Minimum Wages and Gross Domestic Product

Abstract

This study is the first to explore the relationship between minimum wage increases and state gross domestic product (GDP). Using data drawn from the Bureau of Economic Analysis (BEA) and the Current Population Survey (CPS) from 1979 to 2012, I find no evidence that minimum wage increases were associated with changes in overall state GDP. However, this null finding masks substantial heterogeneity in the productivity effects of minimum wages across industries and over the business cycle. Difference‐in‐difference‐in‐difference estimates suggest that a 10% increase in the minimum wage is associated with a short‐run 1% to 2% decline in state GDP generated by lower‐skilled industries relative to more highly skilled industries. This differential appears larger during troughs as compared to that during peaks of the state business cycle. (JEL J3, J4, L5)

Do minimum wages stimulate productivity and growth?

“…finance, insurance, real estate, professional/scientific services). The results show that a 10% increase in the minimum wage is associated with a 1−2% decline in GDP generated by lower-skilled, as compared to higher-skilled, industries [3]. This finding is consistent with a redistribution of employment toward higher-skilled industries.…”

“…Minimum wage increases may increase labor costs and output prices, reduce firms' profits and job training, and cause adverse employment and hours effects, each of which may reduce in GDP. However, if minimum wage increases raise the earnings of low-skilled workers who keep their jobs-and these workers have a higher marginal propensity to consume an additional dollar of income than firm owners or low-skilled workers who lose their jobs-minimum wage increases will result in higher GDP [3].…”

“…In summary, the net effect of higher minimum wages on GDP is an empirical question and depends on how minimum wages affect: (i) the demand for low-skilled workers; (ii) lowskilled workers' wages; (iii) availability of substitutes for goods produced by minimum wage workers; (iv) workers' effort; and (v) job training and educational attainment [3].…”

“…Three studies have empirically estimated the relationship between minimum wages and GDP [3], [4], [5]. The first examines the interaction between exports and minimum wage policy [4].…”

“…Finally, a new US-based study examines data on US states over a three-decade-long period (1979−2012) and estimates the effect of minimum wage increases on gross state product (GSP) or state-specific GDP [3]. The author uses an approach that exploits changes in state minimum wages over time to identify their effect on state productivity, while controlling for other state-specific economic, demographic, and policy trends, including (in some models) controls for state-specific time trends.…”