The Relation Between Minimum Wage and Unemployment

Hannes Seyboth

Abstract:
Countless previous studies have analyzed the effects of the minimum wage on unemployment. Since the beginning of the minimum wage scientists are debating whether a higher minimum wage affects employment negatively, is insignificant or if there is a positive relationship. For all cases there are plenty of previous studies arguing for different answers. This study tries to find a correlation between the minimum wage and unemployment, a positive relationship indicating that a higher minimum wage increases unemployment is expected, following economic theory this is the most likely outcome. The data being used for this is state level data of the 50 states of the US, namely the minimum wage, unemployment figures and several control variables such as cost of living and state level GDP growth rates. Studies from the 1970's found a highly negative relationship, whereas more recent studies (2000-2005) found an insignificant relationship, this study uses more recent data from the years 2015-2019. This way the hypothesis 'A higher minimum wage increases unemployment' can be tested. This could give insights on whether there is a structural change that reduces the effects of minimum wage hikes over time. Additionally, the last federal minimum wage increase was in 2009, which means that most states have higher state minimum wages, making the states comparable. The study employs a regression method for the year 2019 and a fixed effects model in order to find the correlation between the minimum wage and unemployment.