With minimum wage laws a topic of policy discussion recently, this article asks the question –is there a correlation between higher minimum wage rates and financial employment by state?
The main theory is that states with financial centers may get pressure from the public to increase the minimum wage above what elected officials experience in other states because of the idea that financial professionals are overpaid. As the theory goes, because financial professionals are overpaid, why not help out the least off by taking from the “rich” financiers. Before addressing whether any relationship exists, here’s some background.
The federal minimum wage was first imposed at $0.25 per hour in 1938. Since that time, the minimum wage has grown to $7.25 in 2014, an increase of 2,800, or about 4.5% per annum. Interestingly, the 4.5% average annual growth rate in is about a percent higher than economy-wide average annual wages.
In its history, on an annual basis, the federal minimum wage has been bumped up 25 times. The largest increases happened in 2007, 2008, and 2009, when the minimum wage increased $0.70 each year, going from $5.15 in 2006, to $5.85 in 2007, to $6.55 in 2008, and $7.25 in 2009.
Besides the methodical three-year increase in the minimum wage from 2007 to 2009, increases have been sporadic, akin to most political decisions.
The federal minimum wage is, of course, only part of the story. States have the option of increasing, but not lowering, minimum wage rates for most employees.
As of 2014, 24 states have a minimum wage that’s higher than the federally imposed rate. Highest among the states is Washington at $2.07 above the federal level, followed by Oregon at $1.85, Vermont at $1.48, and Connecticut at $1.45. (Isn’t it interesting that less than half of U.S. states have found it prudent to increase the minimum wage above that which the federal government imposes.)
Changes in the minimum wage rates at the state level are also seemingly random. The following is a plot of changes in the minimum wage rates by state across time. (As a note, the details by state are not meant to be decipherable, rather just the clustering of changes by state.)
The first state to risk a minimum wage above the federal standard was Alaska at $0.50 in 1960. Alaska was followed by the District of Columbia, Connecticut, and Massachusetts. Interestingly, Alaska’s $0.50 difference from the federal government continues to this day.
Also interesting to note is the slew of states imposing higher minimum wage laws in 2006 and 2007, at the peak of the housing market boom.
With this minimum wage background in mind, the next part of the question is – where is financial employment clustered in the United States? The following has that plot, which shows the percentage of total employment in a given state employed in the financial industry. On top of the financial industry centers is Delaware, with 10.1% of employment from financial businesses headquartered there. Delaware is followed by Connecticut at 8.1%, New York at 7.8%, and Nebraska at 7.4%.
On the other end, the financial industry has not, relatively speaking, set up shop in West Virginia, with only 3.7% of total employment working in the financial industry. Other states with less financial industry influence include Wyoming at 3.7%, Vermont at 4.0%, Alaska at 4.0%, and Mississippi at 4.0%.
So, what does the connection look like between financial industry-concentrated states and states with high minimum wage laws? Here’s a scatterplot look. Interestingly, not only are the two not related, the linear regression line indicates the opposite conclusion – financial center states generally do not impose higher minimum wage laws. As a note, the regression line is not statistically significant.
The conclusion that there is no relationship between a given state’s minimum wage and financial employment may surprise some observers, given the political nature of the discussion, but it’s true.
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