One potential problem with many recent studies is their use of difference-in-differences comparisons (along with jurisdiction or state-specific controls) to determine changes in employment. Some issues with this methodology are outlined in this
2013 paper by J. Meer and J. West:
Many recent studies of the minimum wage include state- or county-specific time trends to control for heterogeneity in the underlying time-paths by which labor markets evolve within different areas that might be correlated with treatment intensity (e.g. Page et al., 2005; Addison et al., 2009; Allegretto et al., 2011). These models generally find little or no effect of the minimum wage on employment levels. However, if the policy change affects the growth rate of the response variable, rather than its level, then specifications including jurisdictionspecific trends will mechanically attenuate estimates of the policy’s effect. The basic intuition is that including state-specific time trends as controls will adjust for two sources of variation. First, if there is any pre-treatment deviation in outcomes that is correlated with treatment – e.g. if states that exhibit stronger employment growth are also more likely to increase their minimum wage – then this confounding variation may be appropriately controlled for by including state-specific time trends. The potential cost of this added control is that if the actual treatment effect, the post-treatment employment variation, acts upon the trend itself, then inclusion of jurisdiction time trends will attenuate estimates of the treatment effect and often leads to estimating (statistical) null employment effects.
The paper moves on to discuss a separate assumption made by many recent minimum-wage papers: the assumption that an effect on employment would manifest itself as a discrete drop in employment in the short-term, rather than a longer-term decline in the growth rate.
The authors conclude:
If the minimum wage is to be evaluated alongside alternative policy instruments for increasing the standard of living of low-income households, a more conclusive understanding of its effects is necessary. The primary implication of our study is that the minimum wage does affect employment through a particular mechanism. This is important for normative analysis in theoretical models (e.g. Lee and Saez, 2012) and for policymakers weighing the tradeoffs between the increased wage for minimum wage earners and the potential reduction in hiring and employment. Moreover, we reconcile the tension between the expected theoretical effect of the minimum wage and the estimated null effect found by some researchers. We show that because minimum wages reduce employment levels through dynamic effects on employment growth, research designs incorporating state-specific time trends are prone to erroneously estimated null effects on employment. In contrast, the minimum wage significantly reduces job growth, at least in the context that we are able to analyze.
The main takeaway here is that there are a number of potential issues with the standard methodology that has been adopted by many minimum-wage papers since the 1994 Card/Krueger paper (which was when the traditional assumption that minimum wage increases have a negative effect on employment levels was first significantly challenged), and that adherence to this methodology can erroneously result in a confirmation of the null hypothesis.
