Update 1/11/07:First-rate article on this subject by Timothy Egan in the New York Times. It’s easy to see how he won the National Book Award.
There’s been a lot of talk recently about the 110th Congress raising the federal minimum wage. One thing you hear a lot is that raising the minimum wage leads to higher unemployment. (Here’s one risible example; and here it is filleted by David Goldstein.)
But is this canard actually true? I’m skeptical—here’s why.
First off, in deference the economists out there, I should mention that there has been any number of academic papers arguing this question. But one thing that I’ve never seen—although I don’t follow the debate closely—is an argument with recourse to a fairly obvious natural experiment: What’s happening in each of the 50 states?
In this corner, we have 21 states who share the federal minimum wage of $5.15, the lowest allowable wage. Among these states, some have the same wage as the feds, some no state minimum wage, and one, Kansas, has a lower wage. But federal law trumps.
In the other corner, there are 30 states (counting DC), that have a minimum wage higher than $5.15. There’s not much uniformity among these states’ wages and the details vary considerably. Still, we have something like a rough comparison between the stingy states and the generous states.
So what’s the difference in the unemployment rates of stingy and generous states? Exceedingly little.
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- Of the 21 states with the lowest allowable wage, 9 of them (or 43 percent) have an unemployment rate higher than the national average of 5.1.
- On the other hand, of the 30 states with higher minimum wages, just 10 (or 33 percent) have an unemployment rate above the national average.
For a more accurate picture, I calculated the aggregate unemployment rate for the stingy states versus the generous states (basically, using each state’s labor force as a weighting factor for its unemployment rate). The difference is negligible.
The stingy states have a combined unemployment rate of 5.16 percent. Meanwhile, the generous states do almost imperceptibly better, with a combined unemployment rate of 5.07 percent.
Now, there may still be any number of reasons to believe one way or the other based on econometric models or academic theories. But the results on the ground suggest that the minimum wage does not make much of a difference to the unemployment rate. If anything, the state by state experience hints at the opposite conclusion. So maybe we can start retiring this old saw?
Note: All unemployment figures in this post refer to 2005, the last year for which we have complete data.
Update: Something about this post was bugging me on the bus ride home last night. I finally realized what it was: in late 2005 Hurricane Katrina pretty severely screwed up the economies of Louisiana and Mississippi, both of which are “stingy” states that provide only the lowest allowable wage.
So this morning I recalculated things without those two. Here’s what I found:
- 7 of the 19 stingy states (37 percent) had an unemployment rate above the national average (as compared to 33 percent of the generous states).
- The aggregate unemployment rate of stingy states falls to 4.98 percent (as compared to 5.07 percent for the generous states.
My reading of the numbers? Still too close to call—and that’s basically my point. Recent state by state data does not lend support to the oft-repeated claim that a higher minimum wage is tantamount to higher unemployment.
To play devil’s advocate, couldn’t we be talking about apples and oranges? That is, is it possible that the “stingy” states have other factors at play that put upward pressure on unemployment, and that their low minimum wage is in fact what’s keeping unemployment rate in check? A perhaps better (?) test of your theory that minimum wage doesn’t push unemployment up would be to look at, for as many states as possible, at unemployment in the state prior to an increase in the minimum wage, and then (say) three years after the increase. Might need to normalize for any national unemployment rate trends during the period.
Eric de Place
c-bird,You’re absolutely right, of course, that a better way to conduct this little “study” of mine would be a longitudinal comparison of each state over the period that it enacted a wage law—perhaps with a weighting factor that would account for the generosity of their higher minimum wages. (And, yes, I suspect we’d have to normalize for national/regional trends in unemployment and the business cycle that are unrelated to the wage increase.) There are also large questions about labor force participation.Obviously, this stuff gets very complicated, very quickly. In any case, I’m not intending my back-of-the-envelope calculations in this post to be some sort of trump card in the debate. I simply wanted to note what I thought was an interesting comparison based on the natural experiment (and readily accessible data) from the 50 states.
I applaud *any* attempt to help the working poor, but am among those who view raising the minimum wage as an empty promise – and diversion from real remedies such as Earned Income Tax Credits for the working poor. From an arctice from the the non partisan Employment Policies Institute:ConclusionThe authors calculate that, absent any employment loss, the cost to employers of the proposed increase in the federal minimum wage to $7.25 an hour will be $18.26 billion. Only 12.7 percent ($2.3 billion) of this cost will actually go to poor families, with only 3.7 percent going to poor African-American families. The ability of the minimum wage to target poor families is weaker and decreasing over time. Contrary to the statements of its advocates, fewer and fewer low-wage employees are supporting a family on the minimum wage, with only 9 percent of low-wage employees actually supporting a poor family. Therefore, effective anti-poverty programs must concentrate on family income and not wages. While most working poor families will not receive any benefit from an increase in the federal minimum wage to $7.25 an hour, the vast majority would receive a benefit from increases in the generosity of federal and state EITC programs. These programs provide targeted assistance to the low-income working families so often cited in support of minimum wage increases—the same families that receive a minority of the benefits from a wage increase. Full article here: http://www.epionline.org/study_detail.cfm?sid=87
I should add that the authors put aside the unemployment question assuming no net loss of jobs for the study.
Arie’s got it.The real reform is in income, not wages. When we start talking about that, then we’ll have something.
Eric de Place
Hey Arie and Dan—For the record, I agree that addressing family income is much more important than the minimum wage. But in the meantime, I’m for raising the min wage as a small first step toward something more effective and broadly shared.BTW, I love EPI (thanks for the link, Arie). I just love them.
I used EPI when considering a move to WA. They’re fantastic, altho the GF at the time got tired of me repeating their numbers…hmmmm…DS
attempt to help the working poor, but am among those who view raising the minimum wage as an empty promise – and diversion from real remedies such as Earned Income Tax Credits for the working poor.
EPI may be “nonpartisan”, but it is owned and operated by a person who lobbies on behalf of hotels, restaurants, tobacco, and alcohol. They do not disclose the source of their anonymous donations($millions). I would take papers against minimum wage increase from them with a hefty grain of salt.