Introduction - Yuan-032/Econometrics_pre GitHub Wiki

Minimum wage legislation is commonly believed to be job killers. As the reason for minimum wages can actually raise unemployment by giving employers less incentive to hire and more incentive to automate and outsource tasks that were previously performed by low-wage employees. However, recent studies and reality events also show that increasing the minimum wage, which does not necessarily reduce employment. For instance, adjusted for inflation, the federal minimum wage between 1967 and 1969 was one of the highest in history, while the unemployment rate during the same period was below 4 percent, relatively historically low.

We consulted some prior analyses of our question or of similar questions, like “Effects of the Minimum Wage on Employment Dynamics” by Jonathan Meer and Jeremy West and “Using Federal Minimum Wages to Identify the Impact of Minimum Wages on Employment and Earnings across the U.S. States” by Yusuf Soner Baskaya and Yona Rubinstein. These helped us formulate the hypothesis that unemployment and minimum wage are positively related. Both papers discuss and support this with evidence, which inspired us to perform similar analyses. We particularly want to break it down to a state level, where we find that this hypothesis holds true.

To further examine this interesting debate by using U.S state-level data as well as combine the methodology in econometrics, this project aims to analyze how changes in state minimum wages affect changes in the state unemployment level by making three models to explore this relationship. In the first basic model, we use the OLS model which regresses the state's unemployment rate on effective minimum wage in 2020 dollars. In the second model, based on the first basic model, we include year dummies by setting three time periods which are 1980-1989, 1990-1999, 2000-2009 to test the relationship between the change in the minimum wage and the change in the unemployment rate. In the third model, we build a panel regression model including state fixed effect and time fixed effect. Our hypothesis and results indicate that the change in state minimum wages has a positive relationship with the change in the state unemployment rate.