Since the last federal minimum wage increase in the US in 2009, many states have enacted state-level changes to their minimum wage laws. Most recently, on January 1st 2022, twenty states increased their minimum wage, while the US Congress debates a similar federal-level increase. A broad-based minimum wage increase might appear as an attractive labor market policy tool to boost wages and lower poverty among low-wage earners. However, economic theory predicts that, in a competitive labor market, a minimum wage hike might lead to a decline in employment. This issue has motivated a long-lasting, at times contentious, debate in the literature on the effect of minimum wage increase on employment.
In a recent IZA discussion paper, Marianna Kudlyak, Murat Tasci and Didem Tuzemen study the effect of minimum wage increases on vacancies. They combine occupation-specific county-level vacancy data from the Conference Board’s Help Wanted Online at a quarterly frequency with the data on minimum wage changes at the state level. The authors separately estimate the effect of minimum wage increases on existing vacancies (stock) and new vacancies, i.e., less than 30-day old (flow).
Occupations that typically employ lower-educated workers affected most
The study finds a statistically significant and economically sizeable negative effect of the minimum wage increase on vacancies. Specifically, a 10 percent increase in the level of the effective minimum wage reduces the stock of vacancies in at-risk occupations by 2.4 percent and reduces the flow of vacancies in at-risk occupations by about 2.2 percent. At-risk occupations are such occupations with large shares of employed workers at or near the state-level effective minimum wage. Accordingly, vacancies in occupations that typically employ workers with lower educational attainment (high school or less) are affected more negatively than vacancies in other occupations.
So far, most studies have found relatively small or non-existent effects of minimum wage hikes on employment. How can this be reconciled with the findings of the new paper? Vacancies reflect the quantity of labor demanded by firms and serve as one of the adjustment margins that firms can use to reach their optimal level of employment. In contrast, employment is an equilibrium object, determined jointly by labor supply and labor demand; therefore, changes in employment reflect a combination of various margins of adjustment to a policy change.
Minimum wage hike might lead to a decline in turnover
The effect of the minimum wage on hiring is ambiguous because while vacancies decline, job seekers’ input increases—either due to the increase in the number of job seekers or search efficiency. Even though on impact one might expect a higher rate of separations due to the dissolution of some marginal matches, a higher minimum wage forces all new matches to satisfy a higher threshold for productivity. This, in turn, makes these new matches more durable relative to an environment with a lower minimum wage. One implication of this is that a minimum wage hike might lead to a decline in turnover as employees stay longer with one employer but possibly no change in the stock variables such as unemployment and employment.
By analyzing vacancy postings, the authors provide more insight into firms’ behavior as they adjust to minimum wage changes. Understanding these different margins of adjustment may provide more context for policymakers and researchers on the contentious debate of the employment effects of minimum wage increases.