than headcount, remains thin.

The competitive model and its predictions

In a perfectly competitive labour market, firms hire until the wage equals the marginal revenue product of labour. A binding minimum wage raises the cost of labour above that point for some workers, and firms respond by employing fewer of them. The size of the effect depends on the elasticity of labour demand. Monopsony models, in which employers have wage-setting power, reverse this prediction over a range of wage floors, which is why the empirical question cannot be settled by theory alone.