The Impact of Minimum Wage on Unemployment at the State Level Using Fixed Effects
Drs. John Lunn, David Phillips and Todd Steen
This paper discusses the relationship between unemployment and the minimum wage using regression analysis. If the Obama administration increases the minimum wage to $9.00 in 2015, will the unemployment rate increase? According to beginning economics courses, the answer to this question is yes. Unfortunately, economics is slightly more complicated and this topic has been the source for serious debate among economists for decades. There have been reasonable arguments and numerous studies for support for both sides and the question is still left unsolved. This paper analyzes this relationship between unemployment and minimum wage using several empirical models. They are based off other economists’ empirical models and provide different results. I look at the simple relationship between unemployment and minimum wage for the last 12 years at the state level. My data consists of yearly unemployment rates for each state in a given year and inflation adjusted minimum wages for each state in given years. After using different empirical models and running various regressions, I decided the model with a regression that provided statistically significant results and best fit the data is a fixed effects model. At first, explanatory variables seemed to be necessary to control for bias. But the available explanatory variables I used proved to be unnecessary and the fixed effects controlled for omitted variable bias. I have concluded increasing the minimum wage decreases the unemployment rate. This negative correlation is small but shows that a 10 percent increase in minimum wage will results in a 1.52% decrease in unemployment.
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