Raising the minimum wage actually increases racial disparities

Proposals for increasing the minimum wage continue to come at a fast and furious pace. California recently legislated minimum wage increases to $20 in fast-food restaurants and $25 in health care. Washington State is considering a $25 minimum wage. And, not to be outdone, mayoral candidate Zohran Mamdani is advocating for a $30 minimum wage for New York City.

One key argument that advocates for higher minimum wages make is that they reduce racial disparities in earnings by helping lower-paid Black Americans. However, new research suggests that precisely the opposite happens — higher minimum wages reduce job opportunities for Blacks and increase racial disparities.

The logic for why a higher minimum wage should reduce racial disparities seems simple: Black workers earn lower wages, and therefore raising the wage floor should reduce racial differences in earnings. But that is not the whole story.

It is well-established that a higher minimum wage reduces employment among the lowest-wage workers. Given that Blacks earn lower wages than whites, might a higher minimum wage increase racial disparities by reducing employment more for Blacks?

In new research, Jyotsana Kala and I find that higher minimum wages reduce Black employment and earnings while having little impact on whites. Thus, they actually increase race disparities. Talk about unintended consequences!

In a decades-old op-ed, Milton Friedman warned that higher minimum wages could harm Black workers more than white workers because of lower wages and skills among Blacks. Despite this, economists have recently touted a higher minimum wage as a means to reduce racial disparities, relying on evidence from large expansions of the minimum wage in the 1960s. But they sweep under the rug conflicting evidence from the same historical episode that showed Blacks lost jobs relative to whites when this happened.

In our new research, we examine this debate with modern evidence. We use huge data samples from the American Community Survey from 2005 until the onset of the pandemic. This survey gives us the ability to do what economists could not do before: estimate the effects of higher minimum wages on narrow groups of workers defined by race, education and age, such as Black high-school dropouts under 30. We study the many large minimum wage increases enacted at the state and local level in recent years, which have collectively made the $7.25 federal minimum wage irrelevant in more than 30 states and, on average, nearly doubled the minimum wage above the federal level.

Our new evidence is striking and indeed surprising. Higher minimum wages do not just lead to relatively more job loss among Blacks than whites — rather, the job loss falls entirely on Blacks.

Estimates indicate, for example, that a 10 percent increase in the minimum wage reduces employment among some groups of low-skilled Black workers by as much as 4 percent. Moreover, although a higher minimum wage of course raises wages for those still employed at the bottom of the income scale, the wage increases are sufficiently small that higher minimums over all reduce earnings of these low-skilled Black workers — again, without affecting whites.

This concentration of the adverse effects of minimum wages on Black workers interacts in an unfortunate way with another aspect of race in America — extreme racial residential segregation. Because most Black Americans live in areas that are majority Black, the bad consequences of adverse minimum wage effects are concentrated on heavily Black neighborhoods. This likely has a variety of other negative impacts on these neighborhoods above and beyond substantially lowering employment — for example, reducing demand for local businesses and encouraging crime through a dearth of jobs.

We have known for some time that a higher minimum wage does little to raise living standards in general, as evidenced by its failure to reduce poverty. Our new evidence undermines the case for a higher minimum wage even more by showing that it not only fails to reduce racial disparities, but increases them. Politicians who put workers at the center of their policies and campaigns should take this evidence seriously and look to other solutions.

David Neumark is a Distinguished Professor of Economics at the University of California, Irvine and a visiting fellow at the Hoover Institution.