Adam Jockle
Minimum Wage and Income Inequality
library(rmarkdown)
Introduction
For my final project, I will analyze the effect of minimum wage on unemployment and other factors. One of the most debated topics in politics is the raising of minimum wage, and the effects it can have on the economy. Given the United States places a strong emphasis on states rights, analyzing minimum wage, unemployment, and cost of living by state should lead to some informative date and analysis. All of these factors directly relate to income inequality. While this is a very complicated subject, experts have developed theories on why income inequality has grown significantly in the United States over the last several decades.
One of the more prominent factors seems to be a decline in Union Membership. Unions definitely have flaws, but have advocated for fair wages. It seems as if this decline may have led to an increase in inequality. One of the goals of this project will be to analyze the potential effect of declining Union membership as it relates to minimum wage and inequality.
Hypothesis
Minimum wage is a very debated topic, and the subject of raising it has been debated among prominent economists. Some believe this is healthy to compete with inflation, and necessary in order to provide a basic level of living to those working lower wage jobs.(see source 1) However, others believe it forces businesses to lay off workers, and leads to higher rates of unemployment(see source 2). I believe that states that have higher minimum wages will also have higher rates of unemployment. Additionally, I believe that raising the minimum wage will lead to higher costs of living.
Analysis
The first graph will show the federal minimum wage in the United States adjusted for 2020 dollars.
<script type='text/javascript'> The graph shows that the Federal Minimum wage has actually declined slightly over the years when adjusted for inflation. Even though it has been raised, it has not been congruent with the rise of inflation. Later in this project, the decline in Unions may offer insight into the stagnation in federal minimum wage.However,even while the federal minimum wage has stayed the same or declined slightly, various states have responded differently, with some raising the state minimum wage fairly dramatically.
One the best metrics for judging the health of the economy is the level of unemployment. This can be dramtically effected by significant events/disruptions, such as the 2008 financial crisis and the 2020 Covid Pandemic. In order to judge the changes in unemployment over the last several decades, it will be plotted against Median Household Income.
The Second Graph will show the average unemployment by year in the United States plotted against Median Household Income
<script type='text/javascript'> There are some pretty clear trends that can be seen in this graph. Throughtout the last several decades, it seems as if Median Household income is inversly tied to Unemployment. As the unemployment levels dipped, the Median Income rose. Both of these data sources are good for analyzing the health of the economy.There are two major spikes in unemployment that can be seen. The first was during the 2008 financial crisis, while the second was due to the 2020 Covid Pandemic. This helps demonstrate just how quickly the economy can shift with major events.
The third graph will show the Minimum wage by state, and the cost of living of certain cities within the states. This will help to show whether or not raising the state’s minimum wage potentially leads to highers costs of living.
<script type='text/javascript'> It is very clear that the Northeastern region and California seem to have the highest State level minimum wages, along with several cities with the highest cost of living. There is no doubt that some of the most expensive cities in the US are in states with higher minimum wages. The question becomes whether these higher wages are congruent with the higher cost of living. This doesn’t necessarily provide clear evidence that the raising of the minimum wage is the contributory factor, as it is possible that this was just a byproduct of politicians realizing the higher cost of living must be accompanied by a raise in minimum wage.
The next graph will analyze the cost of living vs the political ideology of a state. It is very clear that raising minimum wage has been a talking point of the Democratic party for many years, while Republicans have feared its negative consequences.
<script type='text/javascript'> It is quite amazing to see the strong positive relationship between cost of living and percent vote democrat in the 2008 election. As it can be seen there is a direct, positive linear relationship.The more democratic states seem to have higher costs of living. This relates to minimum wage, as the states with the higher costs of living tended to have higher minimum wages.
Now, all of the data that has been shown is valuable, but further analyis is needed to draw any conclusions. For example, in my hypothesis I states that I believed there would be a correlation between a states minimum wage and its unemployment rate. My logic was that as minimum wage is raised, businesses will be forced to layoff workers as labor costs rise.
<script type='text/javascript'> This graph shows that while there is a slight positive correlation between minimum wage and state unemployment, it is not significant enough to support the notion that higher minimum wage leads to higher levels of unemployment.
Another facet of minimum wage that needs to be analyzed is how it affects poverty and income inequality. Many people that study inquality tend to focus on “the top 1 percent” as a means of measuring inequaliy. While that is a fair measure, for the sake of this part of my project I feel as if “percent living in poverty” is a better, as it is directly related to the effect of minimum wage. The whole thesis behind states that raise their minimum wage is that it will provide a livable income level, and reduce the amount of people living in poverty.
<script type='text/javascript'> This graph tends to support the argument for raising minimum wage, as there is a clear relationship between lower poverty rates and higher minimum wages. While this is not conclusive, it certainly lends credence to the arguments put forth by those in favor of raising minimum wage.
So, if states have raised minimum wages over the last decade, and those states feature lower levels of poverty, the question that must be answered is why is income inequality still so great in the United States. One potential cause for this issue is the decline in Unions. Back in the mid 20th century, Union memberhship was strong, and advocated for higher wages for workers. There has been a steady decline in Union membership, which may offer hints to inequality.
This graph will show the decline in Union Memberhship, along with the wage gap between workers in Unions vs those not in Unions.
<script type='text/javascript'> It is very obvious that Union membership has been on a sharp decline. While union members have consistenly had higher wages than those who are not in unions, this gap has been declining steadily as well. Perhaps, as Union membership has declined so has the overall strenghth and lobbying power of Unions, which have not been able to have as dramatic an effect on wages as it did in the past.
One of the goals of a Union is to limit the wage gap between the top and the bottom of income brackets. To see how the decline in Unions relates to inequality, I made a graph which shows Union membership vs the top 1 percent’s income share.
<script type='text/javascript'> As one can see, there seems to be a very direct convergence between the decline in Union membership and the steep rise in the top one percent.As Union membership declined, there became less advocacy for more fair wages for workers. Even as the top 1 percent faired well, the lower income levels had less lobbying power and thus fell behind in terms of wage growth.
Conclusion
While minimum wage and income inequality can become a sticky and complicated debate, the goal of this project was to use empirical data to analyze the effects of a higher minimum wage, and how a decline in Union Membership has attributed to inquality. From a federal level, there is no doubt that the minimum wage has been stagnant to declining for years. Even as states have enacted laws to raise the state minimum wage, the federal government has lagged behind. It is very reasonable to believe that the decreasing grip of Unions within American labor politics and economics is a potential reason for the stagnation. Another goal this project had was to analyze how minimum wage relates to unemployment and poverty levels. States that featured higher minimum wages did see a trend of a higher level of unemployment, albeit a minor and insignificant level. Even though my hypothesis stated that there would be a fairly strong relationship, the data did not support the claim. One the of the best things about data science is it gives an unbiased way to analyze a theory. In this case, it showed that it does not seem as if raising minimum wages leads to significantly higher level of unemployment. Additionally, there was evidence to support higher minimum wages lead to lower levels of poverty. While this may seem intuitive, I tried to analyze factors that would show this notion to be false. For example, one of the things I analyzed was how state’s that are democratic, and often have higher state minimum wages also seem to have some of the highest costs of living. It seemed as if the rise in cost of living would outweigh the higher minimum wage. However, the data showed that the states with the higher wages did have lower levels of poverty.
It is very clear that the decline of Union Membership has been steep over the last several decades, and inversly proportional to the rise in the top 1 percent’s share in income. However, I believe this runs deeper than just the size of Unions. There seems to be reason to believe that Unions’ have lost some power, and are no longer able to lobby to the same extent as they did in the past. The graph above shows that there has been a significant decline in the gap between Union and Non-Union Wages. While there was a point in American history in which Unions were very powerful and had a dramatic effect, it seems as if this is no longer the case. It is tough to say whether it is truly a reason for higher inequality. There is an argument that if the Union’s were stronger, the federal minimum wage would be higher and that the income gap would shrink. However, I think this misses a critical gap of logic, which is that the middle class has been lagging behind within the wage increases.Even as the middle class has seen an increase in productivity, the increase in wages has been minimal. While this project is not about the middle class, it is important to recognize that inequality is deeper than just those who are at the lower income levels, and that simply raising federal minimum wage would not solve the problem.Fixing inequality is a complex problem that will take a variety of solutions within American politics and economics.
Sources (1)https://edlabor.house.gov/imo/media/doc/FactSheet-RaisingTheMinimumWageIsGoodForWorkers,Businesses,andTheEconomy-FINAL.pdf (2)https://thehill.com/opinion/finance/535936-six-reasons-to-oppose-a-15-federal-minimum-wage https://fred.stlouisfed.org/series/MEHOINUSA672N https://americanideologyproject.com/ https://www.census.gov/data/tables/2021/demo/income-poverty/p60-273.html https://worldpopulationreview.com/state-rankings/poverty-rate-by-state http://www.unionstats.com/ https://www.icip.iastate.edu/tables/employment/unemployment-states http://gabriel-zucman.eu/uswealth/