Abstract
The unemployment theory of Pissarides-Mortensen-Diamond is applied to the close-by geographic comparison identification strategy to analyze the effect of the minimum wage in New York State. The increase in the minimum wage in 2018 is estimated to raise the natural rate of unemployment almost 20 percent. The elasticity of the unemployment rate with respect to the minimum wage is 2.11 in New York City and 3.3 in the suburbs. To account for varying local labor market conditions, the minimum wage rise was phased in and geographically differentiated, which permits a within-state comparison. A labor market matching function and a Beveridge-type market tightness equation are estimated in an environment of low and falling unemployment rates, thus posing a strong natural experiment test of the hypothesis that the minimum wage causes negligible employment effects. It is estimated that the higher two of the three wage tiers caused a loss of about 39,000 jobs, which is in contrast to the dominant narrative of no effect when using the geographic comparison technique.
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Notes
The three were awarded the Nobel Prize in Economics in 2010.
Proponents of higher minimum wages frequently refer to the need of a living-wage as necessary to support a family, the inference being that other family members might, therefore, be induced to work less, for example.
Muehlemann and Leiser (2018) estimated hiring costs at about 16 weeks of wages across a range of industries in Switzerland.
The fast-food wage rates are accompanied by a detailed set of regulations involving, among other things, what sort of food may be served to employees to count as an allowance against the minimum wage.
New York has 22.3% of its labor force belonging to a union, second highest in the U.S. (Hirsch & Macpherson, 2019).
The Minimum Wage Order for the Building Service Industry 141 runs to 17 pages and carefully stipulates permitted allowances for employer-provided apartments, utilities, tools, uniforms, tips, for example (12NYCRR141). (New York State Department of Labor, 2017)
Thus only unemployed workers search for jobs. Allowing for on-the-job search does not materially affect the results (Pissarides, 2000, p. 5).
Hiring cost k is typically assumed as flow per unit of time until the job is filled.
Adding capital to the model with a real return of r, the discount factor in (4) is r + λ.
A t-test for comparing the means of paired populations is \(t=[({\overline{x} }_{1}-{\overline{x} }_{2})-0]/(s/\sqrt{n})=1.56\) versus a two-tail critical value of 1.96 (P = 0.025), where s is the square root of the variance and n = 62 is the sample size. (Kanji, 1993, p. 30).
Quarterly Census of Employment and Wages data is based on place of employment (establishment data).
In correspondence with the author, the Bureau of Labor Statistics says its estimates are not comparable to Census QWI estimates of separations due to differences in data and methodology used. The Bureau does not report separations by county.
The NYC civilian labor force in 2018 was 3.908 million, downstate 1.970 million and rest of state 3.625 million.
The five-year average replacement rate was used to mitigate endogeneity of current benefits relative to wages.
Local Area Unemployment Statistics are based on place of residence, based on household surveys, Current Employment Statistics and unemployment insurance claims.
The matching function and the theta equation were tested for spatial autocorrelation. The hypothesis of no spatial autocorrelation was not rejected for the Theta model (Moran’s I =0.444, Prob. = 0.65). The matching function did exhibit spatial autocorrelation (Moran’s I = 3.658, Prob. = 0.003). The latter was re-estimated with a correction for spatial autocorrelation, and the estimated \(\Delta u\) for NYC = 0.007 and downstate = 0.006. Thus, spatial effects have no measureable impact. This contradicts Dube et al. (2010) who argued the finding of a negative employment effect is largely due to failure to control for spatial autocorrelation.
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Vitaliano, D.F. The Minimum Wage and Natural Rate of Unemployment. Atl Econ J 51, 189–202 (2023). https://doi.org/10.1007/s11293-023-09780-x
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DOI: https://doi.org/10.1007/s11293-023-09780-x