Minimum Wage and Unemployment

With the recent proposal to raise the minimum wage, I noticed that California currently has one of the highest minimum wages ($8.00/hour) and one of the highest unemployment rates (9.8%) in the country.


Minimum wage (in dollars per hour) by state as of Jan 1, 2013. Data source: National Conference of State Legislatures.

min_wage_state_feb_13.gif


However, this does not appear to be a general relation across states. Several of the southern states with no state minimum wage also have unemployment rates that are above the national average.


Unemployment rate (in percent) by state as of Dec 2012. Data source: BLS.

unemp_state_feb_13.gif


A regression of the unemployment rate on a constant and the minimum wage has an R2 of only 0.002.


Scatter plot of raw data and regression line. Horizontal axis: minimum wage as of January. Vertical axis: unemployment rate as of December.

unemp_wage_feb_13.gif


Of course, it is difficult to use data like these to assess the effect of changing the minimum wage on the unemployment rate. The reason is that there are important differences in a variety of characteristics across states that led some states to choose a higher minimum wage than others. Those differences could themselves have important effects on the unemployment rate that do not come from the minimum wage itself. But the one thing that we can safely conclude from the diagram above is that any relation between the minimum wage and the unemployment rate certainly isn’t obvious in these data.

By the way, here is a more detailed plot of last year’s unemployment rates at the individual county level.


Source: BLS.

unemp_county_feb_13.gif

This piece is cross-posted from Econbrowser with permission.

3 Responses to "Minimum Wage and Unemployment"

  1. Brent   February 25, 2013 at 11:55 am

    Actually you cannot come to the conclusion that there is no correlation. There is a high probability that if you account for the cost of living differences between the states, that if fact you will find that the minimum wages are very different. 7.25 in Alabama will go further than 9.00 in California. If you do not adjust for simple things like cost of living, then you cannot conclude for you High School-level diagram that minimum wage rates have little effect on unemployment.

  2. Vet   February 26, 2013 at 3:11 pm

    Any study of localised economic variance should always be viewed against a chart of population density. That's the biggest single determinant of living conditions anywhere. Higher population density = higher cost of land and things related to land (housing, food, environment, water), but lower cost of energy, transport, healthcare, communications, services. It probably relates to higher unemployment – partly because it becomes easier for the unemployed to live there.

  3. DINESH DESAI   February 27, 2013 at 1:52 am

    YOUR RESULTS SEEM TO BE BASED ON PURELY CROSS-SECTIONAL DATA, NOT ON THE TIME-SERIES DATA. THE LACK OF A STRONG CORRELATION POINTS TO INTER STATE DIFFERENCES WHICH ARE KNOWN TO WEAKEN ECONOMIC CAUSALITY. HOW COME YOU DID NOT LOOK AT THE HISTORICAL RELATIONSHIP BETWEEN THE MINIMUM WAGE AND THE UNEMPLOYMENT RATE?