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Understanding Research on Minimum Wages

Frank Atkins

It is very difficult for the average individual to understand published academic research, and published economic studies are no different. This came to the forefront recently, as there has been a renewed interest in the economic effects of raising the minimum wage. As provinces in Canada and some U.S. states have recently begun aggressive increases in the minimum wage, there has been a recent flurry of activity and new data available – starting with Seattle in 2014 – studying the effects of the increase in minimum wage. Here in Alberta we should be watching these studies very closely, as we are currently undertaking a similar policy move.

Unfortunately, the studies based on the effects of the Seattle changes have produced contradictory results. The first study came from Berkeley, California, and it concluded the Seattle minimum wage changes had exactly the desired policy effect: minimum wage workers earned more money, and there was no change in employment. This conclusion was contradicted by the results of a recent study from the University of Washington. These researchers concluded the 2016 Seattle increase to $13 per hour caused employment amongst minimum wage workers to decrease by nine per cent. The Washington authors actually calculated a response parameter (which economists call elasticity): for every $1 worth of increased wages, there will be $3 worth of lost employment opportunities.

One wonders how two groups of researchers can study data from what is essentially a real-world laboratory experiment, and come to two opposing conclusions. Some of this contradiction arises because the two sets of researchers did not actually have the same set of data. The authors of the Washington study had access to the number of hours worked by those receiving minimum wage, while this data was not available to the Berkeley authors.

The different data sets notwithstanding, as an economist, these types of contradictory results are embarrassingly familiar. Some economic research is becoming similar to climate change research: the authors have a preconceived idea of what is “correct” and then proceed to confirm their original opinion. You can see some of this in the reaction from some economists to the results of the Washington study. The Economic Policy Institute, which is a U.S. left-wing think tank, issued a statement that said, “There is a large body of research that shows that modest increases in the minimum wage boost wages for low income workers without causing job loss, and nothing in the UW study suggests we should revise those conclusions.”

It is possible that both sides of this controversy missed an important possible conclusion from the Washington study. Perhaps some minimum wage workers, when faced with an increase in their hourly wage, actually chose to work fewer hours. Interestingly, this possibility is predicted by economic theory. The conclusion here would be that some minimum wage workers are earning enough income already. This conclusion would clearly infuriate the left-wing economists.

Frank Atkins is a senior fellow at the Frontier Centre for Public Policy.