Do Higher Minimum Wage Laws Contribute to Increased Unemployment?
States with a higher minimum wage than the federal $7.25 requirement have an average 2-point higher unemployment rate than the rest of the country
Although many economists are expecting the U.S. economy and the jobs situation to soon be on the road to recovery, the nation’s seasonally adjusted unemployment rate is still hovering just shy of 10 percent and has been in excess of 9.0 percent for a full year.
There has naturally been great variation across the 50 states in terms of how much the economic downturn has ballooned its respective unemployment rolls.
For example, at the extreme, the jobless rate in Michigan (14.0 percent) is 3.7 times that of North Dakota (3.8 percent).
However, while some states may have been hit harder than others on the jobs front due in part to the particular industries on which each state’s economy is most reliant, states also have the power to set their own minimum wage standards, which also have an impact on employment.
Some 14 states plus the District of Columbia currently have enacted state laws that insure their workers are paid more than the federally-legislated minimum rate of $7.25 per hour.
A Smart Politics analysis of wage and employment data finds that those states that have minimum wage laws higher than the federal minimum rate have an average statewide unemployment rate that is 2.0 points higher than those 36 states where wages are equal to the federal minimum.
(Note: Of these 36 states, 26 have rates equal to the federal minimum wage, five states have rates below the federal wage, and five states do not have a minimum wage. The effective result for all 36 states is a minimum wage of $7.25 per hour).
For those states with wages above the federal minimum rate, the average unemployment rate is 10.4 percent. For the remaining 36 states, the average jobless rate is just 8.4 percent.
Six of the top 10 highest unemployment rates in the nation are found in states with minimum wage laws higher than the $7.25 federal rate, including each of the top four slots: Michigan (#1, $7.40), Nevada (#2, $7.55), California (#3, $8.00), Rhode Island (#4, $7.40), Illinois (#8, $8.00), and the District of Columbia (#9, $8.25). (Note: some of these states also have higher costs of living compared to the average state).
All but four of these states with higher than federally-required minimum wage rates have unemployment rates among the Top 25 in the nation.
Of course there are exceptions. For example, the State of Vermont has the fifth highest minimum wage rate in the country at $8.06 per hour, but has an unemployment rate that is just 48th in the nation, at 6.4 percent.
Another state in the northeast, Maine, has the 11th highest minimum wage in the country at $7.50, but only the 33rd highest unemployment rate at 8.1 percent.
No one is expecting any of these 14 states and the District of Columbia to resort to cutting back their minimum wage laws to $7.25 per hour.
In fact, the State of Illinois will have its already seventh-highest in the nation rate of $8.00 an hour increase to a tied-for-third highest rate in the nation of $8.25 an hour effective July 1st of this year.
According to the U.S. Department of Labor’s Wage and Hour Division, the complete list of states with higher minimum wage rates than the federal rate are: Washington ($8.55), Oregon ($8.40), Connecticut ($8.25), Washington D.C. ($8.25), Vermont ($8.06), California ($8.00), Illinois ($8.00), Massachusetts ($8.00), Alaska ($7.75), Nevada ($7.55), New Mexico ($7.50), Maine ($7.50), Michigan ($7.40), Rhode Island ($7.40), and Ohio ($7.30).
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This is an interesting finding. Of course, as Eric notes, some of these states have higher costs of living…
…and I’d venture to guess that many of the areas with higher costs of living are urban, used-to-be-industrial-but-not-so-much-anymore areas… where structural unemployment is far more acute due to a variety of factors not necessarily connected directly to the minimum wage (e.g., concentrations of underclass in economically disadvantaged areas where industrial employers used to reside 1-2 generations ago before relocating to greener pastures; cyclical poverty and underachievement due to lack of adequate infrastructure for education, public health, job training… and the variety of social problems that connect to these factors, such as crime).
Higher minimum wages might be connected to reluctance to hire in some cases, but there’s a huge set of confounding variables, so we really ought not jump from correlation to causation here.
I grew up in Minnesota, and now live in Vermont. One thing people for get about the East Coast is that there’s a lot of old money here. In Vermont, there are many people who don’t work because they are living off trusts. I don’t see this in Minnesota (either a cultural thing, or we’re just 150-200 years behind) but I now understand why the inheritance tax (aka death tax by opponents) may actually be a good thing. People just plain don’t have to work.
It creates a good “arts” industry, but that “art” might not have much value.
That’s surely an interesting finding, but does it actually have merit? I remember when I was paid $4.25 for minimum wage and now my daughter is getting $8.00 an hour. Sure is a big difference, but is there really a cost of living difference between then and now? Not really. If your living off minimum wage, you are barely living.
Its a basic lesson from economics 101 that if there is a mandated floor above market price on a commodity demand drops while supply increases leading a market imbalance (unemployment). As Steve points out the high density urban areas hit hard by de-industrialization will more likely have an high supply of low-skilled labor dropping market price for the few minimum wage jobs remaining.
Bottom line, minimum wages are needed to avoid de-humanizing exploitation but need to be more sensitive to labor-supply fluctuation so as to remain at or below “market” price so as not to lead to artificially low demand for labor and excessive supply.
We live in Oregon, a state with the second highest minimum wage rate of $8.40 per hour.
Locally, in the Southern Oregon region, we see our little city of Medford drying up. Signs are just about in every commercial storefront building detailing lease deals better than we’ve ever seen in this area. All you see are empty storefronts where there were previously thriving businesses. I personally know several individuals with commercial buildings almost empty.
The City of Medford website lists the unemployment rate at 6.3%. I know in the deepest part of my being this is very conservative given the situations described above.
I thought this scenario was typical throughout the nation but in talking with a large cross section of individuals from around the country, I realize the variance is tremendous depending on many factors as you mention above.
High minimum wages seem to contribute to driving small businesses out of business. . Most are working on a thin profit margin to begin with and with the economy nowadays, and the compound effect of paying higher salaries, they don’t stand a chance.
I operate a small business. I have always paid more than minimum wage to unskilled part-timers, except for kids training. When the business can’t afford it, I don’t hire. I don’t try to beat desperate people down to make it easier on myself, I’ll just backlog the work or do it myself; the fact that I’m making far less than minimum wage myself simply means I work far longer hours, 80/week being average.
Having thought from that perspective for 20 years now, I really don’t think that high minimum wage is what’s killing small businesses, I’m convinced it has much more to do with a carefully engineered campaign to extract as much wealth as possible from the small business economy, just as the housing bubble was to extract it from the property-owning economy, and the fantasy-finance industry that fed on it extracted from nearly all sectors.
I’m much more convinced that this study demonstrate some VERY interesting and illuminating correlations in most of these states, rather than causation in more than 3 or 4.