Abstract
For the past 20 years, a major debate has unfolded between academics, economists, and legislators regarding the effects of raising the minimum wage. The main point of contention is if increasing the minimum wage will cause higher rates of unemployment. However, as the federal government remains stagnate on taking action towards increasing the federal minimum wage, income inequality in the nation is on the rise and the purchasing power of those living on the minimum wage is steadily decreasing. To combat these socio-economic concerns, many individual states are taking action to ensure the resiliency of the value of the minimum wage over time by automatically indexing increases of the minimum wage to factors such as the Consumer Price Index. This thesis attempts to provide greater clarity on the relationship between minimum wage policies and unemployment rates through regression analysis. Data utilized for this study come from the Bureau of Labor Statistics, the Department of Labor, the Bureau of Economic Analysis, the National Council on State Legislatures, and the American Community Survey for all 50 states (and the District of Columbia) between 2010 and 2014. Twenty-eight different independent variables were collected for each state. Variables were categorized under the four following themes: state minimum wage policies, state economic output, state education level, and state demographics. The primary form of regression analysis was a fixed-effects panel regression model to account for time differentials and individual state characteristics. The results from the regression analysis suggest that if a state has a policy of automatically indexing the minimum wage, unemployment is higher by an average of 0.69%, keeping all factors constant. This means policymakers will have to weigh the purported socio-economic benefits of indexing minimum wages against the possible unemployment effects. Another key finding is that once a state’s minimum wage amount expands above 38.45% of the all industry average wage amount within that state, unemployment starts to rise at an increasing rate. This result is important for two reasons. First, this provides policymakers and economists another type of benchmark to assess the possible effects of different minimum wage amounts on unemployment. Second, by utilizing this factor of analysis, policymakers can accurately formulate an appropriate minimum wage amount at the highest extent possible to bolster the purchasing power of those living on the minimum wage, while at the same time, preventing the unemployment rate from potentially increasing. The last significant finding is that increasing the education attainment level of the populace through higher rates of high school graduation and college advancement should remain as a top priority for policymakers as this study strongly shows that a more educated populace is a more employed populace.