The Effect of Minimum Wage

Vivian Sun The Effect of Minimum Wage on Unemployment

Background: January 5th, 2007 - Fair Minimum Wage Act of 2007 introduced into the House of Representatives; proposed an increase in the federal minimum wage from $5.15 / hour to $7.25 / hour in three gradual increments of $0.70 over the course of a year.

January 10th, 2007 - the new Democratic majority in the House of Representatives helped pass the Fair Minimum Wage Act of 2007.

February 1st, 2007 - Senate passes the bill as well.

May 25th, 2007 - Fair Minimum Wage Act of 2007 signed into law.

Will an increase in the minimum wage, as specified by this law, prove beneficial to workers, particularly those in groups (i.e. teenagers) that are most dependent on and affected by the minimum wage? Minimum Wage: the lowest hourly wage that employers must pay their workers

Pro: - guarantees workers a certain degree of financial stability

Con: - might increase unemployment in those groups that are dependent on the minimum wage

Unemployment Rate: - the percentage of unemployed workers from a pool of people who are above 16 years of age and are employed or actively looking for work.

In theory, a raise in the minimum wage will initiate an increase in unemployment Analysis: - as minimum wage increases, so does the supply of labor because the financial incentive encourages more people to seek work

- as minimum wage increases, the demand for labor decreases because employers do not want to employ more workers at a higher cost

- the intersection of the demand for labor and the supply for labor results in an equilibrium point at which the demand for labor equals the supply for labor at a certain minimum wage. At this wage, the exact number of people who are looking for work are employed.

- if the minimum wage is increased from its equilibrium position, then we observe a larger supply of labor than a demand for labor. At a higher wage, more people seek work, but less employers seek workers. There is a surplus of job-seekers but not enough employers, so unemployment develops. Data: Federal Minimum Wage - $5.15 Current 2007 Statistics

States Above Federal Minimum Wage: Alaska - 5.8 (unemployment rate) Minnesota - 4.5 Arizona - 4 Missouri - 4.5 Arkansas - 5 Montana - 2.2 California - 5.1 Nevada - 4.4 Colorado - 3.5 New Jersey - 4.3 Connecticut - 4.2 New York - 4.1 Delaware - 3.7 North Carolina - 4.8 DC - 5.7 Ohio - 5.7 Florida - 3.4 Oregon - 5.1 Hawaii - 2.4 Pennsylvania - 4.1 Illinois - 4.8 Rhode Island - 4.5 Iowa - 3.4 Vermont - 3.9 Maine - 4.3 Washington - 4.4 Maryland - 3.6 West Virginia - 4.5 Massachusetts - 4.6 Wisconsin - 5.1 Michigan - 7.1 States At or Below Federal Minimum Wage: Georgia - 4.4 Idaho - 2.8 Kansas - 4.3 Kentucky - 5.3 Nebraska - 2.8 New Hampshire - 4.0 New Mexico - 3.6 North Dakota - 3.3 Oklahoma - 4.2 South Carolina - 5.8 South Dakota - 3.4 Texas - 4.2 Utah - 2.5 Virginia - 3.1 Wyoming - 2.9 Hypothesis Tests for the Difference Between Two Means: null hypothesis - the unemployment rates of states that have minimum wages at or below the federal minimum wage is the same as those of states that have wages higher than the federal one. - μ1 = μ 2 alternate hypothesis - the unemployment rates of states with higher minimum wages is higher than the unemployment rates of states with lower minimum wages. - μ 1 > μ 2, where μ 1 is the mean unemployment rate of states with high minimum wages and μ 2 is the mean unemployment rate of states with low minimum wages

Conditions: - SRS - Distributions are pretty normal

Calculations: States Above: mean unemployment rate: 4.41 standard deviation: 0.97 n = 31

States At or Below: mean unemployment rate: 3.77 standard deviation: 0.95 n = 15

Use calculator to obtain: t-statistic = 2.11 df = 28.34 P = 0.0217

Interpretation: The P-value is 0.0217, indicating that if the null hypothesis were true, we would see a test statistic this or more extreme about 2% of the time. This is a small probability and gives evidence to reject the null hypothesis, particularly at the a = 0.05 level. There is evidence that the mean unemployment rate in states with a higher minimum wage is higher than in states with a lower minimum wage, relative to the federal minimum wage. Thus, it is not improbable that the Fair Minimum Wage Act of 2007 might contribute to a higher unemployment rate as a result of increasing minimum wages, and therefore increasing labor supply but decreasing labor demand, creating a shortage of job openings. Shortcomings: - This analysis only addressed unemployment rates in general for the states, making no distinction between age or ethnicity (data for these groups was hard to come by). This is a crucial point because certain groups are affected more than others by changes in the minimum wage and thus their unemployment rates might shed more light on the situation than national numbers. - For instance, teenagers comprise a significant portion of the minimum wage- dependent work force, and their unemployment rates are many times greater than the national rate.

- The states in the two groups examined (above the federal minimum and at or below) were innately different and thus various factors that are unique to each state or geographic region might have contributed to the unemployment rates. - For example, the states included in the first group tended to be geographically located on the western and eastern coasts, while the states in the second were located further inland in most cases. Some states might have a higher ratio of population to the number of jobs available, etc. due to geographic circumstances. - other instances of deviations

--- Sources:

General: http://www.uvm.edu/~vlrs/doc/min_wage.htm

Minimum Wage: http://www.infoplease.com/ipa/A0774473.html

Unemployment Rate: http://www.bls.gov/cps/prev_yrs.htm

By State: http://www.bls.gov/web/lauhsthl.htm http://money.cnn.com/pf/features/lists/state_unemployment/index.html

State Minimum Wages: http://en.wikipedia.org/wiki/List_of_U.S._state_minimum_wages