Wednesday, March 10, 2010

Did the Minimum Wage Increase Destroy Jobs?

Copyright, The New York Times Company

As I’ve discussed before, national trends suggest that the sharp fall in part-time work during the last five months of 2009 can be largely attributed to last summer’s federal minimum-wage increase. A look at job changes in individual states seems to confirm this conclusion.

Two months ago, I noted how national, seasonally adjusted part-time employment increased almost 2.5 million during this recession, but then it peaked in July 2009 and headed sharply downward. I thought that it was no coincidence that the federal minimum hourly wage was raised, on July 24, 2009, from $6.55 to $7.25 — especially since the inflation-adjusted federal minimum wage had already gotten pretty high.

I estimated that part-time employment would have been about 500,000 greater in the last couple of months of the year if it hadn’t been for that last increase in the federal minimum. Many of us view 500,000 job losses as a lot because they would, for example, make a sizable dent in the jobs that the White House claimed last year that it would create with its $787 billion stimulus law.

Some of the readers of this blog, as well as the Economic Policy Institute, wondered whether my conclusion about the federal minimum could be confirmed with regional data.

After all, 19 states were not directly affected by the July 2009 federal increase because they already had their minimum wage at least at $7.25 per hour (the federal minimum prevails over the state minimum whenever the former is greater). Thus, whatever jobs were lost because of the federal increase would be lost in the other 31 states and the District of Columbia (which sets its minimum to be $1 above the federal minimum, so when the federal minimum jumps, do does D.C.’s).

Testing the state-level hypothesis with the Census Bureau’s household survey is not so easy because 500,000 job losses, significant as they are, can easily be swamped by seasonal and statistical fluctuations in the state-level household surveys.

Indeed, I noted before that even changes in the seasonally adjusted national-level household survey look a bit random from month to month. So it is no surprise that seasonally unadjusted, state-level monthly measures of part-time employment are also pretty noisy. (To my knowledge, neither the Census Bureau nor the Bureau of Labor Statistics has seasonally adjusted, state-level monthly part-time employment data.)

Another problem is that high-minimum-wage states have different labor markets than the others.

I try to alleviate this problem by comparing part-time to full-time employment, and considering just the months immediately after the federal move. (Combining a study of the federal change with studies of state minimum-wage increases could make the problem worse, because each state most likely reacts to its own economy when considering the timing of its increase; see Professor David Card’s paper on this point.)

With these cautionary notes, consider the chart below. It shows how the ratio of part-time workers to full-time workers has changed since its level in July 2009 (the last month that the federal minimum wage of $6.55 was in effect). For example, a value of “0.02” for December means that the ratio of part-time workers to full-time workers in a group of states in December was 2 percent greater than it was in July. (If you’re curious: Nationwide, there is one part-time worker for every four or five full-time workers).


The ratio increased in both the “unaffected” states (blue series) and the affected states (solid red series). As we know from the national seasonally adjusted data, the ratio did not increase nationally, so seasonality tended to increase both series. My claim is not that the federal increase would halt seasonality, but merely that it would put the ratio lower in the affected states than it would have been.

The red series for the affected states is below the blue series for the unaffected states four out of five months, which is consistent with the hypothesis that the federal increase caused part-time job losses in the affected states, but not in the others.

With all of this recession’s significant labor market problems, and the expensive federal efforts to offset them, it’s too bad that the minimum-wage law added so many people to the list of those who today cannot find jobs.

[TECHNICAL NOTE: There are a couple of ways to measure part-time in the CPS monthly files, and a couple of ways to extrapolate the sample totals to state-wide totals. Shown above are the results from the most conservative (showing the least gap between red series and blue seris) of these alternatives]

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