Monday, June 25, 2012

Inflation, Minimum Wage, and Unemployment

With some spare time I had today, I decided to look at the relationship of unemployment and minimum wage. I started with the year 1978 since it was simplest to track minimum wage using this year. I only used the federal rate, so state rates that differ could explain much of the variation in the following regressions. Additionally, I used CPI numbers from the government instead of some alternative, and as different methodologies have been used over the years, it is a little difficult to track inflation consistently (as it is also difficult to track it by only using one number). Finally, I did something which may seem unique. Instead of using the government unemployment figure U3, I decided to use the Civilian Employment-Population Ratio. This number is prone to bias due to demographic changes, labor participation, etc. However, these are the graphs produced. Enjoy.

The figure seems to have limited use. I used the nominal minimum wage rate, and you can see just how wildly the unemployment rate fluctuated at a given minimum wage. This graph is essentially useless because of that. Also, the years when nominal minimum wage was this low saw tremendous inflation, so it cannot just be ignored.
But this figure, on the other hand, corrects for inflation. You will probably first notice that there are many less data points. For this figure, I only used yearly data instead of the quarterly data I used for the last regression, mostly because it saved me some time on data entry. Now, you will notice a clear trend, but an r-squared value that is pretty low. That is to be expected, because there are so many things that affect this employment ratio besides just minimum wage. But the trend is there and undeniable. However, as with most economic data, you can poke holes in it. The highest minimum wage data points in the chart are from earlier in this analysis, and the reason employment may have been lower there is because women were still not completely entered into the job market. However, you could make the point that lowering economic productivity is what pushed women into the job market into the first place, and that minimum wage was at least partly responsible for that. I cannot answer that question with complete certainty, and this is why we should not use data to try to prove our hypotheses. That said, we expect higher minimum wage to produce higher unemployment due to lower productivity labor being pushed out of the market. The data seem to agree, which is nice for those who are addicted to data, but remember that data is not where an argument ends.

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