JTShideler (96.30)

Minimum Wage Analysis Now With 75% More Facts

July 17, 2009 – Comments (15) | RELATED TICKERS: WAG , ES

Background: 

Okay, there has been a lot of Minimum wage discussion these past months, as it has become a hot topic with the third installment of the Federal Minimum Wage increase taking effect on the 24th of July.  I would like to thank Devoish, WhereamInow, and a few others for bringing up the topic.I will admit out in the open that I have always believed that Minimum Wage and Price Controls negatively affect employment because of the basic laws of supply and demand and the personal belief that businesses operate to generate a profit. 

In a comment in Devoish's post I said that there are four alternatives for how a business can structure their labor pool.

1.  They can hire a lot of cheap unskilled workers

2.  They can hire more expensive skilled workers that require advanced training to operate complicated machines (most of your union jobs)

3.  They can use capital to automate their process and reduce their manpower (replace an assembly line with robots)

4.  They can move their business to a place where a lower wage rate exists (another state or another country)

While this is not true for all businesses, obviously Intel cannot make silicon chips with day laborers, and a retail store can't move to another location once it’s been built, for a good many jobs there are choices in who or how businesses will make their future labor investments.

Most businesses without political interference will choose to make investments that will provide the best return.  For example if the cost of hiring and training one more additional employee is likely to increase profits then they will add that job.  If the benefit of adding one more employee does not equal more profits then they won't hire another person. 

So the question is if the minimum wage is increased and employers cost increase what happens?  Based on Devoish's challenge, I decided to take a look at the answer.  Since he rightly pointed out that

"When I returned there was some discussion, mostly in agreement with me that my data was insufficient to prove anything, and also some religious fanatics.The sensible discussion included theorising a variety of other possibilities for Texas outperformance. Since they did not check their theories, I ignored their theories and checked some of my own."

As I like to lump myself in one of the commenter’s who disagreed with Devoish and presented sensible alternatives, and since I had criticized his methods but did not "check" my theories I decided to do my own analysis my own way to try and provide analysis with more insight.

Method:

I had criticized the structure of Devoish’s analysis because his analysis on the impact of minimum wage looked at two states, New York and Texas.  With New York having a higher state minimum wage than the Federal Minimum wage and therefore being unaffected by increases and Texas having the Federal Minimum wage and being affected by the federal increase. I had argued that comparing the unemployment effects between states was not a fair comparison because the employment situation in New York is much different then Texas. 

The only fair comparison is to compare Texas to Texas and New York to New York.  Devoish also admitted that NY subsequently increased their state minimum wage during 2 of the 3 periods that he measured so in fact NY would also experience the effects of a minimum wage increase.To try and better replicate Devoish’s experiment I focused only on the Minimum Wage increases of 2007 and 2008. 

Both of these events happened in July of the year and impacted 19 states whose State Minimum Wage is less than or equal to the Federal Minimum Wage.  These states included: Alabama, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Nebraska, New Mexico, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia.  I left 5 states off the list Idaho, New Hampshire, Utah, South Dakota and Wyoming, based on their size and geographic area.

I then examined the states whose State Minimum wage was higher than the federal law.  If a state increased its own minimum wage in response to the Federal Minimum Wage increase by more than 15 cents then I excluded them from comparison.  This left 9 states that had higher than the federal increase for each of the two raise periods and did not raise their own minimum rate at the same time.  These states included: Arizona, Connecticut, Florida, Hawaii, Maine, New Jersey, Oregon, Washington and Wisconsin.  Because of Hawaii’s geographic location I excluded it from comparison.

So this left a total of 14 states who were impacted by the Federal Minimum Wage increase to $5.85 in 2007 and $6.55 in 2008 and 8 states whose impact to their own minimum wage rate was less than 15 cents during the Federal Increase during the same period.

Since the impact of the higher costs would not be immediately obvious and to account for some variation month to month.  I broke the calendar year into three periods.  Jan-Mar, Jun-Aug and Oct-Dec.  My goal was to be able to see a comparison before the change in the minimum wage and a period after the minimum wage.For each state I took the seasonally adjusted Unemployment percentage and averaged the monthly value across the three months.  So when comparing data I would take an average unemployment percentage from Jan-Mar and compare it with the average from Jun-Aug and Oct-Dec.

When comparing data I made comparisons between individual states and between groups which have been abbreviated RAISE for States forced to raise their minimum wage and NO RAISE for states whose minimum wage was already higher and did not change.  

Data: (skip to the graphs if numbers make your head hurt)

JAN-MAR 07

JAN-MAR 07 Unemployment for RAISE States was 4.31% and included a high of 6.4% Mississippi and a low of 2.80% Virginia and Nebraska.

JAN-MAR 07 Unemployment for NO RAISE States was 4.36% and included a high of 5.00% in Oregon and a low of 3.8% in Arizona.

JAN-MAR 07 Unemployment National Average was 4.5%, so both data sets were below the national average at the beginning of the study.

JUN-AUG 07

On July 1st the minimum wage increased from $5.15 to $5.85 a 70 cent jump.  So let’s see what the average was for JUN-AUG 07.

JUN-AUG 07 Unemployment for RAISE States was 4.30% and included a high of 6.2% Mississippi and a low of 3% Virginia.  5 states had an increase in unemployment  and 9 states had a decrease in unemployment since JAN-MAR 07.  So the average unemployment for the RAISE states was about equal to where it was at the beginning of the year.

JUN-AUG 07 Unemployment for NO RAISE States was 4.44% and included a high of 5.17% in Oregon and a 3.67% in Arizona.  5 states had an increase in unemployment , 2 states had a decrease in unemployment and New Jersey had no change since JAN-MAR 07.  The average unemployment  for the UNRAISE states was 0.08% higher.

JUN-AUG 07 Unemployment National Average was 4.67% an increase of 0.17% So not a big change, employers did not immediately lay off employees because of the increase in the minimum wage and there was a statistically insignificant decrease in unemployment.  Although interestingly enough the NO RAISE states and the Nation as a whole experienced an Increase in unemployment.

OCT-DEC 07

OCT-DEC 07 Unemployment for RAISE States was 4.36% and included a high of 6.2% Mississippi and a low of 3% Nebraska.  8 states had an increase in unemployment  and 6 states had a decrease in unemployment since JAN-MAR 07.  The 4.36% raise was an increase of 0.05% since January 2007.

OCT-DEC 07 Unemployment for NO RAISE States was 4.66% and included a high of 5.27% in Oregon and a low of 4.4% New Jersey.  7 states had an increase in unemployment  and 1 state had a decrease in unemployment since JAN-MAR 07.  4.66% is an increase of 0.33% in unemployment.

OCT-DEC 07 Unemployment National Average was 4.8%, an increase of 0.3% since JAN-MAR 07.

JAN-MAR 08

JAN-MAR 08 Unemployment for RAISE States was 4.45% and included a high of 6 % Mississippi and a low of 3.03% Nebraska.  9 states had an increase in unemployment  and 5 states had a decrease in unemployment since JAN-MAR 07. 4.45% represented an increase in unemployment of 0.14% since January 2007.

JAN-MAR 08 Unemployment for NO RAISE States was 4.88% and included a high of 5.4% in Oregon and a low of 4.43% Wisconsin.  7 states had an increase in unemployment  and 1 state had a decrease in unemployment since JAN-MAR 07.  The 4.88% represented an increase of 0.52% since January 2007.

JAN-MAR 08 Unemployment National Average was 4.93%, an increase of .43% since JAN-MAR 07.

JUN-AUG 08 

On July 24, 2008 the Minimum wage increased from $5.85 to $6.25 a 40 cent increase.

JUN-AUG 08 Unemployment for RAISE States was 5.1% and included a high of 7.7 % Mississippi and a low of 3.3% Nebraska.  13 states had an increase in unemployment  and 1 states had a decrease in unemployment since JAN-MAR 07.  5.1% is a 0.8% increase since January 2007 but unemployment jumped 0.65% in this three month cycle compared to JAN-MAR 08.  Important to note, however, this period was also when gasoline prices reached an all time high.  So it is likely that the increased cost in fuel prices combined with the increase may have contributed.

JUN-AUG 08 Unemployment for NO RAISE States was 5.58% and included a high of 6.27% in Florida and a low of 4.57% Wisconsin.  7 states had an increase in unemployment  and 1 state had a decrease in unemployment since JAN-MAR 07.  5.58% is a 1.22% increase in unemployment since January 2007 but only a  0.48% increase since January 2008.  This was the first time that the month over month increase in NO RAISE states was less than the RAISE states. 

JUN-AUG 08 Unemployment National Average was 5.87%, an increase of 1.37% since JAN-MAR 07.

OCT-DEC 08

OCT-DEC 08 Unemployment for RAISE States was 5.77% and included a high of 8.27 % South Carolina and a low of 3.7% Nebraska.  All 14 states had an increase since JAN-MAR 07.  5.77% represented an increase of 1.46% in unemployment after the effects of both Minimum Raise increases happened.

OCT-DEC 08 Unemployment for NO RAISE States was 6.48% and included a high of 7.7% in Florida and a low of 5.4% Wisconsin.  All 8 states had an increase in unemployment since JAN-MAR 07.  The 6.48% unemployment figure represents an increase of 2.12% in unemployment after the effects of both Minimum Raise increases happened.

OCT-DEC 08 Unemployment National Average was 6.87%, an increase of 2.37% since JAN-MAR 07.

Analysis:

Both RAISE and NON RAISE states had negative job growth during the period of JAN 2007- DEC 2008.

RAISE states had an average increase in unemployment from JAN 07- DEC 08 of 1.46% with Alabama and Tennessee having the worse increase nearly 2.8% and West Virginia and Nebraska being the major outlier with only a .17% and .23% increase in unemployment.  Both Nebraska and West Virginia seemed to be little affected by the minimum raise increase or the slowdown in the economy and maintained rather resilient employment.  Even today Nebraska bucks the national trend with an average unemployment of only 4.4%, although West Virginia since December 2008 has caught most of the rest of the states and in June had an 8.6% unemployment rate.  

NON RAISE states had an average Increase in unemployment from JAN07-DEC08 of 2.12% with Florida experiencing the worse loss of 3.7% and Wisconsin being an outlier of only changing .5%.  So this data would show that while the minimum wage increase may have impacted unemployment in the RAISE states, the rate of change was actually slightly higher for the NON RAISE states then the RAISE states. 

So I thought that perhaps my data was just getting washed away in the deteriorating economy.So I went to the Bureau of Economic Analysis and looked at the change in GDP from one Quarter to the next

Q1 07 =4.3%, Q2 07 =6.9%, Q3 07 =6.3%, Q4 07 =2.3%

Q1 08 =3.5%, Q2 08 = 4.1%, Q3 08 =3.4%, Q4 08 =-5.8%

So while the economy was still growing its GDP quarter over quarter for much of 2007-2008 unemployment was increasing rapidly for both RAISE and NON RAISE states.  Unemployment is usually thought of as a lagging indicator of economic performance, so an increase in unemployment should have followed a contraction of the economy not preceded it.  Both increases in the Minimum wage happened in quarter 3 and both quarters resulted in less growth in GDP approximately 0 .6% then the quarter before it. 

As the economy began to slow though it gave me another thought in respect to Unemployment and Minimum Wage.  As the economy suffered the states who did not have to raise their minimum wage because it was already higher experienced more unemployment, then those states that were still comparatively lower. 

While I would need to do a different analysis to prove this theory, one possibility could be that during a recession the higher wage rate caused layoffs to occur faster as profits shrank and the cost of each additional worker added less and less value.  So states with a lower minimum wage could afford to maintain employees longer before letting them go.

While I am sure this will not change anyone’s mind, this exercise convinces me that the 70 cent increase in minimum wage was partially involved in the increase in National Unemployment and as unemployment increased so did the rate of foreclosures, and the drop in economic growth as consumption fell. 

I also find it interesting that the states with the highest minimum wage rate also have some of the highest unemployment rates, although not always the case:

Washington $8.55 unemployment  9.4%,

Oregon $8.44 unemployment 12.4%, 

California $8.00 unemployment 11.5%,

Conneticut $8.00 unemployment 8.0%,

Illinois $8.00 unemployment 10.1%,

Massachusett $8.00 unemployment  8.2%,

Michigan $7.40 unemployment 14.1%

Compared to the national average of 9.5%, anyone want to bet where unemployment will go after July 24th  and a mandatory increase in the minimum wage to $7.25 another 70 cent increase.

While very few people are actually paid the minimum wage, the minimum wage matters because it makes businesses consider other alternatives in their hiring.  Employers choose to hire fewer but more skilled-expensive workers or increase investments in technology or moving to other states or overseas.

I have included a couple of graphs that I had made before researching this study to show the impacts of the National Unemployment % and the GDP relative to the Minimum wage increase and some other significant events that I think might be interesting. 

This is my first take at economic analysis since College and I was rushing a little to get it done in time to contribute to the discussion.  Also if anyone is interested in my data please let me know and I can possibly forward a copy of my excel sheet to you.  I have included a few of my graphs in the comment section since I could not figure out how to add them to the blog.

Comments and Recs are both appreciated.