North Dakota and Minimum Wage
Minimum wage returned to the Jarrod Thomas Show as a topic this week and it seemed appropriate to answer a few questions and respond to a few points in more detail than I could during the program. First, empirically, the outcomes from legislation increasing minimum wages is far from clear. Most people apply a Principles of Microeconomics level analysis and have supply and demand curves and a price floor that drives a wedge. As I say on the radio when this comes up, this is good, as far as it goes, and unfortunately that is not very far.
This is not a misapplication of theory in as much as it is an analysis rife with assumptions about the real world. The most obvious is that you assume that the minimum wage is above the equilibrium wage. It surely is for some people, but that leads us into the next point. There is not one labor supply and labor demand curve, just like there really is not just one equilibrium wage for the economy.
Many occupations require specialized skills, training, or education implying that workers in different occupations are less than perfect substitutes for each other. This means we could have a different supply curve for each occupation, and the slope of that curve depends on the amount of training, skills, and education required to be qualified for a particular job. I am not going to spend too much time on labor demand here, though obviously that can differ for various occupations depending on the needs of the various businesses in the economy. Market dynamics still hold so that high demand in the face of low supply should lead to high wages for the occupation and should create entry provided there are not significant barriers to that entry. Those are a topic for another post though.
For many of the occupations in many areas across the state the $9.25 minimum wage will be below the current, equilibrium level. Certainly it is not universally the case, but it is not even close to a scenario of widespread unemployment. Let’s start with the median wage.
The Bureau of Labor Statistics comes up with an annual report that lists age levels for various occupations in North Dakota. The geographic divisions are for the metropolitan statistical areas of Bismarck, Fargo, and Grand Forks, as well as four non-metropolitan areas of Far West North Dakota, West Central North Dakota, East Central North Dakota, and Far East North Dakota. I used the year 2015 as it was the most recent year available.
Now recall the argument is not that a minimum wage hike to $9.25 per hour will create no unemployment at all. Rather, my argument is that it is not likely to lead to widespread, general increases in unemployment. For the various areas included in the report there are only 55 occupations out of 1,765 reported with a wage less than $9.25 per hour, or 3.1%. When we look at the 10th percentile, that is the lowest 10% of wages in the distribution, we see that around 18.26% of occupations report less than $9.25 per hour. At the 25th percentile it was approximately 8.58% of listed occupations reporting wages below the suggested new minimum wage amount. The data also include a 75th percentile and a 90th percentile amount as well, with only .3% and 0% of occupations below the key $9.25 level.
There were some geographic disparities to note, made evident in the graph below, but the essential point still remains: while there will surely be an impact from a minimum wage increase, it seems unlikely to be a widespread change. The graph does not seem to want to resolve clearly so the missing region from left to right are Grand Forks, West Central and Far East, and the link provides a higher resolution image.
Finally, another comment from the radio had to do with the impact of higher paying job in Grand Forks on median wage numbers. Certainly higher paying jobs (the caller was referencing Professors) would push an all occupation median higher, but this type of analysis, which look at different occupations, should not be influenced by that. Unless of course you want to suggest the higher paying job increase demand for the outputs of the other occupations and increase wages. I do not think the caller was attempting to make that argument, especially since it start to become very convoluted and circular in its reasoning.