A popular 2010 study claiming minimum-wage hikes do not cause ‘economic shocks’ has just been reanalyzed and overturned
HONOLULU, May 17, 2022 >> The consensus in Hawaii seems to be that Gov. David Ige will sign HB2510, raising the state’s hourly minimum wage from $10.10 to $18 over the next six years. But maybe new research by one of the nation’s leading minimum-wage researchers will help change his mind.
Economist David Neumark, along with colleagues Priyaranjan Jha and Antonio Rodriguez-Lopez, all of the University of California, Irvine, recently examined a popular 2010 paper often cited in defense of minimum-wage increases and found its methodology to be inadequate and its conclusion erroneous.
As Neumark, Jha and Rodriguez-Lopez explain in their study — “What’s across the Border? Re-Evaluating the Cross-Border Evidence on Minimum Wage Effects,” published just this month[1] — it can be useful to estimate the “economic shocks” of minimum-wage increases by comparing changes in “local economic areas” that span state borders, since this allows researchers to separate the actual effects of minimum wages from other changes in local economic conditions.
However, they say, the 2010 paper examining employment in restaurants and other low-wage sectors used “local economic areas” made up of pairs of counties on opposite sides of state borders, without regard to whether their economies were related. As a result, the 2010 paper concluded that minimum wage increases on one side of the border did not reduce employment there in the targeted sectors.[2]
Neumark’s new study, on the other hand, used a more natural definition for local economic areas — commuting zones that span state borders.
In an email to the Grassroot Institute of Hawaii, Neumark said commuting zones are a much more compelling way to control for economic shocks because they are defined as “common economic areas.” Some of the county pairs in the 2010 study, by comparison, “may be economically unrelated and hence not serve as good controls. Indeed, as the [new] paper notes, some of the authors of the 2010 study have made this very argument.”
Neumark’s new study explains that commuting zones are groups of counties with strong commuting ties based on U.S. Census journey-to-work data. Specifically, they are intended for use as spatial measures of local labor markets, which is “not necessarily the case for county pairs: Even if they are contiguous, two isolated U.S. counties may share little or no commuting and economic activity.”
Thus, Neumark’s new study overturns the results of the 2010 study, finding that the evidence points rather sharply toward restaurant employment declines in response to higher minimum wage.
“In the short run,” Neumark said by email, “the evidence indicates that a 10% increase in the minimum wage reduces employment by 2.4%, and in the longer run by 6.9%.”
Keli‘i Akina, Grassroot Institute of Hawaii president and CEO, said he hopes Ige will take a little more time to study this latest minimum-wage research before deciding on whether to sign HB2510 into law.
“Gov. Ige has qualified economic advisers with whom he can discuss this,” Akina said. “I urge them all to read professor Neumark’s latest research so they can see for themselves that we simply must not enact the drastic wage increase that HB2510 calls for.”
He continued: “There are many ways to help lower-income people increase their purchasing power and improve their standard of living, but increasing the state’s minimum wage isn’t one of them. If the governor wants more information about those other ways, the institute would be happy to offer suggestions, many of which are included in our 2020 report ‘Road map to prosperity: How Hawaii can recover and even excel after the coronavirus lockdowns.’”
Akina hosted Neumark — one of the top 5% of published economists in the U.S. based on the number of his distinct works, citations and other criteria — on his “Hawaii Together” program in March on ThinkTech Hawaii to talk about the minimum wage, which you can view here. Akina also wrote two “President’s Corner” columns on the issue, hereand here.
You can read the institute’s testimony on HB2510 here. And institute policy researcher Jensen Ahokovi produced an outstanding commentary on the issue, “Five myths about the minimum wage.”
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[1] David Neumark, Priyaranjan Jha and Antonio Rodriguez-Lopez, “What’s across the Border? Re-Evaluating the Cross-Border Evidence on Minimum Wage Effects,” IZA Institute of Labor Economics, May 2022.
[2] Arindrajit Dube, T. William Lester and Michael Reich, “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties,” The Review of Economics and Statistics, November 2010. See also irle.berkeley.edu/files/2010/Minimum-Wage-Effects-Across-State-Borders.pdf.