Over the past year, we’ve been doing a lot of research on the impacts of raising the minimum wage in Oklahoma. We’ve looked at the impacts on housing, public safety, health, and the labor market.
Throughout all of these reports, we’ve tried to balance the increased wages people would be exposed to with the economic rationale that imposing a binding price floor in the labor market would theoretically lead to some reductions in employment. Overall, the literature suggests that while employment may go down in the face of a minimum wage increase, the effect often isn’t large enough to offset the higher wages.
Our minimum wage model analyzes the impact of a minimum wage on the state as a whole and tries to measure the average effects of wage changes across the state. However, individual firms will respond to this policy change differently from one another. Opponents of raising the minimum often point to the idea that minimum wages are particularly burdensome for small businesses that often have very tight budgets and operate in less stable markets.
This idea is challenged by a new paper published in the Quarterly Journal of Economics by Nirupama Rao and Max Risch.
These researchers constructed a new panel data set linking business, their owners, and their employees with their tax returns. This allows them to carefully track business and employee changes at the firm level across states. They use their new dataset to conduct a difference-in-differences analysis to see how state minimum wage changes impact independent firms.
The first outcome they find is that minimum wage increases do not lead to independent firms laying off employees. Instead, they find a modest reduction in future hiring, particularly among teenagers. Their research suggests firms don’t have to lay off their employees because they’re able to increase revenue by enough to fully offset the additional costs.
While minimum wage increases don’t seem to have significant impacts on existing firms, they do create distortions in the labor market in other ways. In states that raised their minimum wage, industries with high shares of impacted workers saw fewer new firms enter the market in the following years. The effect is small, new firm entry decreases by about 2%, but still this may lead to less competitiveness.
The silver lining of fewer firms entering is that those that do choose to enter are more productive on average. Past research has found that when states raise their minimum wage, workers become more productive.
In fact, there is an overall trend in markets with higher minimum wages that tends to favor more productive firms. The end result is that despite lower firm entry, industries in states with higher minimum wages tend to have the same aggregate revenue as those in states that don’t raise their wages.
In other words, minimum wage increases do not have any negative impacts on overall economic activity. There is a shift that excludes some less productive firms in favor of more productive firms, but this nets out to a null effect.
This new evidence shows that minimum wage increases tend to reshape markets rather than weaken them. Existing firms largely maintain employment by raising revenue and benefiting from more productive workers, while new firm entry declines slightly as less productive businesses are filtered out. Overall economic activity is not significantly impacted since the firms that stick around tend to be more productive and cover the difference that new firms would make.