Hidden Employment Impacts of the Minimum Wage

I have seen several stories of late suggesting that minimum wage phase-ins tend to mask the full employment effects of the wage change.  That is because people tend to look at employment before and after the wage change itself, when in fact many companies may have already adjusted their employment long before the wage change goes into effect based on the original announcement.

This certainly rings true with me.  We decided to close one operation in California after the state passed legislation to raise the state minimum wage (the minimum wage change was one of three factors leading to the closure, the other being the PPACA employer mandate which would be particularly expensive at this location and vexing litigation harassment in this one particular area).   This means that for a minimum wage change that does not take effect until July 1, 2014, our decision to reduce staff came in the fall of 2013 and the jobs will go away on December 31, 2013, months before the minimum wage change actually takes effect.

I can certainly see how this would make designing a study to capture the employment effects of the minimum wage change very difficult.  From a more cynical point of view, it also makes it far easier for minimum wage supporters to understate the employment effects.

This same phase-in effect can be seen with the Obamacare employer mandate.  I criticized Brad Delong for arguing that we would not see any shifts to part time labor until the employment report after the actual start date of the employer mandate.  But I know our company had been shifting people to part-time status in anticipation of the start date nearly a year earlier, as had most other retail businesses.  While it may be normal for the government to put off working on something until on or after the due date (e.g. the Obamacare web site), private industry tends to start planning and implementation of responses to government regulations months or years in advance.


  1. kidmugsy:

    "private industry tends to start planning and implementation of responses to government regulations months or years in advance.": you can't expect Broad DeLarge to know that. He's an economist, for goodness sake.

  2. mesaeconoguy:

    One of DeWrong’s many, many problems is that he only understands lags (economics context). You’re describing leading effects.

    This also explains why so many Obamugabe policies have been so disastrous – his policy advisors/czars have no business experience (i.e. “real world”), and do not understand corporate planning and reporting cycles. They just assume you flip a switch, and – presto – desired results achieved.

    [They also have no concept of unintended consequences.]

  3. slocum:

    The effects could also lag the implementation of the minimum wage by a long time as well. Business owners often do not know how much pricing power they will have once they (and their competitors) have to pay the higher wages, and they don't know if they'll be able to squeeze higher productivity out of their employees when paying higher wages. Also, it may be that they've made capital investments in a business that, in retrospect, would not have made sense in light of the higher labor costs, but once the wages are raised it makes sense to continue operating until the equipment is fully depreciated. But they avoid making additional capital investments. They patch the old stuff as long as possible, and when that finally becomes impossible, they get out (and meanwhile new entrants don't come in). Or, the higher minimum wage create incentives for automation or customer self-service or products with less labor input -- but it takes time to invent and market the automation machinery or to rework the business processes (or for new entrants to enter the market whose business models are inherently less labor-intensive). All of this would tend to make measuring the effects very difficult (and all but impossible in the short term in the periods before and after the wage change).

  4. gr8econ:

    Some government entities do adjust early. The Maricopa County Community College District implemented work hour restrictions starting in the middle of 2013. As with any bureaucracy the delay in the mandate for a year didn't change their implementation. It was hard enough getting it started. They certainly weren't going to back off for a year only to have to do it again.

    Why an economist like Brad DeLong doesn't understand this is beyond me. One of the basic principles of economics is that markets are forward looking. If expected price changes are priced into the market today, then it only makes sense that future regulations would be "priced" into the market today.