Fri 06 Dec 2013 @ 05:52 PM


Minimum Wage and Unemployment

First, the summary of my analysis of the minimum wage on unemployment: You are 12.4% more likely to be unemployed if you live in a state that has a minimum wage above the federal minimum wage. That includes 19 states and the District of Columbia.

By considering states that use the federal minimum wage as one group, and states that use a higher state mandated minimum wage as a second group, I've computed what I believe to be fairly accurate estimates of the relative unemployment rates of the two groups.

  • In October 2013, the national unemployment rate was 7.3% (as reported by the government for workplace participants age 16+).
  • The unemployment rate for states that use the federal minimum wage is 6.90% (estimated based on age 18+ population figures).
  • The unemployment rate for states that use a higher minimum wage is 7.88% (estimated based on age 18+ population figures).

I believe the numbers above err on the side of caution. While it is true I did not consider workers under age 18, it is also true that workers under age 18 have some of the worst unemployment statistics of any group. I believe the percentages would be somewhat larger if I had been able to consider them with the 18+ population.

And now for the even more boring details.

It's been almost eight years since I posted some thoughts on the minimum wage vs a living wage. The more things change, the more they stay the same.

As I observed back then, there are multiple effects of raising the minimum wage. Employer costs increase (which are in some way passed on to consumers). Some employees will be let go and others will see their responsibilities increased to offset the increased labor cost. Contracts tied to the minimum wage will be impacted. Tax revenues go up due to a higher effective rate for employees now making marginally more money and thanks to increased payroll tax costs imposed on employers.

At the time I compared Utah and Oregon. Oregon had a higher minimum wage, but it also had a higher unemployment rate (at least for the month of November 2005). As this topic has been revisited, I got to wondering: What is the real national impact of minimum wage laws on unemployment rates?

Before I continue, allow me to throw in a disclaimer. Lots of people want to oversimplify this, and I guess I'm guilty of that as well. Economics is a very complex beast, and to suggest that there is only one variable (in this case minimum wage) impacting unemployment rates is ludicrous. The potential cost to the economy is large enough that we must evaluate the impact of increasing the minimum wage beyond the oversimplification of "it'll give people more money to spend". It may give some people more money to spend, but it'll take money from others to accomplish that.

In any case, I went searching for some raw numbers from which to construct a spreadsheet. What I found was:

  1. State by state unemployment rates for the month of October 2013
  2. State by state minimum wage rates as of January 1, 2013
  3. The national workforce participation rate (people age 16 or older either working or looking for work) was 62.8% for the month of October 2013
  4. State by state population estimates as of July 1, 2012

You can refer to the numbers above (assuming the links haven't disappeared by the time you read this). You can also refer to my compilation of the numbers in my spreadsheet. I've tried to be accurate but reserve the right to be human and have made a mistake. In fact, as I write this, I've already corrected two mistakes. Please let me know if you find any factual errors.

Speaking of "errors", I know there are at least four potential issues with this data set. In the interest of full disclosure, they are:

  1. The month used for unemployment statistics is October 2013, but the population estimates are from July 2012. I don't think there is much change in the population (relatively speaking) in the intervening 15 months, but it is something to consider.
  2. The workforce participation percentage is also from October 2013, which means it does not apply directly to population numbers from July 2012. Again, I think it is close enough to give us a good idea.
  3. The workforce participation percentage applies to the entire country, whereas other numbers are applicable to a single state. Unfortunately it is all I have been able to find thus far (though I've spent too much time working on this post already).
  4. The population estimates include numbers for 18+ population, whereas the workforce participation rate is applicable to the population age 16+. This means that raw numbers are going to be off, as we aren't considering any 16 or 17 year old workers.

Finally, some might consider it an error that I impute a minimum wage of $7.25 (the current federal minimum wage) for states that either have no minimum wage defined or have a statutory minimum wage that is less than the federal. Since the federal minimum wage trumps undefined or lower minimum wages, I believe this is the right way to analyze the data. It doesn't matter if a state offers less protection than the federal government does, since the businesses have to comply with the larger of the two numbers.

After using the numbers to estimate the number of unemployed and total people in the workforce participation group, and computing sums based on the minimum wage of the state, I came up with the numbers at the top of this post.

Note: In case it is not clear, all the above data is taken from government sources on government websites. Whenever I've had a choice to make, I've tried to do so in favor of the minimum wage, though given my admitted bias, you'll have to be the judge of whether I was successful. If you think I did bias some numbers, please let me know. And as always, the government does not count unemployed people who've lost all hope and given up searching. The real numbers of unemployment would be larger if they counted in a different manner, but they don't, so I've tried to stick with the "accepted" definition of "unemployed".

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