Looks Like the Minimum Wage Effects Are Starting to Show Up in the Labor Market

If there’s something investment bankers like to talk about outside of money, it’s policy.  In particular, economic policy.  And within the economic policy world, it’s hard to find a more hotly debated topic among financial professionals (investment bankers chief among the policy-minded ones) than the minimum wage.

The issue brings up notions of the free market, slave labor, class warfare, and a host of other philosophical issues.  These broad philosophical issues are not addressed here.  Rather, this is simply a look at what has happened to retail employment growth in states that imposed higher minimum wages in 2014 and/or 2015 compared to states that left the labor market as is.

The Minimum Wage

First, a look at the minimum wage rate by state since 1980. As shown, over time the minimum wage across states has slowly ticked up from the initial 25 cents per hour in 1938.

The minimum wage varies widely by state, with the highest state minimum wage in the country at the end of 2015 in Washington at $9.47 per hour. The most common minimum wage rate is $7.25, which is the federal minimum wage rate.

Minimum Wage

 

The wide variation in the minimum wage rate poses the obvious question: are states with higher minimum wage rates missing some retail jobs or do they experience lower overall employment growth?

The next section takes a look at the most recent experience.

Retail Employment Growth

If the minimum wage is adversely affecting employment growth, it would most likely show up in retail employment first. Here’s a look at retail employment by state for 2014 through 2015. The chart is divided into two groups – states that imposed higher minimum wage rates in 2014 and/or 2015 and states that did not. On the left are states that left the labor market as is.  On the right are states that imposed higher minimum wage rates.

Looking first at the laissez-faire states.  In 2014, states that left the labor market to itself were (on the median) seeing retail sales employment growth of 1.40% per year.  In 2015, that jumped to 1.55%, an acceleration of 0.15%.

Switching to states that imposed higher minimum wage rates in the current or previous year, in 2014 retail employment growth was slightly higher at 1.61%.  In 2015, that dropped to 1.21%, a drop of about 0.40%.

So interestingly, perhaps the common sense view is correct.  Higher minimum wage rates are pushing down on retail employment.  Of course, it’s still early, but perhaps Bill Gates does know what he’s talking about when he talks about higher minimum wage rates encouraging automation and other adverse employment effects.

min wage1

Conclusion

In looking at what has happened with retail employment growth in states that imposed higher minimum wages in 2014 and/or 2015 compared to states that left the labor market as is, the initial evidence looks like what most would expect – retail employment grows slower.

The total job growth differential is about 0.55% (0.15% + 0.40%) for retail employment growth.  This recognizes that there are a plethora of other factors that affect the labor market situation in a given area…but that notwithstanding, retail growth appears to have been slowed in states that imposed a higher minimum wage rate compared to states that left the labor market negotiation up to the (potential) employee/employer.

It’s still early, of course, to know exactly what the long term impacts will be.  Only time will tell the full story.

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