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Wage Growth in the Context of State Minimum Wage Laws

Published in August 2016

By Kristopher Kapphahn

Minimum wage increases have been a hot topic of late. While the federal minimum wage sits at $7.25/hour, many states and municipalities are taking it upon themselves to ensure that the people who make the least start making more. According to the National Council of State Legislatures, two states, New York and California, have recently passed state minimum wage laws mandating incremental increases in minimum wages to $15/hour. Many other states rang in 2016 with either directly mandated or inflation-adjusted increases in the minimum wage, as well.

In addition, within many states, municipalities are enacting minimum wage increases. The Center of Labor Research and Education at UC Berkeley lists 34 cities that are currently considering or have recently implemented minimum wage increases. While these municipal and state minimum wage laws certainly stand to benefit people employed at the minimum wage, their influence on other relevant metrics, like the overall wage trajectories of workers, is unclear.

Minimum Wage Effects Are Difficult to Measure

This lack of clarity is caused by the complexity of the economy and our fundamental inability to conduct the types of controlled experiments that can provide bulletproof insight into cause and effect. It will never be possible to conduct anything like a randomized clinical trial to study the effects of minimum wage increases. Without that gold standard of evidence, it's difficult to tease out the results of minimum wage increases from the noise produced by other factors, which are completely independent, but potentially equally relevant. For instance, minimum wage increases in California coincide with an historic Southwestern drought. It is possible both have significant impact on the California economy, but because they're occurring at the same time, determining how each affects aggregate economic measures is difficult or impossible.

What Might We Expect?

There is, however, some pertinent data that can be used to assess what is currently happening in the context of a national trend toward minimum wage increases. All other things being equal, it's reasonable to assume that increases in minimum wage will result in increased aggregate wages. Data from the ADP Research Institute® Workforce Vitality Report shows that wage growth has maintained a slight positive trend in the aggregate through Q1 2016 among job holders and job switchers. That was also true for those moving between full-time jobs, those moving between part-time jobs and those moving from full-time to part-time jobs. In fact, wage growth was only negative for leisure and hospitality job holders who moved from part-time to full-time work. These latter results make sense independently from minimum wage considerations, given the wage-dilution that commonly accompanies the jump from part-time hourly to full-time salaried work.

Hourly employees promoted to full-time management often experience a reduction in actual hourly wage as the increased hourly requirements of their new responsibilities are no longer directly proportional to their level of compensation. The greatest wage growth continues to be in full-time to part-time job holders, which suggests an inversion of this wage dilution effect.

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