MINIMUM WAGES AND GROSS DOMESTIC PRODUCT

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, 1 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) I. INTRODUCTION While a number of studies have examined the wage (Autor, Manning, and Smith 2014), employment (Card and Krueger 1995; Dube, Lester, and Reich 2010; Neumark, Salas, and Wascher 2014; Neumark and Wascher 2008; Sabia 2009a, 2009b), and poverty (Dube 2013; Sabia and Burkhauser 2010) effects of U.S. minimum wages, none have examined the impact of minimum wage increases on gross domestic product (GDP). Theoretically, the effect of minimum wage increases on GDP is ambiguous (Nickell and Layard 1999). Increases in the minimum wage may increase labor costs and output prices (Aaronson and French 2007; Aaronson, French, and MacDonald 2008) as well as reduce earnings, profits, and employment (Neumark and Wascher 2008), which could reduce GDP. However, if minimum wage increases raise the earnings of lower-skilled workers who keep their jobs, and these workers have higher marginal propensities to consume than capital owners or low-skilled workers who lose their jobs (Aaronson, Agarwal, and French 2011), minimum wage hikes could increase GDP. The effects of minimum wages on productivity could also differ in the short run as compared to longer run. For instance, adverse employment effects among younger, less-experienced workers could induce greater educational investments, leading to longer-run increases in productivity as these individuals enter more highly skilled industries (Cahuc and Michel 1996). While policymakers advocating state and federal minimum wage increases have historically focused on their potential to fight poverty (Clinton 1995; Clinton and Gore 1992; Kennedy 2004; Kerry 2007; Obama 2008; Roosevelt 1937) and reduce income inequality (Clinton 1996; Obama 2013), more recent calls for minimum wage increases have focused on their potential productivity effects (Reich 2011). (1) To date, however, no study has explored the effect of minimum wage increases on the state GDP or on the distribution of productivity across industries. Using data drawn from the Current Population Survey and the Bureau of Economic Analysis, this study seeks to fill these gaps. My results show that minimum wage increases enacted between 1979 and 2012 had little effect on overall state GDP in either the short run or in the longer run. However, this null finding masks heterogeneity in the industry-specific GDP effects of minimum wages. Controlling for state-specific time-varying tax policies, state-specific economic trends theoretically unaffected by minimum wages, and state-specific time trends, difference-indifference-in-difference estimates show that minimum wage increases are associated with a reduction in state GDP generated by lower-skilled industries (retail and wholesale trade, manufacturing, and food services and drinking places) relative to more highly skilled industries (finance, insurance, and real estate). Estimated elasticities range from -0.05 to -0.2 and appear to be largest in the short run. Finally, I find some evidence that industry-specific GDP effects of minimum wage increases are larger during downturns in the state economy, providing little support for the claim that minimum wage increases provide a short-run economic stimulus. …