A couple of weeks ago, I pondered what would happen to the unemployment rate if Congress raises the federal minimum wage. My guess: very little. And now for you readers with a stomach for numbers, I’ve got more data lined up in support of my case.
State experiences show that, if anything, raising a state minimum wage actually correlates to better employment performance than the country as a whole. That actually surprised me a bit.
Here’s how it breaks down…
From 1990 to 2004, 10 states raised their minimum wages above the federal wage floor. With a huge assist from super-research intern Deric Gruen, I looked at what happened to state unemployment rates when the states boosted their wages above the federal minimum. In 7 of the 10 states, the unemployment rate performed better than the national average. The other 3 performed worse.
State by state results are below the jump.
In 1990 Oregon boosted its wage 45 cents above the prevailing federal wage. Its unemployment rate then rose by 1.1 points. Bad, right? Well, not really, because the national rate rose even faster: by 1.4 points during the same period. So Oregon managed to increase its minimum wage and and still do a better job of maintaining employment than the country as a whole.
The same thing has happened in other states too. In 1999, California, Connecticut, and Delaware all raised their wages. Unfortunately, unemployment went up in all three states. But just like in Oregon, the national unemployment rate rose even faster during the same period. So the three generous states still outperformed the national unemployment rate change.
Maine raised its wage in 2002 and the same thing happened.
There are happier stories too: when Massachusetts raised its wage by 50 cents above the federal floor in 1996, its unemployment dropped 2.7 percent during the same period that federal unemployment declined by only 1 percent. And when Illinois gave low-income workers a small boost in 2004, its unemployment rate dropped by a half point at a time when the national rate stayed virtually unchanged.
To be fair, there are three counterexamples to my argument here: Hawaii, Rhode Island, and Washington. Hawaii, in particular, experienced a very large jump in the unemployment rate after raising the minimum wage. But the Hawaiian economy is substantially different from the rest of the US economy and it’s probably unwise to draw too many conclusions from Hawaii’s experience.
In any case, the score is still 7 to 3. Of the 10 states who raised wages, 7 of them outperformed the country as a whole in unemployment; 3 did not.
Now none of this can prove that there’s no relationship whatsoever between the minimum wage and unemployment. But if a link exists it’s probably fairly weak. Today’s little data experiment does not show a connection between raising minimum wages and hurting employment, nor did my 50 state experiment earlier this month. So unless folks have some pretty compelling evidence to the contrary, maybe they should stop saying this.
A couple of research notes. To make the unemployment rate comparisons meaningful, we calculated a 3 year average of the state unemployment rate before the new minimum wage boost went into effect and a 3 year average starting the year after it went into effect. (The comparison in Illinois, which raised wages in 2004, was necessarily conducted with a shorter “after” period.) We then compared the change between the “before” and “after” state averages with the change in the national minimum wage over the same period. We said that a state performed well if its unemployment rate either 1) fell faster than the national rate, or 2) increased more slowly than the national rate. Just so, we said a state performed poorly if its unemployment rate either 1) rose faster than the national rate, or 2) fell more slowly than the national rate. And, of course, by “we,” I mean “Deric.”
Arie v.
I hate to say “correlation does not mean causation” but states with progressive attitudes may have other attributes that may explain relative gains in the employment rate. Another idea might be to see if it hurts employment among the working poor – were that data available. They are the canaries in the coal mine here and the ones we hope to help with raising the minimum wage. Barring that it might help to check if rates of change were impacted. For example if Hawaii was already trending away from the nation as a whole, then the minimum wage increase may not have had a negative impact.It may be that Deric used methodology and software like SPSS to help identify spurious relationships. My guess here is also that the impact is benign enough that it’s hard to prove either way.
Gary Durning
I can see the arguement between raising the minuim wage and higher unemployment but I think the bigger factor is taxation and government social benefits versus the minimum wage. Europe as a whole has a bigger unemployement rate but is that due to a higher minimum wage or is it due to higher taxation, or one or both? Basically how does miniumum wage vs. taxegdp growth, because Europe’s gdp growth as a whole lags behind the U.S. but is that because it is Europe has higher taxation or less of a difference between rich and poor or legal restraints of industry? or something else that I havn’t thought of? The miniumem wage being raised adjust to raise their minium wage to cost of living. isn’t going to affect the unempoyement rate until it reaches a critical point in which it puts enough businesses out of businesses to affect national indicators. Personally I think the minimum wage is correctly adjusted at the state level because different states/regions have a different cost of living. Therefore the federal minium wage should be the minium of what the nation needs to survive and the more expensive states should raise the minium wage to compensate for the cost of living.