Two variables that I believed were in some way related yet to what extent was unsure, were changes made to the minimum wage and the unemployment rate. The specific question I planned to answer was what indeed is the relationship between a change in the federal minimum wage and unemployment, and how strong was the correlation between them. I hypothesized that an increase in the minimum wage would increase the unemployment rate. After interpreting data from 1960 to the present I found that when increases to the minimum wage are made, the unemployment rate goes up.
The Model used to determine the relationship between a change in the minimum wage and the unemployment rate is a simple labor supply and demand model. The graph includes a decreasing demand curve and an increasing supply curve. The X axis are labeled number of jobs and the Y axis are labeled as wage. The intersection of supply and demand is the equilibrium and at this point for this wage, the supply of workers equals the demand for them. If the level of wage is raised, the supply and demand of jobs will no longer be at equilibrium. The demand for workers will be lowered because if employers must pay people more money, they will look to hire as few people as they can. Thus, raising the unemployment rate. The supply has been raised, meaning more people are looking for jobs but the demand has been lowered meaning that despite people searching for jobs, they are not being hired. As demand decreases but supply increases, the unemployment level rises. INSERT MODELS HERE
DATA
The key independent variable was the minimum wage. In 1947 the First minimum wage was set at 40 cents per hour. It has changed sixteen times since then and is currently five dollars and fifteen cents. Changes to the minimum wage is not the only variable to affect the unemployment rate. Anything that shifts the labor supply or labor demand curves will affect the unemployment rate. Variables that will do this include the average hourly earnings in manufacturing, the percent growth of the money supply, and the deficit percentage. Data on these variables was collected from the DRI Basic Economics Database. Average hourly earnings of workers is for the entire United States and is measured in nominal terms starting in the year 1947 at a price of one dollar and twelve cents and ending in 2002 at fifteen dollars and 30 cents. The percent money growth is calculated by starting with a given year’s money stock, subtracting the previous year’s money stock, dividing by the original year’s stock, and multiplying by 100. The deficit is calculated by dividing either the surplus or deficit of a given year by that year’s GDP. Both the deficit or surplus, and the GDP are measured in billions of dollars.
After testing each variable it has been found that the average hourly wage of workers in manufacturing is not significantly different from zero. Its coefficient is .449, its standard error is .226, and the T-statistic is –1.9896. This means that the true significant variables are the minimum wage, deficit percentage, and the percent growth in the money supply. The final equation is Unemployment Rate = b0 + .015*minimum wage + .149*percent money growth + -.583*deficit percentage. For every dollar increase in the minimum wage, the unemployment rises by .015 points.
The original question of this paper was what is the relationship between changes in the minimum wage and the unemployment rate. The answer is that indeed the unemployment rate and changes in the minimum wage are positively related. As the minimum wage increases so does the unemployment rate. The minimum wage does not have as great an effect on the unemployment rate as the deficit percentage or percent money growth, yet they are still positively related. This positive relationship can be concluded because from the regression, b1 is determined to be positive.