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The administration of Prime Minister Shigeru Ishiba aims to raise the country’s minimum wage to ¥1,500 per hour within the 2020s on a national weighted average basis. To achieve the target by fiscal 2029, the hourly minimum wage will have to be raised by an average of 7.3% every year from fiscal 2025. This is an ambitious policy goal.
The intention should be to improve people’s lives. However, according to traditional economic theory, raising the minimum wage would either have no impact at all or, if it did have an impact, it would be negative for the economy. If the minimum wage remains lower than the market wage determined by the supply and demand in the labor market, raising the minimum wage will have no effect on wages or the economy.
However, if the minimum wage was raised above market wages, those who had been earning less than the new minimum wage were expected to lose their jobs due to dismissal or other reasons. In that case, companies would face a contraction in both production and profits. What’s more, inequalities would grow between the people who were lucky enough to receive wage increases and those who became unemployed, resulting in division among workers.
Such thinking among economists about the minimum wage greatly changed in the 1990s. The turning point came in 1994, when a study coauthored by David Card, a University of California, Berkeley, professor who went on to win the 2021 Nobel Prize in Economics, was published.
In 1992, New Jersey’s minimum wage rose from $4.25 to $5.05 per hour, but that of the neighboring state of Pennsylvania remained constant. Card’s team analyzed the number of minimum wage employees working at restaurants in areas of Pennsylvania near the New Jersey border and found that there was no decrease in employment. In other words, a rise in the minimum wage in the adjacent state had no negative impact on Pennsylvania.
Many ensuing studies were conducted, but none came up with definitive findings. Still, the empirical findings by Card and his colleague showing no indication that a rise in the minimum wage reduced employment, as suggested by traditional economic theory, were persuasive enough to cause a sea change in economic thinking.
Why did an increase in the minimum wage have no adverse effects on employment? The reason was that the labor market was not competitive. Many people who work for minimum wage simply want to find jobs near their homes or schools. They’re reluctant to choose better-paying jobs that are available in places a little further away. This tendency allows employers to not worry about competitors possibly offering higher wages. It is enough for them to pay the minimum wage, as workers in their neighborhoods will take those jobs.
An increase in minimum wages under noncompetitive circumstances does not bring about a reduction in employment. This is a characteristic of the labor market as found in the study by Prof. Card and his co-researcher.
It is fairly difficult to understand how minimum wage growth affects employment. The reason lies in the way the minimum wage is raised. The minimum wage is determined by taking into consideration changes in consumer prices and wage levels as well as labor market shortages.
When employment growth is the reason for increasing the minimum wage, the negative effect of the wage growth on employment may appear small. When the minimum wage goes up due to a labor shortage, such a hike hardly troubles companies because they are intent on raising wages anyway. If prices are rising, those companies find it easy to pass on their higher costs to consumers.
Researchers all over the world have been carrying out studies on how the minimum wage affects employment. In Japan, for instance, the October 2024 issue of The Japanese Journal of Labour Studies (Nihon Rodo Kenkyu Zasshi) focused on the latest studies on the minimum wage.
Worldwide advances in resear
The study by Prof. Card and his co-researcher analyzed the differences between two states. However, the latest studies analyze all the pairs of adjacent states with different minimum wage levels, or employ more precise data and different methods. Many leading U.S. studies have shown that the minimum wage has no effect or a very small effect on employment.
Studies done in other countries, too, have shown similar findings. A study on Hungary’s steep increase in its minimum wage in 2001 found that a higher wage had a negative, yet small, effect on employment and that most of the higher labor costs were passed on to consumers through increased product prices.
Germany introduced a statutory minimum wage in 2015, but studies on the measure have found no impact on employment.
However, a Danish study has revealed that minimum wages have a significant impact on reducing youth employment.
There have been various studies in Japan, too. Since 2007, the minimum wage has been raised in prefectures where the minimum wage used to be lower than welfare benefits. Given that this raise was determined by a factor separate from the underlying economic conditions, it is easy to gauge the actual impact of a higher minimum wage.
According to a study by University of Tokyo Prof. Daiji Kawaguchi and Tsuda University Prof. Yuko Mori, who took advantage of the aforementioned circumstances in their research, the said minimum wage hike has contributed to decreasing employment among young men whose highest level of education is high school or lower.
Doshisha University Associate Prof. Hiroko Okudaira and others used data about individual corporations to study the relationship between the minimum wage and labor market competitiveness. Their findings show that a higher minimum wage has had a negative effect on urban areas with usually competitive labor markets, whereas there has been no adverse impact in rural areas with usually less-competitive labor markets.
Atsuko Izumi, a director of UTokyo Economic Consulting Inc., and others analyzed cases pertaining to stricter hiring criteria resulting from minimum wage growth. They found that there has been an increase in employment among highly educated and middle-aged people but both recruitment and job offers have decreased in the restaurant, lodging, wholesale and retail sectors, which employ many workers with salaries close to the minimum wage.
When examining the impact of minimum wage growth, it is not sufficient to look at the overall labor market — it is indispensable to keep a careful eye on different groups of workers.
Whether companies can raise product prices to offset the impact of a higher minimum wage depends on how competitive the environment surrounding those products is. Markups are easier for products for the domestic market than those for export. Studies conducted abroad indicate that such markups have greater effects on lower-income people.
In the past, there were few minimum wage workers in Japan. However, there are now many non-regular workers with jobs paying minimum wage at such places as convenience stores. The social norm may have changed from the perception that workers should be paid more than the minimum wage to a new attitude that it is enough to pay them the minimum wage.
For that reason, the minimum wage now has a greater effect on the economy than in the past. Can minimum wage hikes therefore be effective in improving our living standards? In raising the minimum hourly wage to ¥1,500 over a short period of time, the government should advance the process by continually performing evidence-based checks.
Fumio Ohtake
Ohtake is a specially appointed professor at Osaka University, where he served as an executive vice president in 2013-15. He was president of the Japanese Economic Association in 2020-21. He specializes in labor economics and behavioral economics.
The original article in Japanese appeared in the Dec. 2 issue of The Yomiuri Shimbun.
