Numbers Are In: What a Minimum-Wage Hike Can and Can't Do
Economics became a spectator sport in the "Freakonomics" era, and these days all eyes are on Massachusetts, a state that increased its minimum wage and still achieved one of the lowest unemployment rates in the country. What's its secret?
In June 2014, the state enacted a staggering increase to its minimum wage, ultimately raising it from $8 per hour to $11 per hour over three years. The final increase was last month.
Will wage growth accelerate as the labor market approaches full employment? If so, by how much? 1 Another question is what the impact of higher minimum wage laws would be.
The Massachusetts labor market has changed significantly, but wage growth has been stubbornly stuck.
When the minimum-wage increase was passed, the state's unemployment rate was 5.7 percent, slightly lower than the national rate of 6.1 percent. In the following two years, despite two increases in the minimum wage, there was no sign that people were actually earning more money; if they were earning a higher hourly wage, evidently they were working fewer hours.
By January 2016, the state's unemployment rate had decreased to 4.7 percent and the minimum wage was $10 per hour. Yet measures of wage growth remained muted. Proponents of the higher minimum wage may point to Massachusetts as evidence that it wasn't affecting the unemployment rate.
But they can't cite the state as evidence that raising wages actually makes the working poor less poor. The inconsistent upward trend in real earnings did not accelerate when the minimum wage started to rise.
One illuminating exception to stagnant wage growth in Massachusetts is the leisure and hospitality sector -- one area that's rocketing higher. Year-over-year growth is now at a whopping 11 percent.
There are three reasons this is significant. First, the leisure and hospitality sector has a higher rate of labor turnover than most sectors, so changes in labor market conditions will show up in the data there faster than in other sectors. Second, for a while the anecdotal evidence both in the news and in company earnings reports have suggested that this sector was feeling labor tightness, and we're now finally seeing signs of it showing up in the official economic data. And third, leisure and hospitality workers earn less than workers do in many other sectors, so changes in minimum-wage laws will affect more workers more dramatically than in higher-paid industries.
Massachusetts provides one data point showing that policies to support full employment, in combination with minimum-wage increases, really can make a difference in (some) low-paid service workers' paychecks. It's not the sort of broad, dramatic outcome that fans really love to see, but sometimes economics is like that.
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