Thursday, December 5, 2013

Minimum Wage and Unemployment

Following up on this post, a signature of minimum wage induced declines in employment is that they are mostly reflected in reduced labor force participation and employment declines among the youngest age group.  I have taken the same data that I used in the last post and the earlier post on minimum wages and run it again using the Employment Rate as the dependent variable instead of Total Employment.  Here are some comparisons:

Employment Changes per typical episode

Total Employment, expressed as 6 month relative change

Employment Rate, expressed as 6 month relative change

For total employment, in non-MW periods (Group 1), about 70% of net changes in employment are transfers with unemployment (.13/.18).  About 30% of net changes in employment are transfers into and out of the labor force.  After initial MW hikes, about 60% of net changes in employment are transfers with unemployment (.28/.46), so, on net, 40% of the job losers leave the labor force instead of appearing as unemployed.  After subsequent hikes (Group 3), there is a slight increase, on average, in employment (.06% per 6 months) and a slightly larger increase in the Employment Rate (.08% per 6 months), suggesting that workers are still leaving the labor force, even as the Employment Rate is recovering.

The difference in age groups are interesting.  As I have found in the previous posts, there appears to be a strong substitution effect between 16-19 year olds and 20-24 year olds.  When MW increases, some of the damage is mitigated in the 20-24 age group as employers trade up from lower-wage teens, so 20-24 year olds have unusually good employment trends during MW periods and poor trends in non-MW periods.  We see the same phenomenon in this comparison.  After the initial MW hike, all age groups show less of a drop in the Employment Rate (ER) than they do in total Employment, suggesting a drop in Labor Force Participation.  But, 20-24 year olds have a higher drop in the ER, suggesting that even though employment is dropping for all age groups during these periods, some 20-24 year olds are being drawn into the labor force.

After follow-up MW hikes, this phenomenon expands to all of the 20-44 year old groups.  They experience some employment increases during these periods, but only some of these increases are reflected in the ER, suggesting an inflow into the labor force.  Some of this would be catch up growth.  For 16-19 year olds, total employment continues to fall, but the ER improves, on average, suggesting that for the youngest age group, an exodus from the labor force continues through the entire series of rate hikes.

Employment Changes compared to the size of the MW increase

ER and total employment have the same general trends here.  Even though the serial nature of month-to-month data creates a large amount of residual error when plotted by the month, in both cases, the trend line indicates a relationship between the size of the MW hike and the loss of employment.  (Edit: I ran regressions with distinct 6 month periods, including 4 periods from each episode, from 6 months before the initial MW hike to 18 months after.  Trends are similar to the regressions for the rolling periods. The slope coefficients for Employment of 20-24 year olds and total employment show significance at 5%.  16-24 year olds are significant at 10%.  Regressions on the ER do not exhibit statistical significance of 10% or less.)

This comparison suggests that when the size of the MW hike is factored in, less than 40% of the lost employment shows up in a reduced ER.  (A slope of -.039 compared to -.104.)

This is especially pronounced in the youngest age groups.  The comparison of 16-24 year olds suggests that after an initial transfer from employed to unemployed, nearly 90% of subsequent lost employment among young adults, due to steeper MW hikes transfers, leads to an exit out of the labor force.

The other age groups exhibit the same pattern - an intercept near the origin with a downward slope - but the difference between the total employment slopes and the ER slopes are less extreme than they are in the 16-24 age group.

Employment Forecasts from Lagged MW/AW changes

Because the loss of employment from MW hikes is more weighted to labor force exits, the forecast of MW effects over the period of 2007 - 2011 is much stronger when stated in terms of total employment than it is when stated in terms of Employment Rate (which is the corollary to the Unemployment Rate).

Whereas the forecast from MW hikes explained 4.24% out of the 8.23% drop in total employment from trend, the forecast of the Employment Rate only forecast 1.08% out of 4.05% of the drop in the ER.

Adding the recent recession to the regression specification (bottom graph) would increase the forecast to a 1.75% drop in the ER.  Interestingly, adding the recent recession to the specification for the total employment forecast created little change to the forecast results.  So the recent recession has produced an unusual coincidence of unemployment with a MW hike, but it hasn't produced an unusual coincidence of employment decline with a MW hike.

In the next post, I will look at how the minimum wage might have affected the labor force participation and unemployment rates in the recent recession.  (But, first a digression on LFP.)

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