Minimum Wage and Unemployment

Following up time! I’m sure I don’t need to link to the collection of papers and blog posts claiming minimum wage increases increase/decrease unemployment or the total employment level or the rate of job growth? Here’s John Schmitt at CEPR on why the minimum wage has no discernible effect on employment, and here’s the J. Meer Texas A&M paper on the relationship between minimum wage and labor dynamics. After that, you’re on your own.

One criticism of the previous post‘s approach brought up by Dr. Steve Steib1 (that I was totally going to mention anyway) is that state populations over time are not strictly comparable because people can move between states. Extreme cases here are pretty obvious. If North Dakota decreases its minimum wage to -$1,000 per hour (for science? To honor the ghost of Ayn Rand? As a bid to secure Paul Ryan’s transfer of citizenship? Whatever), low-wage workers, assuming their wages in ND set them below the poverty level for their family size in North Dakota, will move out of North Dakota, which will decrease the North Dakota poverty rate through selection rather than through any impact on people’s standard of living. Another criticism of the previous chart is that any relationship between poverty and the minimum wage might be attenuated by some sort of threshold effect: if the minimum wage is enough below the poverty level for full-time work, increases won’t affect the poverty level because there’s a large space for minimum wages higher than the current minimum but still below the poverty level. For those reasons, the poverty rate might not be a good proxy for the question “does increasing the minimum wage make people’s lives suck less?”, and it might be more useful to examine the impact on unemployment.

Examining unemployment in the context of interstate migration is also problematic. It’s possible that states that increase their minimum wages might attract in-migration. Ignoring the idea that firms lay people off for now (i.e., ceteris paribus), this in-migration increases the labor supply for a given level of labor demand, which, if wages are sticky downward, results in higher unemployment. If wages aren’t sticky downward, then wages in a region with a minimum wage increase should decrease. Both of these are testable predictions, which is nice, but for now, the raw, unexplained relationship between minimum wage and unemployment rates for different states is easier to display.

From a lazy, non-econometric approaches to visualizing the two time series, here’s what the relationship looks like between 1988 and 2006, with the unemployment rate2 in blue and the minimum wage2 in red:

Full image at the link

Again, look at all that variation! Look at North Dakota! Steadily rising minimum wage with decreasing unemployment! Liberal point: PROVEN.  But also, look at D.C. Unemployment sure was on the downswing before that minimum wage increase got out of control. Conservative point: PROVEN.

I’m not trying to say too much about what the “actual” relationship between minimum wage and unemployment and/or poverty is here. I think the point is probably something like “the relationship between changes in the wage-level and unemployment and/or poverty varies across space and time,” but that’s boring. Instead of that… look, graphs! But really, next time you hear that minimum wage increases will ruin everything/save us all, keep in mind both that meta-analyses tend to find a small and insignificant effect and that the impact of any minimum wage change will probably be dwarfed by what’s going on in the economy at large.

P.S. Github link is included above, but in case anyone wants to play with data, feel free to fork the repo. Current version of unemployment is monthly/seasonally adjusted. I’d like to do something similar with aggregated data from the monthly level (monthly unemployment series in Fred for not seasonally adjusted unemployment rates are just [state abbrev.]URN, and weights are just the size of the labor force in each month, which are [state abbrev.]LF. This isn’t hard, but I have a job and am sort of lazy?) to the annual level.

1 The actual facebook comment from Dr. Steib was “Intra state migration attracted by minimum wage differences???” The assumption that people don’t respond to their policy environment is a bit strong, so this is a point well taken, even if Matt Yglesias says people don’t move.
2 Standardization here was identical to standardization in the previous post, in which series were divided by their mean values to to bring the scales in line.


Minimum Wage and Poverty

The CBO estimates that increasing the federal minimum wage to $10.10 per hour would lift 900,000 people out of poverty. Pew Research points out that full time minimum wage work “hasn’t been enough to lift most out of poverty for decades,” which sounds like an argument for increasing it. Meanwhile, the Mises Institute has a principles-of-micro (this can be either a compliment or a criticism, but here, I think for lack of empirics, it’s a criticism) explanation for how minimum wage laws increase unemployment and poverty, and Jeffrey Dorfman at Forbes interprets the CBO report as evidence that the minimum wage is “terrible anti-poverty policy.”

This is all very confusing. I looked at minimum wage rates by state and poverty levels by state over time to see if there was anything that jumped out/suggested a more likely correct explanation of the relationship between the minimum wage and poverty and foundthat (with a lazy, non-econometric approach to looking at the relationship between poverty and the minimum wage), conclusions are hard to come by.

The chart below shows the minimum wage rate and two-year moving average poverty rate for each state, D.C., and the U.S. on the whole from 1993 through 2005. Minimum wage is in red, and poverty rate is in blue. Each was normalized by its mean in the period to get values onto roughly the same scale.


…nothing really jumps out. Connecticut has a steadily increasing minimum wage over the period, but no interesting poverty trend. New Mexico has a nice big poverty wobble in a period with no minimum wage change. California’s nice little criss-cross is a terrible joke about the perils of putting separate series on the same graph. I guess Kentucky was on a downward poverty trend before their slight uptick in minimum wage, and then the trend reversed? I guess?

You’d need a better sense of what’s supposed to be related to poverty rates (Education levels? Demographics? Tax policy? I’m not sure what to control for here) before drawing any conclusions of course, but I’d expect, if anyone’s going to call minimum wage either a terrible or great anti-poverty policy, there’d be something more visible here.

Next step: the same but with unemployment.