How High Would a Federal Minimum Wage Have To Be to Cause Mass Unemployment?

Answer: pretty high (at least $12), but see below for qualifications and doubts. The highest Federal minimum wage in U.S. history, relative to the average manufacturing wage, was the modern-day equivalent of $12. It took effect in October 1939. However, this only applied to employees engaged in interstate commerce or the production of goods for interstate commerce, so it isn’t clear what percentage of the U.S. workforce was affected by it:
Screenshot (49)
https://research.stlouisfed.org/fred2/graph/?g=1LZX
Note: to convert minimum wage from portion of prevailing average manufacturing wage into approximate present dollar equivalent, multiply the portion by twenty or twenty-one.

However, assuming this correlation:
Screenshot (50)
https://research.stlouisfed.org/fred2/graph/?g=1M09
(R² = 0.83841884602996, using a power trendline) was sound for the time, this is what the portion of hourly paid wage and salary workers working at or below the highest Federal minimum wage would have looked like before 1978, if the power trendline correlation used for the average hourly wage in the U.S. is applied to the average hourly manufacturing wage (not quite the same thing, especially after 2006):
Screenshot (52)
I strongly doubt that over 50% of hourly workers in 1969 or over 65% in 1950 had their pay determined by the maximum hourly Federal minimum wage of the time. How many workers actually had their pay determined by the various minimum wages of the time would be interesting to see. Also, it’s not just the Federal minimum wage that matters -state and local minimum wages matter just as much, perhaps, even more.

In the old days, the highest U.S. minimum wage was more restricted in application than it is today, yet, far higher relative to prevailing average wages. The minimum wage only became fully unified for farm and nonfarm workers in 1978, when farm work had become all but irrelevant in America. However, it is clear that the minimum wage has generally had little effect on broad unemployment trends in the United States: the modern era of high over-27 week unemployment began only in 1974: precisely when the minimum wage relative to the prevailing average wage came down from its secular heights in the 1950s and 1960s. Also, note that the largest minimum wage increase in post-WW II U.S. history; that in January 1950, seemed to have no substantial effect on the natural rate of unemployment (it also coincided with, but certainly did not cause, the largest RGDP/worker boom in post-WWII U.S. history).

There were four periods in U.S. history when minimum wage hikes occurred around recessions: the minimum wage hikes around the recession of 1990, which pushed the percentage of hourly paid wage and salary workers paid at or below the minimum wage up to 1986 levels, the minimum wage hikes around the Great Recession, which pushed the percentage of hourly paid wage and salary workers paid at or below the minimum wage up to 1998 levels, and the minimum wage hikes of 1945 and 1974.

Thus, I doubt the Federal minimum wage is very important in explaining broad unemployment trends from 1939 to today. But this is hardly an exhaustive study on this topic, and does not look at the actual prevalence of the various state, Federal, and local minimum wages for the various occupations to which it applied from 1939 to today. Such a study would be very useful in explaining how high a minimum wage would cause an appreciable amount of unemployment, especially for low-skilled workers.

By the way, also see this post for the Federal minimum wage growing faster than productivity for most workers who are actually paid the minimum wage or below, and why the Far Left is generally deceptive in its claims about the minimum wage and productivity. Also, I have noticed a small upward trend with average wages for leisure and hospitality workers in the late 1960s which I’m fairly, but not quite, sure has nothing to do with the expansion of the applicability of the Federal minimum wage:

Screen Shot 2015-09-06 at 23.25.29

Of course, I completely oppose the minimum wage, as well as any other price control during peacetime. The minimum wage, despite its seemingly small effect on U.S. unemployment, is never a good thing on net, as it interferes with the proper functioning of the free market and is fundamentally against Americans’ freedom without any clear net social benefit. The full long-term effects of price controls and their interactions with markets are more difficult to predict than most think.

Update: Here’s a graph of the convergence of the rural and maximum Federal minimum wages. Also, there’s a graph of teen unemployment divided by middle-aged unemployment in the comments. It doesn’t strongly support the idea that the minimum wage ever did much of anything.

Update #2: The minimum wage hike of 1950 (largest of all time) was intended for all workers covered by the fair labor standards act; roughly half of wage and salary workers. So probably something like 30% of wage and salary workers had their pay directly determined by the Federal minimum wage at the time-higher than the level in the 1970s, but nowhere near 70%.

Author: pithom

An atheist with an interest in the history of the ancient Near East. Author of the Against Jebel al-Lawz Wordpress blog.

8 thoughts on “How High Would a Federal Minimum Wage Have To Be to Cause Mass Unemployment?”

  1. I don’t think this should be surprising, since most workers in the US make well above the minimum wage. Still, deflating the minimum wage by average hourly earnings is not necessarily the best way to look at it-skilled and unskilled labor can be substitute production goods, but so can machines. I’d deflate by either the Producer Price Index or better yet the GDP deflator. I also think the case is stronger for youth unemployment if you control for the business cycle (ie you use prime age unemployment as an explanatory variable)

    Most people probably see neither an income benefit nor a disemployment effect from minimum wages, unless they are set to very high levels indeed.

    1. I’m deflating it by average hourly earnings to get a sense of the burden of the minimum wage on employers. The GDP deflator or the PPI would just adjust it for inflation (in the latter case, producer price inflation), which is not my intention here.

      As you can see, minimum wages were set to very high levels indeed before the 1970s, it’s just not clear to me to what percentage of the workforce they applied. As you can also see, at some points, most workers worked at or below the maximum Federal minimum wage! Certainly the minimum wage isn’t that relevant since the 1970s, but it was certainly very relevant during the 1930s, 1950s, and 1960s (though, again, I’m not sure just to what extent).

      Also, youth unemployment relative to prime age unemployment was highest in the late 1960s and lowest in 1954. The great minimum wage hike of 1950 seemingly had zero effect on it:
      https://research.stlouisfed.org/fred2/graph/?g=1Mqu

      1. That’s just it, you need to compare the minimum wage to employer costs in general not just relative to other, higher skilled wages, but to other alternative productive inputs. Using the PPI or the GDP deflator is designed to compare the minimum wage to the price of alternative inputs, not merely to alternative labor inputs exclusively. Doing so would not indicate nearly so strong a decline over time in the employer burden from the minimum wage, indeed it would eliminate there being a long term decline at all.

        1. But wouldn’t replacing labor with capital have a disemployment effect (as well as a higher minimum wage relative to the average wage causing more unemployed to stay in the labor force)? And, in any case, doesn’t the traditional supply and demand graph showing how a minimum wage leads to a labor surplus have the free-market determined wage on the y-axis? I’m only now starting to understand your argument, but I still don’t quite get it.

          1. Hi Pithom-yes, it does have a disemployment effect, but wage substitution is perhaps the worst way to measure the strength of the effect, because the disemployment of unskillled or low skilled labor is in that case partially offset by a positive employment effect for higher skilled labor as a substitute input. This presentation by Roger Garrison goes very in depth into the various secondary effects. I only quibble with two things: he deflates using the CPI, which is a mistake since labor is not a consumption good, and I would add that a higher minimum wage should increase the demand for “under the table” ie illegal immigrant labor.

            Higher demand for skilled labor to the extent that it can be substituted for low skilled labor is one underappreciated knock-on effect and explains in part why union workers making well above minimum wages would want to see them raised (alternatively, this explains why employers agree to index union labor contracts to the minimum wage).

            If when the minimum wage rises I fire two minimum wage workers and replace them with one highly skilled worker, the net disemployment effect is one worker. If I fire two and replace them with a machine, the disemployment effect is two workers. What I substitute matters!

            With regard to the wage on the Y-axis: is it the real wage, or the nominal wage? I’d say it’s the “real” wage in the sense that it’s the wage relative to alternative means available to the employer to achieve his ends (ie production ie consumption (Say’s Law)) and therefore it’s the wage relative to alternative inputs. On the other hand you might say from the supply side that from the worker’s perspective it should be the real wage relative to the price of the goods they want to consume with the income they earn from their labor. The GDP deflator balances both.

            Well, technically you could draw the diagrams either way, ie in purely nominal terms. But for intertemporal comparisons ie time series analysis I think it’s easier to think about in real terms-after all, the entire concern with nominal rigidities, and the minimum wage is nothing if not the mother of all sticky wages, is that wages rise suddenly relative to other prices or to the expected path of nominal income, ie in real terms, causing unemployment.

            1. Okay, I sorta get what you’re saying (I thought about it yesterday; it sounded very complicated to my brain at first), but it still sounds iffy to me to use the GDP deflator to deflate the minimum wage for our present purpose. Let’s imagine that, in the near future, RGDP per capita grows ten-fold in a couple years, but the GDP deflator and the minimum wage stay at the same level. Would it really be fair to say that the minimum wage is just as burdensome in the future as it is today? I think not.

            2. Ah, yes I see your point. I’m trying to think of the disemployment effect on workers of approximately equal skill level and productivity across time periods (different cohorts of teenagers and early twenty somethings, though even that’s not quite true) whereas here you’re focused on its burden on employers in general. I think you’re right, the GDP deflator probably isn’t quite right for capturing that. My method was better for the comparison I wanted to do, yours was better for the comparison you wanted to do.

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