States’ Minimum Wage Increase had Minimum Impact
A cottage industry has sprung up in recent years. The task? Take any employment report that comes out and find something negative about it. So, after last Friday's robust employment report, the earth was scratched, the duty done.

It was hard to attack job gains themselves, after all they have been strong for quite some time. Lack of growth in the "labor force" is old news, people are tired of it, but it grew 702 thousand in January anyway, so it was impossible to fight that.

What had the pessimists scratching their heads was the 0.5% increase in average hourly earnings. These earnings are now up 2.2% from a year ago, and January was the strongest monthly gain since November 2008. This was the final missing piece of the job market puzzle, so it just had to be attacked. And guess what, a reason for the outsized gain blossomed early in the morning – "Wages were up because 20 states boosted the minimum wage in January, with New York adding to the mix on New Year's Eve."

Could this be true? Well, let's dig into the data. First, the Economic Policy Institute (EPI) – a left-leaning organization – in a blog post on December 18, 2014 (link), projected how many people would see wage increases due to the minimum wage hikes at the state level. EPI believes 2.3 million will be directly affected and another 900,000 will be indirectly affected for a total of 3.2 million people. We think this overstates the case because the impact will actually reduce employment, but let's take it at face value and divide that number by the total employed. Guess what? Only about 2.2% of all workers were affected in January. Given the size of the minimum wage increase in each state as well as the number of workers affected in each state, our calculations suggest the minimum wage hike in these states contributed at most 0.04% to the total gain of 0.5% in average hourly earnings nationwide, a very minimal impact.

The reason average hourly earnings are improving is because productivity, driven by private-sector, entrepreneurial activity has been improving. While many want to attribute all positive activity to government programs, we do not credit minimum wage increases, government spending, QE or stress tests and other supposedly comforting regulation for this growth. In fact, these developments hold back growth and the economy grows in spite of them. There are still plenty of headwinds, but the Plow Horse Economy will continue to trudge forward. Higher minimum wages limit job growth by making labor more expensive – it's the first thing you learn in Economics 101, supply and demand. Nonetheless, because so few workers are actually affected, we expect even more job growth, less unemployment and faster wage growth in the years ahead. Entrepreneurship is still winning.
Posted on Tuesday, February 10, 2015 @ 3:00 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.