Can the performance of states at different minimum wage levels be used to predict how a rise in national wage would affect the economy?

Currently, 21 states including the District of Columbia have higher minimum wages than the $7.25 level that the U.S. government has installed at a national level.  As states such as Maryland, Delaware, West Virginia, Hawaii, and Minnesota have now approved plans to increased the wage beyond the national minimum, the number of states that have set the wage above the government’s mandate will be over half of the country. There are 10 states (AZ, CO, FL, MO, MT, NV, OH, OR, VT, and WA) that have minimum wages that are linked to a consumer price index.

Washington and Oregon are presently among the only states with a minimum above $9.00. The graph produced from Bureau of Economic Analysis data below represents six states with separate minimum wage policies. Washington’s minimum currently stands at $9.32 with an adjustment used that is based on the consumer price index for urban wage earners and clerical workers for the prior year.  Similarly, Oregon uses the U.S. City Average Consumer Price Index for All Urban Consumers for All Items in order to adjust for inflation, with minimum wage equaling $9.10.  Unlike the other two, Tennessee is one of five states that has no set minimum wage, and therefore federal laws override to push wage to $7.25. Both Pennsylvania and Idaho have wages set at $7.25. The figure below was produced using statistics from the U.S. Bureau of Economic Analysis. The states  in bold font are those that have their minimum wage at $7.25.

Blog Final Blog Pic

 

As seen by the figure, Oregon ($9.32), Washington ($9.10), and Tennesee ($7.25) have merged towards an equal upward-angeled slope above the United States’ current GDP trajectory. States such as Pennsylvania ($7.25) and Illinois ($8.25) have consistently followed with the overall GDP fluctuations of the overall country. Idaho ($7.25) has consistently been growing at less than the nation’s GDP average growth.

With minimum-wage states performing above, below, or even directly in line with the overall U.S. economy, it is difficult to use state data to predict whether an increase from the current national wage minimum would be beneficial to the overall country. Key economic and social developments in each state such as fracking  and marijuana legalization must be examined and factored into their changes in GDP before any conclusion to this data can be made. Nevertheless, it seems as though economists will have to look elsewhere to find viable proof that a change in minimum wage would be practicable option or not.

 

Sources:

http://www.bloomberg.com/visual-data/best-and-worst/highest-gdp-growth-states

http://www.dol.gov/whd/minwage/america.htm#Washington

http://www.cbo.gov/publication/44995

http://www.bea.gov/

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2 thoughts on “Can the performance of states at different minimum wage levels be used to predict how a rise in national wage would affect the economy?

  1. kmadri15

    As we have seen from the AS/AD model an increase in wage will cause greater expenses on behalf of the firms that are hiring workers. This could potentially put some brakes on the recovering economy. However, it would be interesting to projected rise in unemployment rate that the BLS could possibly predict. It would also be interesting to see a graph that displays how the economy has reacted with after increases in the minimum wage in the past. This will hopefully allow us to gauge where our economy will be headed after these increases are made.

    -Kevin Madrigal

    Reply
  2. mjflan15

    After reading this post, I agree with many of the points made. I see it as being difficult to asses the effects nationwide of a minimum wage increase simply on the successes or downfalls of state economies. This prediction is difficult to make based on the fact that each state could differ greatly in terms of economic or social developments as was mentioned. I think even further building from this, as has been evident on the effects of the AS/AD model and the most recent GDP growth of only 0.1% we have been discussing in class, is the role that weather can play. Changes in weather nationally have led to differing outputs from numerous states. For example Georgia and the Carolinas had lower GDP growth than normal during the first quarter because of unexpected snow. Because of these fluctuations in GDP growth, I believe it is difficult to apply the outcomes associated with a given state’s minimum wage level to the country as a whole. As Kevin had mentioned above, seeing how the economy reacted to previous rises in minimum wage could be more helpful.

    Reply

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