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State Minimum Wage Differences: Economic Factors or Political Inclinations?

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Abstract

This paper examines the importance of factors that influence a state's decision to adopt an above-federal minimum wage level. Our results indicate that state political leanings are the primary factor explaining differences in state minimum wage laws since 1991. Further, state cost of living differences do not appear to influence a state's decision to increase its minimum wage above the federal level. This result is interesting since proponents of raising the minimum wage cite the rising cost of living as a principal justification for an increase. Our findings should be of special interest to economists responsible for analyzing and forecasting labor cost trends within and among states where their employers operate or plan to relocate.

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Notes

  1. The new law incorporated three increments, starting with an increase to $5.85 per hour in July 2007 followed by an increase to $6.55 per hour in July 2008 before the final step in 2009 to $7.25 per hour.

  2. In many cases, these local rates were substantially higher. Hartford, Connecticut for example had a rate of $15.39 per hour; nearly triple the federal rate, in July 2007 [ACORN 2007].

  3. For example, at the time of the 2004 Presidential election, of the 31 states that voted Republican, only Alaska and West Virginia had a state minimum wage greater than the federal level. Nineteen states and the District of Columbia voted Democratic in the 2004 election, and 12 of these had a minimum wage higher than the federal level.

  4. Exceptions include Waltman and Pittman [2002] and Levin-Waldman [1998].

  5. This is similar to the argument for living wages. In some areas the minimum wage has been modified to serve as a living wage that is explicitly tied to the cost of basic needs.

  6. See Burkhauser and others [1996], Fairchild [2005] and Neumark and Wascher [2007] for comparisons of minimum wages to the Earned Income Tax Credit as one example, and Neumark and Wascher [2002] and Neumark and others [2005], for evidence regarding the groups affected by the legislation.

  7. We use U.S. House and Senate voting records to proxy political views at the state level. Alternatively, we could have constructed our political variables from state government voting records since they directly influence a state's minimum wage. However, there is considerable variation in how state governments operate and we are not aware of a consistent means to characterize state voting patterns between states and over time.

  8. This idea is so firmly grounded in economic theory that it is presented in principles of microeconomics courses.

  9. Falk, Fehr, and Zehnder [2006] find evidence in a laboratory experiment that a minimum wage unambiguously raises an employee’s reservation wage, which could adversely affect employment levels.

  10. It is worth noting that many areas with high state minimum wages (that is, New England states) also have higher education levels and those in states with a minimum wage at or below the federal level (that is, southern states) have lower educational attainment.

  11. The minimum state-level value for the index is 94.07 and the largest value is 729.91.

  12. Singell and Terborg [2007] find different employment effects from minimum wage changes in the food sector where it is binding, vs. the lodging sector, where it is not binding.

  13. We also conducted the same analysis on a sample that includes observations for states that had already increased their minimum wage. Including these observations does not change the sign or significance of the LQ coefficient in the probit and Tobit models for the entire sample or for the 1997–2006 time period. The LQ variable is no longer significant in the probit and Tobit for 1991–97. The hpi and growhpi variables become positive and significant in probits and Tobits for the entire sample. Only the hpi level is significant in either regression for 1997–2006 and only the growhpi is significant for 1991–97. We do not report these regressions because they include information that is irrelevant at the time of the state's decision.

  14. All specifications were also estimated with state-level fixed effects models (without region indicators), and yielded qualitatively similar results. Since the regional indicators are time invariant and cannot be included in fixed effects models, and because Hausman tests of random vs. fixed effects and Breusch-Pagan LaGrange Multiplier tests favor random effects in each of the regressions, we report only the random effects results.

  15. All regressions were also calculated using an alternative which specified the dependent variable in terms of the state-mandated minimum wage instead of treating lower wages as simply the federal rate. This change in the dependent variable did not affect the sign or significance of any of the coefficients reported. We do not focus on these estimates because this characterization of the state minimum wage may not represent the “true” value either. This is especially problematic because states with lower-than-federal minimum wages are not likely to adjust their state law if the change does not bring the state level above the federal mandate. Thus, some state minimum wages are a non-binding artifact remaining from a point in time where the federal limit overtook the state's mandated minimum wage level. We use the federal level for states that have a lower minimum wage level for this reason, in addition to the fact that the federal level is binding.

  16. For states that experience a change in minimum wage within the year, we construct a weighted average of the minimum wage and use this value for the state's year observation. For example, the federal minimum wage value for 1997 is recoded as 4.88 because the minimum wage changed from 4.75 to 5.15 on September 1, 1997.

  17. All of the reported analyses were also conducted with several other specifications of the dependent variable. These include state binding minimum wages, state deviations from federal minimum wage, deviations from the national mean minimum wage, and deviations from the national mean minimum wage weighted by the national standard deviation. Each of these was found to have qualitatively similar results, and significance levels to what is reported here. We report the results for the percentage deviations from the federal minimum wage as the dependent variable because they are somewhat more intuitive and because they have a lower bound of zero for all censored observations.

  18. There was a change in both 1996 and 1997, but the initial increase was very small and did not increase the minimum wage over levels set in states with higher levels already. Further, both were part of the same piece of legislation, so it is treated as one large change in 1997 in these regressions. We performed the same set of regressions using 1996 as the last year and the signs and significance levels did not change qualitatively.

  19. We measure state-level differences in the cost of living using the home price index variables and feel this is appropriate given that more than one third of household income is spent on housing. However, since this finding is somewhat unexpected it is worth investigating whether it does in fact capture enough variation. Additional regressions estimated without the LQ variable indicate a positive and significant effect from the hpi and growhpi which suggests they have some impact. Also, other cost of living measures which could potentially be used are likely to be endogenously determined with minimum wages.

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Acknowledgements

The authors would like to thank their colleagues Charles Baum, Gregory Givens, John Nunley, Adam Rennhoff, Alan Seals, and many others for their helpful comments, suggestions, and editorial advice. All remaining errors are our own.

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*William F. Ford is Professor and Weatherford Chair of Finance, Middle Tennessee State University. He holds a B.A. from the University of Texas at Austin, and an M.S. and Ph.D. from the University of Michigan. Travis Minor is an economist in the U.S. Food and Drug Administration's Center for Food Safety and Applied Nutrition. He holds a Ph.D. from Middle Tennessee State University. Mark Owens is an Associate Professor and Director of Graduate Studies in the Department of Economics and Finance at Middle Tennessee State University. He holds a B.S. from St. Vincent College and an M.A. and a Ph.D. from the Ohio State University.

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Ford, W., Minor, T. & Owens, M. State Minimum Wage Differences: Economic Factors or Political Inclinations?. Bus Econ 47, 57–67 (2012). https://doi.org/10.1057/be.2011.37

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