Approaches to Arguments for Raising the Minimum Wage with Caution

TSURU Kotaro
Program Director and Faculty Fellow, RIETI

The revised regional minimum wages for fiscal 2019 have been released. As a result of increases of 3% for each of the last 4 years, the national average now sits above 900 yen, at 901 yen, and exceeds 1,000 yen in Tokyo and Kanagawa (see chart). The government aims to achieve a national minimum wage of 1,000 yen through annual raises of around 3%, and the figures reflect that. Furthermore, there have been moves to investigate introducing a national minimum wage such as by establishing the LDP's Diet Member's Caucus for Promoting a Uniform Minimum Wage.

Chart: Weighted Average of Regional Minimum Wages and Rate of Increases
Chart: Weighted Average of Regional Minimum Wages and Rate of Increases
Source: Ministry of Health, Labour and Welfare

When evaluating policy for increasing minimum wages, an important factor is how you view the effect on employment. In this article, I would like to talk about this issue based on my knowledge of recent positive analysis and overseas experience.

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The following arguments are often raised with regard to the effect on employment of raising the minimum wage. For example, "the latest US research indicates that raising the minimum wage does not affect employment and researchers who have been awarded the Nobel Prize for Economics agree," and "you do not hear about effects on employment from introducing a national minimum wage in the UK." Both arguments are based on existing research to some extent, but more detailed consideration is necessary.

Much of the US analysis is based on minimum wages that are determined separately for each state and look at the effect of the disparity between regions on employment. In their 2010 paper, Professor Arindrajit Dube et al. from the University of Massachusetts, and in their 2011 paper, Sylvia Allegretto from University of California, Berkeley et al., state that when comparing different states, it is possible to more accurately determine the effect of the minimum wage on employment through comparison with neighboring areas that experience the same economic shocks.

By taking such an approach, the papers indicated that negative effects on the employment of teens, who are most likely to feel the effects of raising the minimum wage, are negligible, and this finding was extremely influential thereafter. This research has also had an impact on the statement of Paul Krugman of the City University of New York in his New York Times Column to the effect that raising the minimum wage does not affect employment.

However, Professor David Neumark of University of California, Irvine, indicated in his most recent (2018) survey paper about the effect of the minimum wage on employment that there is a clear effect on teen employment when using comprehensive sampling methods rather than using comparable regions (e.g. the 2016 article by Rand Corporation's David Powell). Most recent analyses that use a different approach from that of comparing neighboring regions report negative effect on employment.

Furthermore, Professor Neumark emphasizes that not only is there a problem with analysis methods, but that it is difficult to see negative effects if labor migration occurs as a result of changes to the minimum wage in neighboring regions. For example, if the minimum wage is raised in 1 of 2 neighboring states, relatively highly skilled workers that attract higher wages migrate from the neighboring state as demand for these workers increases in the state that has raised the minimum wage. Conversely, it is anticipated that negative effects in the state that has raised the minimum wage will be extremely low as lower-skilled workers will move to the state with the unchanged minimum wage.

In conclusion, the approach of comparing neighboring regions may, analytically speaking, skew results in unintended ways. You can't help but conclude that it is premature to reach the conclusion that there is no negative impact on employment from these kinds of specific research results.

Next, we will look at the effect of the minimum wage in the UK. After the UK abolished the minimum wage in 1993, the minimum wage was re-introduced at a national level in 1999. The effect on employment has been subject to many positive analyses, and as raises in the minimum wage were moderate, most researchers have reached the consensus that there is no clear effect.

However, in the 2019 paper by Professor Mike Brewer et al. from the University of Essex in the UK, it was pointed out that previous research was overly focused on the statistical aspect of whether it was possible to reject the null hypothesis that "the UK minimum wage has no effect on employment."

Much of the previous research indicated that it was not possible to reject this null hypothesis, and therefore, they emphasized that the data did not deny any effect on employment within a certain range. For example, they indicated that it was statistically likely that a 10% increase in the minimum wage would decrease the retention rate of minimum wage workers by 22%.

When considering the effect of introducing a nationally uniform minimum wage, it is also important to consider the case of Germany which introduced a relatively high national minimum wage in 2015. Several years have passed since the minimum wage was introduced, so thorough positive analysis on the effects on employment has now been released.

In their 2018 paper, Professor Marco Caliendo et al. from the University of Potsdam in Germany conducted a survey of this research and found that although there was a negative impact on overall employment, there were aspects in which effects were not clear, and particularly when it comes to regular employment, the effects can be positive. However, most of the research shows that the marginal form of employment known as "mini jobs," which is most likely to be impacted by the minimum wage, was negatively impacted.

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I will now examine the impact that research results such as those mentioned above have on policy in Japan. Firstly, we should not simply jump to the conclusion that raising the minimum wage has no effect on employment. Even without the German case, analysis that focuses on workers who are most likely to be impacted by changes to the minimum wage, such as young workers, generally shows a negative impact on employment, whether in Japan or overseas.

Secondly, if the minimum wage is raised, it should be raised as gradually as possible. In Japan, the rate of inflation is lower than overseas, and this must be taken into account. In addition, it is not clear whether increases of approximately 3% can be sustained going forward. If the minimum wage reaches a historically high level, the effect on employment may differ from what previous analyses indicate.

For example, the Moon Jae-in government in Korea has posted income-led growth and has pledged to raise the minimum wage to 10,000 won by 2020. To achieve this, the minimum wage was drastically increased by 16.4% in 2018 and 10.9% in 2019.

As a result, the retail and food service industries, which rely heavily on minimum-wage workers, have been impacted heavily, with a significant decline in the number of employees, and an ongoing increase in the unemployment rate. This greatly shrunk the required increase by 2020 to 2.9% but has left the pledge unfulfilled. In Japan, there are also significant hurdles to the introduction of a national minimum wage.

Discussions about the minimum wage are similar to discussions about fiscal policy. If a government is inclined towards populism, it is likely to tell the people that they can get something for nothing. However, a fundamental principle of economics is that there is no such thing as a free lunch. If raising the minimum wage does not affect employment, then it may place a great burden on businesses. We must not forget that somebody always pays.

>> Original text in Japanese

* Translated by RIETI.

September 17, 2019 Nihon Keizai Shimbun

October 25, 2019