Wage Growth in the Context of State Minimum Wage Laws

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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.

Spotlight: Leisure and Hospitality

According to the Bureau of Labor Statistics 2014 Characteristics of Minimum Wage Workers Report, 3.9 of American workers earn at or below the federal minimum wage, but the leisure and hospitality industry owns the largest share (18.0 percent) of those workers. Despite that fact, the Bureau of Labor Statistics also shows that, across all workers in leisure/hospitality, average hourly earnings continue to increase, reaching a seasonally adjusted value of $14.70/hour at the end of Q1 2016. So although wage minimum increases cannot be definitively pointed to as the root of those wage gains, some correlation between them seems more than probable.

As might be expected, wage growth doesn't appear to be slowing in the face of state-mandated minimum wage increases. It will be interesting to see if increases in mandated minimum wages drive overall wages higher, especially in segments that contain large proportions of minimum wage earners, like the leisure and hospitality industry. Whether these increased wages will translate to lower overall employment (as some minimum wage pessimists contend) or increased consumer spending (as minimum wage optimists might argue) remains to be seen.

For more insights on wage growth trends, visit ADP Research Institute® Workforce Vitality Report.