The Many Effects of the Minimum Wage: New Evidence on Employment and Prices
In this paper, we use new firm-level micro data on employment, wages, sales, and prices to study how low-wage employers adjust to minimum wage hikes.
After a minimum wage hike, aggregate employment falls ...
... and prices rise.
But Newly Binds firms (paying just below the new minimum wage) increase employment, while Initially Binds firms (already paying the old minimum) decrease employment.
Prices rise at Initially Binds firms but stay flat at Newly Binds firms.
And since prices increase on average, relative prices at Newly Binds firms fall.
Doesn’t Bind firms (not directly affected) also adjust employment and prices.
They compete with directly affected firms for both workers and customers.
Employment
Effect of a 1 log point minimum wage increase, by quarter
Figure 1 in the paper.
reconciling the literature
Different mixes of these groups of firms give different answers
A sample made only of Newly Binds firms would report a positive employment elasticity. One made only of Initially Binds firms would report a strongly negative one.
Changing the mix of firms can produce nearly 90% of the estimates in a recent review by Neumark and Shirley (2022).
Read the paper to see what these firm-level responses tell us about the structure of product and labor markets and what they mean for future minimum wage hikes.
Published minimum wage employment elasticities
Neumark and Shirley (2022), number of estimates
Figure 6 in the paper.
the economics
Every firm has a threshold
A monopsonist that wants one more worker must raise the wage for everyone, so its marginal cost of labor exceeds the wage. A binding minimum wage removes that wedge. Up to a threshold ω*, the firm hires more along its labor supply curve and cuts its price along product demand. Past the threshold it is on its marginal revenue curve, and each further increase cuts employment and raises the price.
The right panel uses the paper’s estimates. Employment rises steeply (slope φ = 5.44) until the bite reaches the threshold at about 0.03 log points, then falls slowly (slope −γ = −1.31). Thresholds differ across firms, so one minimum wage leaves some firms below theirs and pushes others past; the paper reads the Newly Binds and Initially Binds groups this way. The two-firm view shows how that dispersion caps the average gain.
Robinson’s monopsony model
Wage and price against employment at a single firm. Drag the minimum wage line or use the slider.
Schematic with linear curves, drawn to illustrate Figures 3 and 4 of the paper. Units are arbitrary.
The direct effect at one firm
Change in log employment against the direct bite of the minimum wage on wages, market conditions held fixed
Two firms, one minimum wage
Change in log employment against the size of the minimum wage increase
Figure 10 in the paper, recomputed from the rounded estimates of φ and γ in Table 3 (the paper’s figure reports a maximum of 0.179). The φ and γ sliders apply to both views.
Figure 11, panel (b) in the paper. Wages in log points above the old minimum; the average is the simple mean of the two firms. The φ and γ sliders apply to both views.
These interactives were created with Claude to illustrate results in the paper; please refer to the paper for the most recent version of these figures. We also thank our data partner for providing access to the data used in this study. Our data provider has provided an analytic sample that is a subset of total business volume. In particular, no statistics should be taken as representative of the business scope or composition of any products offered by the data provider. All analyses, findings, and conclusions are those of the authors and do not reflect the views of the data provider. This material is based on work supported by the National Science Foundation Graduate Research Fellowship under Grant No. DGE 1746045. Any opinion, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation.