We were thinking about the history of federal minimum wage increases in the U.S. this morning, when we had a flash of inspiration: we thought of a way we could illustrate how the rate of unemployment in the U.S. might have changed in response to changes in the minimum wage in the overall context of the health of the U.S. economy at the time they occurred.

How you ask? Easy! We took our dividend data for the S&P 500 and calculated the year over year change in its rate of growth after adjusting it for inflation. We then assigned the result a score of either +1 when the year over year change in real dividends per share was positive or a score of -1 when the year over year change was negative.

That provides a framework against which we can present the results of a similar exercise for changes in the year over year rate of unemployment, assigning a positive score when the unemployment rate fell or a negative score when the unemployment rate rose. We could then identify the milestones for when the federal minimum wage increased.

We presented what we found in the accompanying chart for the years where we have monthly unemployment data, from January 1948 through September 2009 (the first data point covers the year over year period from January 1948 through January 1949, the next data point spans February 1948 through February 1949, and so on....) We've also tweaked the positive and negative scores of the dividend slightly to offset it from the unemployment changes to make it stand out more.

Here's how the analytical part works. When the U.S. economy is healthy, the stock market's dividends per share will rise and the rate of unemployment will fall. On our chart, that's indicated by the situation where both the year over year changes in dividends and unemployment have scored a positive value. It's during these times that we would expect that the U.S. economy can absorb an increase in the minimum wage.

When both these scores are negative, that likely corresponds to a period of recession or stagnation for the U.S. economy. This would correspond to a period in which raising the minimum wage would aggravate the unemployment situation.

Finally, there is the situation where the two measures are out-of-sync with one another. This indicates a period in which the economy is relatively weak. In these circumstances, if the U.S. economy is not in recession, raising the minimum wage might indeed spark enough job loss to push the U.S. into recession.

Examining our chart, we find the following:

1. Of the 20 minimum wage increases that have taken place from January 1949 through the present, 5 occurred at times when unemployment rates were falling from where they were a year earlier, and 15 occurred approximately when the rate of unemployment in the U.S. was rising. This observation suggests that the U.S. Congress is uniquely unfortunate in its choice of the dates it selects when it mandates a minimum wage increase should take place.

2. 7 of the 20 minimum wage increases correspond closely with sudden reversals from falling rates of unemployment (good) to growing rates of unemployment (bad). The dates of the related minimum wage increases are 1 March 1956, 3 September 1963, 1 February 1967, 1 May 1974, 1 January 1979, 1 April 1990, and 24 July 2007.

3. 2 of the 20 minimum wage increases correspond closely with sudden improvements in the rate of unemployment (1 January 1976, 1 October 1996). Here, the 1 January 1976 improvement coincides with an improving situation for the stock market, coming at the end of a series of disruptive events for the U.S. economy which had severely impaired its performance. The period surrounding the 1 October 1996 appears to be a very short-term anomaly occurring within a period of otherwise strong economic growth.

4. There are 4 instances when unemployment rates rose at times corresponding to minimum wage increases, even as stock market dividends per share were growing (1 March 1956, 3 September 1963, 1 April 1990 and 24 July 2007.)

The takeaway from all this is that when the U.S. Congress acts to increase the minimum wage, this action either directly coincides with the loss of jobs in the U.S. economy one-third of the time or with the continuance of job losses for another one-third of the time. And one out of five times, these job losses occur despite economic growth as indicated by growing stock market dividends.

Worse, since the U.S. Congress has historically acted to pass minimum wage increases in periodic batches, with increases occurring at annual intervals following the first increase of the batch, the situation of these additional minimum wage tend to represent an ongoing worsening of the employment picture.

So the bottom line answer to the question we asked in the post title is very likely "Yes."

Labels: economics, minimum wage, politics

- posted by Ironman at 3:05 PM | Permalink | Home |