Raising the minimum wage has become an increasingly popular policy in recent years.
Many states and cities have recently imposed minimum wage increases, and President Joe Biden issued an executive order raising the minimum wage to $15 for federal contractors in early 2021. Moreover, 62% of Americans now say they support a $15 minimum wage.
Despite its popularity, the benefits of minimum wage increases remain debated. “The
Minimum Wage and Occupational Mobility,” Andrew Yizhou Liu finds that raising the minimum wage decreases occupational mobility. He argues that increasing the minimum wage compresses wages and reduces the benefits
workers get from switching jobs, leading to lower occupational mobility and greater
job mismatch (the gap between your skills and the skill-requirements of your job).
Additionally, a higher minimum wage can decrease firms’ vacancy postings and job arrival
rates.
The Wage Compression and Employment Effect Channels
The author highlights two ways a higher minimum wage decreases occupational mobility. The first is wage compression, “in which the minimum wage narrows the wage gap between mismatched occupations and better-matched occupations, reducing the gain of switching occupations, and thus decreasing workers’ search incentives. By reducing workers’ incentives to switch to better-matched occupations than the ones they currently have, the wage compression channel keeps workers in mismatches longer.” This wage compression also affects low-ability workers more than high-ability workers, because the minimum wage is more binding for low-ability workers.
The second way raising the minimum wage hinders occupational mobility is through the employment effect channel. A higher minimum wage leads to a displacement effect, the author argues, decreasing the value of being a good match with a firm and increasing the probability of endogenous separation. This separation decreases occupational mobility, “because workers who would have remained on the job and search for another occupation become displaced.” The minimum wage can also reduce firms’ vacancy postings. This decrease in vacancy posting results in a lower job arrival rate, which in turn decreases occupational mobility. This “reduction in vacancy posting affects all workers’ occupational mobility regardless of ability and mismatch.” Specifically, the author finds that a 10% increase in the minimum wage decreases vacancy postings and job arrival rates by 1.4%.
The Minimum Wage and Occupational Mobility
The author finds that an increase in the minimum wage decreases occupational mobility for younger workers (16-30 years old) but has no significant effect on older workers (31-45 years old). Specifically, a 10% minimum wage increase decreased young workers’ occupation mobility by 3%, meaning that 3 out of 100 younger workers who would have switched jobs without the minimum wage increase chose instead to stay in their current occupation.
The occupational mobility of younger workers is further affected by minimum wage increases based on their level of education. The author finds that a 10% increase in the minimum wage decreases younger, less-educated (no college degree) workers’ occupational mobility by 3% but has no significant effect on the occupational mobility of younger, college-educated workers.
The minimum wage’s impact on occupational mobility is even greater following a 100% increase (from $7.25 to $15). A $15 minimum wage decreases the occupational mobility of low-ability workers by as much as 44%. By contrast, medium- and high-ability workers do not see a significant decrease in their occupational mobility. “Overall, occupational mobility falls by 30% after the 100% increase in the minimum wage.”
One explanation for why raising the minimum wage reduces workers’ occupational mobility is occupational switching costs. “Workers switch to occupations that better match their skills, provide better wages, or have better career outlook, as long as the anticipated gain outweighs the switching cost. When the minimum wage increases, the potential wage gains from switching occupations are reduced, leading to a decline in occupational mobility.”
The Minimum Wage and Job Mismatch
The author defines job mismatch as the distance between workers’ skills and the skills required by their occupation. A low mismatch means that match quality is high, and vice versa. The author finds that the wage compression caused by minimum wage increases leads to greater job mismatch and lower occupational mobility.
For young workers, a 10% minimum wage increase is associated with a 2% increase in job mismatch, “which suggests that a higher minimum wage is associated with lower average match quality.” For older workers, there is no significant correlation between a minimum wage increase and mismatch. These findings are consistent with models showing that workers discover their best-matched occupations with time. Older workers are therefore more likely to have a well-matched occupation compared to younger workers, meaning minimum wage increases have less effect on their switching incentives.
The author finds that minimum wage increases affect the job mismatch of males and females differently as well. A 10% increase in minimum wage is associated with a 4% greater mismatch for younger workers but has no effect among younger female workers or older workers.
“The positive correlation between the minimum wage and mismatch suggests that the switching cost can explain the effect of the minimum wage on occupational mobility.” In other words, a higher minimum wage is likely to cause workers to stay longer in mismatched occupations. Higher wages narrow the gap between well-matched and poorly matched occupations, reducing the benefits of switching to a new occupation.
How the Minimum Wage Affects Different Occupations
While a minimum wage increase may cause greater job mismatch, it may also affect certain occupations differently. The author next explores how a higher minimum wage affects four different occupational categories: non-routine cognitive occupations (e.g., lawyer, engineer), non-routine manual occupations (e.g., food preparation, building cleaning), routine cognitive occupations (e.g., office and administrative support), and routine manual occupations (e.g., butcher, material moving).
The results show that younger workers are less likely to transition from non-routine manual occupations to routine cognitive occupations when the minimum wage is higher. “If the routine cognitive occupations serve as job ladders to non-routine cognitive occupations, the results suggest that a higher minimum wage is associated with fewer transitions from manual occupations to these ladders. Specifically, the author found that workers in routine cognitive occupations are twice as likely as non-routine manual workers to transition into a non-routine cognitive occupation.
These findings are consistent with a switching-cost explanation for the minimum wage’s negative effect on occupational mobility. “Without the minimum wage, workers might be more likely to switch to occupations that better match their skills or that lead to higher-skill occupations.”
The Minimum Wage and Aggregate Output
Both the wage compression channel and the employment effect channel contribute to worse occupational mobility when the minimum wage is increased, which in turn leads to a decrease in aggregate output, the author argues. “A higher minimum wage slows down occupational switching towards better matches, which leads to an increase in aggregate mismatch and hence a decrease in output.”
To test how the minimum wage increases aggregate mismatch, the author simulates an increase in the minimum wage from $7.25 to $15. Low-ability workers are 2% more likely to be in non-optimal occupations with a $15 minimum wage, while medium- and high-ability workers aren’t affected.
This increase in mismatch translates to lower aggregate output. Low-ability workers’ output decreases significantly, by 1.3%, while the output of medium- and high-ability workers is again not affected. Overall, a $15 minimum wage decreased aggregate output by as much as 0.4%. Of this decrease, the wage compression channel accounts for 80%, while the employment effect channel makes up the other 20%.
Conclusion and Implications
The author finds that raising the minimum wage can decrease occupational mobility, as more employees stay in mismatched positions. The author highlights two channels by which the minimum wage decreases occupational mobility. The first is wage compression, in which the minimum wage reduces the gain workers acquire by switching to an occupation that better matches their skill. The second is the employment effect, in which workers are displaced and firm vacancy posting and job arrival rate decrease because of an increased minimum wage.
While raising the minimum wage continues to grow in popularity, this study details consequences of the policy that business and government should consider before its implementation.
