Minimum wage vs Unemployment: A Historical Approach

As President Obama continues his cross-country tour encouraging a raise in minimum wage, there is a lot of speculation as to how the change would affect the minimum wage in America. Of course, where better to look than history to see how increases in minimum wage have affected the short-term unemployment rate in America.

The below graph shows FRED data on the civilian unemployment rate across time, along with data points I’ve added to show where the minimum wage was increased by more than 10%. The proposed increase to $10.10 from the current rate of $7.25 would be the second largest change in history, compared to an 88% change in 1950 (the 1950 increase took the wage from $0.40/hour to $0.75/hour).  More detailed information on other wage increases can be found in the table I’ve created.

FRED_unemployment

So what have we seen from rate hikes in the past? There are a couple important trends to consider. First, there has been a much more noticeable increase in unemployment for recent minimum wage increases. Since 1990, 5/6 (83%) of rate increases have resulted in a short-term increase in unemployment rate. In addition, all five were prior to or during a recession – a bad sign for those in favor of increasing the rate once again. Oddly enough, the other big rate increase, the aforementioned 88% hike in 1950, actually was turning a huge decline in unemployment. The wage increase’s timing significantly helped, as it was during a cyclical boom following the late 1940s recession.

The big question mark from this data is how today’s mark compares to a wage in the cents. Is data from the 1950s relevant for today? While history’s tales often tell true, it is always hard to justify comparing what seem like apples to oranges. When considering the trends mentioned above since 1990, it may be safer to take the successful increases of the 1950s with a grain of salt.

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However, while similar increases have seemed to spark or worsen recession periods in the past quarter of the century, trials seem to tell another story. The Wall Street Journal reported today that the city of San Jose hasn’t experienced job loss after moving the minimum from $8 to $10. After the announcement that the wage would move, there was a sharp reaction resulting in many layoffs. However, once the change went through, things quickly leveled out and there was a similar reaction in the positive direction. While it is dangerous to take this small sample too seriously, it could provide evidence that minimum wage workers are going to be needed, even at higher salaries.

The Congressional Budget Office has estimated that while there will be approximately 500,000 finding themselves without a job, the wage increase will bring almost a million out of poverty in the United States. But before we make one of, if not the most, drastic change in minimum wage in history based on economic models, it is important to view the negative consequences that have been so frequent in the recent past.