Great Minimum Wage Experiment

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The last two years have seen a big change in minimum wage laws in America. However, like everything in the U.S. these days, none of the changes came at the federal level from a gridlocked Washington. Instead, various states and cities have tinkered with minimum wage laws. This results in a nation where the rules for low wage workers are very different, depending upon where you live. While that may not be ideal for some, it makes for a great opportunity for economists and data analysts to finally see what actually happens when you raise minimum wage laws.

Here is an update about which states raised minimum wage in 2016.

Higher Minimum Wages in Some States

minimum wage rising graphicWhile opinions and projections abound, real scientific, and economic, conclusions require data. More specifically, such conclusions require definable data sets that include a control set. A control set is the data set that represents the status quo, or unchanged data. In this case, these are cities and states where the minimum wage laws are not increasing. The new data set will come from the states where the minimum wage is increasing. Additionally, the increases are not uniform, so we may get data suggesting what the optimum increase or minimum wage level is.

In reality, these data sets won’t be so clean. The trouble with economics is that it is impossible to isolate all other factors from influencing your economic data. For example, there have been plenty of news stories about how North Dakota has the fastest growing economy in the United States. Despite the efforts of political leaders there to take credit for the increase, the fact is that policy had nothing to do with it. Rather, North Dakota sits on large oil fields that were previously inaccessible until cheaper fracking methods were developed by the oil industry. If the politicians in North Dakota had sponsored such research, then they could maybe claim some of the credit.

As one of the state not increasing the minimum wage, one could use the growth there as “proof” that such increases are not optimal. Fortunately, it is possible to compare across several states and then extrapolate for various differences.

The questions that economists and researchers will be looking at include, do higher minimum wage laws actually drive away businesses? This question will be more likely to have an effect where a city has raised wages. Relocating a business to another state is more difficult than to move to the next suburb over. In these cases we can see if otherwise similar municipalities experience different economies with different wage laws. Will Seattle experience a boom or bust based on its high minimum wage versus its surrounding cities? A lesser economy would be a warning against higher minimum wage laws. A better would would be an endorsement of them. The same economy could provide ammo to either side.

The long-term affects will actually be more noticeable not in the areas that just bumped up the minimum wage number, but rather from those that set their minimum wage to grow automatically based on inflation. In Colorado, for example, the minimum wage grew in 2014 to $8 per hour. While far below other areas, that number will continue to increase based on inflation. Assuming things remained the same into the future, there would come a day where the minimum wage in some states would be $20 per hour, while it remained $7-ish per hour in other states, would the fortunes of the citizens of each state diverge noticeably? Or, are minimum wage workers simply too unimportant, statistically speaking, to actually affect the economies around them?

What is certain is that in the next five to ten years, we’ll have a whole different set of data to argue over 🙂

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One thought on “Great Minimum Wage Experiment”

  1. Denny Rivera says:

    PEW did some studies showing companies who raised hourly pay form minimum wage to something (anything!) higher saw improvements in bottom line due to higher output from those workers.

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