One of the big questions about minimum wage increases is whether and how they will reduce employment. In general, as we discuss in our recent report on I-1433, the preponderance of evidence suggests that employment will decline as the minimum wage increases. But “by how much?” is less settled, as there is not a consensus as to what the labor elasticity of demand is.

Economist Bryan Caplan links today to a meta-analysis published last year in the European Economic Review. Regarding the various estimates of elasticity of labor demand, it found, “Heterogeneity due to the theoretical and empirical specification of the labor demand model, different datasets used or sectors and countries considered explains more than 80% of the variation in the estimates.”

Some interesting points from the study:

• “There is unanimous belief in a negative relationship of real wages and labor demand, and thus a negative own-wage elasticity.”
• The study finds that demand for labor is less elastic in the short-run than in the long-run. (Employment may not decline immediately after a wage increase, whether because of regulations or ability to adjust “capital and material input.”)
• The study also finds that “demand for unskilled labor and workers with atypical contracts is particularly responsive to wage rate changes.” (“Atypical work” is apparently the European term for employment that isn’t full-time, regular, and with a single employer over a long period of time.)

The authors’ best estimate of elasticity is -0.246. As Caplan notes, “An elasticity of -.25 implies that raising wages 4% permanently depresses employment by 1%.”