1

Minimum Wage Increases and Low Income Families

Thomas Payea
Department of Economics, State University of New Paltz, New Paltz, NY 12561
Introduction
This paper proposes that the rising cost of labor through federal wage increases hurt the
real wealth position of low income workers. Low income workers are defined as workers
earning, on aggregate, between one and one and a half times the federal minimum wage given a
40 hour work week annually. The population for the quantitative research discussed by this paper
will be restricted to workers over the age of 18 as minor workers portray an incomplete and
biased assessment of the whole labor equation for both workers and employers. Including
workers that typically rely on their household income rather than contribute dilutes the measure
of poverty since their income is supplemental rather than primary (Sabia, 2010). Refining the
study to adult workers, ages 25 54, limits research to workers whose earnings contribute a
larger portion of total household income (Campolieti, 2012). And that older employees earning
the minimum wage are more likely to earn that wage indefinitely. Sabia argues that the inclusion
of minor workers may instill a false positive impact of wage legislation in the studys results
where non - poor teenagers are benefited but a large portion of adult primary household earners
with families are financially harmed. The working population included in the study may be
further divided in order to describe trends among specific worker groups, such as single earner
households, marital or parental status, level of healthcare coverage, or level of education. Data
used for this study will be restricted to the United States and Canada, two developed OECD
nations with similar industrial and commercial economic structures, political values, and very
interdependent trade economies. The exchange rate between these two nations is also nearly

equivalent and Canada, being the United States largest trade partner, accounts for a significant
portion of the day to day and long run exchange rate volatility.
The null hypothesis being tested in this report will be defined as those successive
increases in the minimum wage will reduce the aggregate net income position of the population
between 1 and 1.5 times minimum wage full time employees. Low income workers are more
sensitive to price fluctuations and shocks to labor costs than higher income working populations.
Thusly, low income families, the focus of this report, are far more likely to be negatively offset
by minimum wage increases while the positive spillover benefits middle class workers.
Aggregate net income position will represent a collective value accounting for real weekly
income, hours worked, and worker benefits for employees. The low income working population
will be defined as employees earning between one and one and one half times the federal
minimum wage given a 40 hour work week including all federally mandated benefits of a full
time employee. Post inflation accounted income is impacted by rising cost of living, reactive
economic factors by businesses in response to rising labor costs, such as reduced hiring or
average hours, and increases in the consumer price index through reactive Consumer Price Index
increases (Fraja, 1998). Defining direct change in the level of real income as a result of a
minimum wage increase requires the use of time, at least one year according to Neumark, to
account for individual firms microeconomic reactions to shocks in the price of labor. For this
reason author Neumark and his colleagues, in their article Minimum Wage Effects through the
Wage Distribution, 2004, describe how within one year microeconomic equilibrium will be
reestablished following a federal wage. This year delay, known as a time lag effect, is used as an
allowance period for firms to adjust their business platforms to account for the higher cost of
labor. Neumark utilizes an algorithm that combines government labor statistics from the Census

Population Survey and an artificial time scalar to calculate effects one year following an
individual employees work pattern being affected by a minimum wage increase. Results from
this study indicated that all immediate benefits to worker populations following a year of
minimum wage increase would be negated in the following year by which real wages, average
worker hours, and total worker benefits would be redacted amongst the low income working
population. The high income working population would be far less directly hurt, and would
actually see benefits from the minimum wage increase, in terms of immediately quantifiable
wages, work hours, and benefits while the impoverished class bears the brunt of higher labor
costs. A limitation to this assessment is that the test did not incorporate aggregate increases in
consumer price indexes, food prices, transportation costs, or housing prices which are more
difficult to directly link to a single policy change over time. Higher labor costs are transmuted,
over time (one year as described by Neumark) into increased business expenses for companies
who are encouraged to increase prices to recoup lost profits.

Review of Literature
Author Sabia, in the article Do Minimum Wages Fight Poverty, 2010, describes a
recurring state of declining marginal utility effect for a continually increasing rising minimum
wage in terms of real worker income weighed against the value of the dollar. Sabia and her
colleagues argue that as the minimum wage continually rises proportional to the dollar or faster
than the nominal rate of inflation, a declining percentage of workers between the one and one
and half times minimum wage earning populations are assisted. This means that as the legal
minimum wage is pushed higher the political measure of increasing the price of labor for

unskilled workers will become increasingly ineffective in adding real income to poor households.
Impacts from a non-effective subsidy to poor workers can only occur in the form of a net
deterioration in the welfare of the national economy or a benefit to non poor workers equal to
or less than that of the aggregate federal labor price increase. The basis for this hypothesis is that
much of the low income households primary earners are earning more than the minimum wage
already and that the predominant occupiers of minimum wage positions are earning supplemental
household incomes rather than primary (Sabia, 2010). A political move to raise federal minimum
wages merely dilutes the wage pool, encouraging youth workers to take on less desirable part
time positions while diminishing the availability of more desirable full time or higher paying
positions previously worked by head of households or primary household earners. This effect is
compounded by the fact that firms are most likely to eliminate higher paying and supervisory
positions first in an effort to maintain solvency. These employers attempt to pass down the
supervisory work to the less paid employees and eliminate the higher paying positions as a
response to the added labor cost. The only economic inevitability from the mathematical function
Sabia and her colleagues describe is a rise in labor costs which will either be absorbed or
recouped by staff or hour reductions given the time lapse effect of one year described by
Neumark. In either event though output will not be increased as would be the case in a pure free
market structure and labor costs will either remain constant or rise given the particular course of
action of the firm. Should a firm absorb the costs, its efficiency will drop and if a firm chose to
eliminate supervisory positions, it would be assumed, that output would also be decreased as a
result of less effective or reduced management structure.

Labor Model and Assumptions

Another journal article written by author Michele Campolieti, 2012, and two others
describes the effectiveness of wage legislation within the other developed nation in this report,
Canada, data which will make up a large portion of the empirical evaluation of this paper. A
similar story to Sabias previously mentioned paper, a paper also cited within Campolieti own
report, describes a state of declining utility associated with rising federal mandates on labor
costs. Campolieti reports that among the 25 64 year old working population in Canada, the
group that should be of the highest concern for poverty risk as the majority of these individuals
are primary household earners, only 3% earn minimum wage. A stark 60% of all Canadian
minimum wage earners are teenagers or youths, 25% are couples whose spouse earn a wage
higher than minimum, 11% are economically unattached, and only 4% are primary household
earners (Campolieti, 2012). Data this overtly pronounced should be of great concern to any
legislator considering an uninformed and widespread federal wage increase. In addition to the
necessary focus towards scaling the economic benefits to head of households the choice to
exclude youth workers becomes an increasingly obvious choice for the empirical analysis. As
discussed earlier in the works of Sabia in order to depict a complete case study of the economic
impact of wage legislation on the working poor one must focus on primary earners who are non
youths. A new measureable factor is also introduced in order to describe the fiscal effects on
the microeconomic level following a legislated minimum wage increase. This effect is defined as
spill over, a sort of inverse to the trickle down economics of Reagan, where only a small
portion of the intended economic subsidy reaches the working poor and the remainder is
absorbed upward into the economy by higher class non poor workers (Campolieti, 2012).
Absorption by the non-poor occurs in a variety of inflationary price responses where basic goods

and services rise in price to opportunize on the economic surplus while the job market remains
almost the same or moves into a state of decline hurting only the working poor.
An article published by Gianna De Fraja entitled, Minimum Wage Legislation,
Productivity and Employment, 1998, defines a two key assumptions that must be maintained in
order for accurate and practical assessment of the complete economic function of minimum wage
increase. The first of these, and arguably the most important, is microeconomic flexibility on the
part of the individual firm to adapt the characteristics of employees labor scheduling in response
to a federally mandated wage increase (Fraja, 1998). The second assumption, which is less
directly quantifiable, is that employees have differing preferences on the quality, or personal
value, of their labor schedules. Differing personal values affect an employees understood value
their work schedule in the way that frequent night, or weekend hours are less desirable to the
employee since they are less sociable and limit the employee from partaking in personal leisure
expenditure (Fraja, 1998). This assumption is critical to the empirical analysis of the article
where a formula is developed to incorporate individual firm flexibility and provide a more
accurate assessment of what truly happens to worker hours following an exogenous labor price
shock. Fraja uses this algorithm in order to refute a previous analysis by authors Card and
Krueger in regards to previous United Kingdom wage increases. These two authors assessment
of the U.K.s wage increases utilizes the textbook model of competitive labor markets, a model
that Fraja finds serious weakness in. The competitive labor market model provides a skewed and
misleading analysis that overemphasizes the positive effects of a wage hike because of the
unidimensionality of the model. Competitive labor market theory provides only employee
dismissal as a response to a federal wage hike where firms may only eliminate jobs and cannot
adapt the scheduling of its workers. This, Fraja states, is overtly false and non practical, a

model that could and should not be utilized for real world analysis for it lacks the previously
mentioned schedule quality dimension which depicts the true macroeconomic impact of a
minimum wage hike.
Price Effects and Spillover
One of the most prominent of such impacts is the occurrence of a bunching effect that
occurs as minimum wage rises closing the gap between minimum wage earners and previously
slightly higher than minimum wage earners. The slightly higher earners, wage equal to between
one and one half times minimum wage with a forty hour work week, are drawn into a group that
would be aptly defined as impoverished or, the alternative, wages of higher wage earners are
pushed up in response to the rising minimum wage legislation (Fraja, 1998). Though, according
to the author, the majority of these low income workers are not receiving financial benefit and
only the significantly higher earners find any real wage increase. In this way, Frajas article
compounds the hypothesis of Campolieti in regards to the presence of a spillover effect where
the true benefit of poverty alleviating wage hikes are found in the pockets of higher wage
earners. The data Fraja presents shows very limited effect on the working poor with a federal
wage hike and a far more pronounced positive effect on higher wage employees by way of wage
inflation and labor market dilution. Wage inflation reflects a distortion in the most basic value of
labor, the federal minimum wage. Workers produce no additional units of production and only
the price, not the quality of labor has increased. There are now more Year 0, dollars in the hands
of the working poor that is spent on goods and services of the more wealthy, this defines the
nature of the spillover problem. Year 0 being defined as the year prior to a federally mandated
minimum wage increase and Year 1 defined as the year of a minimum wage increase. Year 2
would be the post year following an increase that would allow the time lapse effect to take place

allowing microeconomic adaption for firms to adapt employment and for macroeconomic price
increase to occur (Neumark, 2004). This postulate will become critical in the calculation of real
wage effects as opposed to the nominal which becomes a more complex issue than a basic
characterization of inflation.
In Year 1 an immediate influx of Year 0 dollars has occurred as firms have not had the
necessary time to cut hours or dismiss any of their workforce. Minimum wage earners are now
facing a Year 0 pricing structure with a Year 1 budget and thusly have more disposable income
in the current time frame (Neumark, 2004). Free market structure thusly dictates that companies
will be incurring increased demand from this group with no added supply or output as the quality
of labor has not increased with the labor cost increase. Ceteris parabis microeconomic theory
will mandate a rise in the price of consumer goods, food, housing, and transportation. This
fundamental equation lays the foundation for the inevitable trickle up effect that will lead to
the non impact on or corrosion of the net income position of the working poor. Those who
profit from this additional disposable income and increased revenue in the immediate will be the
business owners, those who earn commission, and managers or supervisors of companies that are
reporting increased profits as a result of the added income (Fraja, 1998). This defines the core of
the spillover effect and absolute counter intuitiveness of political efforts to alleviate poverty by
simply mandating a non specific and sweeping cost of labor increase.
In addition to the spillover which already directly adds to wage disparity of high income
earners to low income workers there also occurs the bunching effect near the minimum labor
price. A microcosm of socialism, slightly higher than minimum wage earners are now earning a
wage nearer to or equivalent to the Year 1 minimum wage in the immediate and only the
equivalent to minimum wage earners have higher disposable income. The slightly higher than

minimum wage earners, who were already deemed more productive workers by their employers,
are now earning a smaller percentage of the minimum wage which in a free market would
indicate that the quality of their labor had declined which is clearly not the case. Raising the base
rate of minimum wage also raises the legal rate of poverty according to the 2013 Federal Poverty
Guidelines and this process explains how the bunching affect harms the income position of low
income workers in basic proportion to an employees labor earnings against the rate of poverty
(Fraja, 1998). The low income workers focused on by this paper is the one and one half times
minimum wage working population and in the immediate a rise in the minimum wage will
actually increase the population of this group by expanding the upper limit of the population.
To effectively scale the true impacts of federal wage increase while discounting
masking variables a secondary set of empirical data for use in this paper were developed by
author Neumark and his colleagues, in their work Minimum Wage Effects throughout the Wage
Distribution, 2004, by the way of the time lag algorithm previously mentioned. This
methodology used data from the Census Population Survey to scale individual impacts on
workers on a base year, wage increase year, and post increase stabilization year. Using such
methodology the authors and researchers were able to use metadata from the CPS and refine the
data in a way that would eliminate many of the false positives that may imply a beneficial
financial impact that is unsustainable. Neumark and his colleagues argue that though some
financial windfall may occur in the very short run but that these gains are in no way permanent
and are actually a toxic attempt at subsidizing of the working poor. By artificially propping up
the cost of labor without giving the necessary time, defined as one year by the article, for
individual firms to react to the exogenous shock the labor market is poised for future Consumer
Price Index inflation. Neumark found in the American data that nearly all of the short term

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positive gains were eliminated completely or counteracted and reversed within one year leaving
workers in an equivalent Year 0 income position in Year 2. This effect also does not account for
the inevitable consumer price inflation function as described by Campolieti or other deterioration
in real value of the USD that may occur during that time period. In effect the real wages had
fallen and the net income position was damaged for all but some of the one and one half times
minimum wage working population.
Time Lag Effects
Neumark describes this phenomenon as the time lag effect that, in his and his coauthors
hypothesis, is unrepresented by other studies leading to misleading outcomes. This time lag
effect, as he describes, reflects a macroeconomic adaption to the effects of previous minimum
wage hikes that effectively neutralize positive financial gains that minimum wage workers may
have incurred in the very short run. The basis for such an effect is derived from the market
constraints employers are faced with in the immediate but not the long term where firms can
better cope with shocks to labor supply, such as a minimum wage hike. The incurred differential
between the cost of labor and the output of existing employees will be readjusted by employers
over time when they are not bound by current labor needs and can resize, or reformat, their
workforce. A downsizing or reformatting, a move away from full time to part time employment,
will undoubtedly hurt employees and must be accounted for to gain a complete sense of the
economic effects of a wage increase. An additional element of this is the real value of wages
once inflation and rising cost of living is accounted for. It is argued that minimum wage increases
do not serve as a means to cope with inflation, but rather, one of the driving factors causing
higher costs of living.

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Actual changes in the macro economy following a wage hike are unlikely to be
immediately recognizable, a primary critique made by the article towards previous studies that
did not include a time dimension in their models. Rather these models were limited to an
immediate cross sectional quantification of worker employment and income which does not
allow for any market adaption following a wage hike. As a response to this limitation, Neumark
develops artificially applies the effect time lag has on worker wages using an algorithm that
weighs worker wages on a sliding scale against a previous year of minimum wage increase.
Using this method short term or immediate gains that are not macroeconomically feasible or
stable in the long run are negated and only lasting benefits that improve a workers real wealth are
retained.
U.S. Correlation Test Data
The econometric analysis this paper includes will be ran through the Gretl software and includes
two tests for correlation. One tests for correlation between the minimum wage increases and
changes over time in the Consumer Price Index and the other is a test for minimum wage
increases and raw poverty numbers. Both tests use data from 1970 through present, a period of
accelerated increases in the minimum wage. The CPI, poverty, and minimum wage data comes
from the Bureau of Labor and Statistics government website.
U.S. Correlation Test Methodology
The annual minimum wage will serve as the independent variable in both tests while the CPI and
total poverty numbers will be dependent variables in two tests respectively. Logarithmic
functions for all variables will be used to better account for differing variances and an ordinary
least squares test will be utilized. This test will set the increasing minimum wage against the

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changes in CPI over the same period of time in order to determine if there is any statistical
correlation. The same type of regression will be run to test for correlation between poverty rates
and the rising minimum wage. Results will be tested for normality, heteroskedacity, functional
forms, and auto correlation. If the data is found to be permissible then the null hypothesis that
these dependent variables, CPI and poverty, are impacted by the independent variable, minimum
wage, will be tested and accepted or rejected.
U.S. Correlation Test Results
The first test for correlation of CPI to minimum wage increases came back as highly significant
with a p-value of less than 0.01. This regression was found to have a normal statistical
distribution and did not test positive for a significant influence through heteroskedacity. A null
hypothesis for the absence of autocorrelation among the data was also tested and accepted
proving that autocorrelation did not influence the dataset results. However, the CUSUM test was
not entirely within the parameters for acceptance, the only test that was not entirely passable, and
peaked outside of the range of acceptance in the 1980s. The CUSUM SQ test, though, was
entirely passable with the full spectrum of results within the desired parameters.
In the actual analysis of the data from the CPI test the regression had an R-squared value
of 0.96 furthering proof of a correlation between minimum wage increases and a rising
Consumer Price Index. The beta value associated with the minimum wage log was 1.26162
indicating a one unit change in the logarithmic minimum wage resulted in a 1.26162 change in
the logarithmic value of Consumer Price Index. The entire logarithmic range for the logarithmic
function for the CPI was between 3.65 in 1970 and 5.43 in 2013, a range of 1.78 and mean of
4.78. Minimum wage logarithmic range was between 0.47 in 1970 and 1.98 in 2009, a range of

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1.51. The beta of 1.26 means that the minimum wage had a 26% higher impact on the change in
consumer price index than a one unit change of itself. Through this analysis it is apparent that the
minimum wage was a significant factor in promoting increase in the consumer price index.
The second regression performed, minimum wage as independent and poverty as
dependent, also came back as significant with a p-value of less than 0.01. The normality plot for
the minimum wage and poverty regression also came back as acceptable and heteroskedacity did
not test positive for a significant factor. A null hypothesis for autocorrelation not being present
was also accepted verifying that autocorrelation did not pose a significant effect on the data
results either. CUSUM test results, though, had the same issue as the data in the first regression
and peaked out of the acceptable limits near 1990. Similarly, as well, the CUSUMQ test came
back with the entirety of the data plot within the acceptable limits.
For the minimum wage affecting poverty regression an R-Squared value of 0.968 was
found furthering the hypothesis that minimum wage had a significant impact on poverty. This
regression had a beta value of 1.27 implying a 1.27 change in the logarithmic function of poverty
for every 1 unit change in the logarithmic of minimum wage. The entire logarithmic range for
poverty ran from 7.57 to 9.369, a range of 1.79, and had a mean of 8.64. Minimum wage
logarithmic range was the same as before, between 0.47 in 1970 and 1.98 in 2009, a range of
1.51. The beta of 1.27 implied that a rising minimum wage had a 27% increased impact on rising
poverty than a one unit change of increasing minimum wage indicating that a rising minimum
wage a significant impact on rising poverty.

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U.S. Time Lag Test Data

The empirics of this study will be based on findings by the Current Population Survey conducted
by the Bureau of Labor Statistics and will use a graded scale of state and federal minimum wages
over the period of 1979 1997. As described by Neumark in his article, Minimum Wage Effects
through the Wage Distribution, 2004, a dummy variable of Year 1 to denote a year of increase
in the minimum wage while the correspondent Year 2 will indicate an effect known as time lag
in which the market has readjusted to equilibrium afterwards. The time lag effect measured by
the study takes place over a one year period in which businesses are not constrained to their
current workforce and there is some flexibility in the macroeconomy to account for any inflation
or other change in real wages that may have occurred. Thusly, when a census survey is
conducted in a year of a minimum wage spike an individuals household income, working
conditions, education, and race are added to the data set. This will serve as the initial observation
instance for the hypothesis testing Year 1 data point. The subsequent year, if data is available, the
individual will be also added into the Year 2 data set, if the individuals characteristic
information is confirmed to be a match; mathematically the same individual studied in the
previous year.
Year 2 data for the individual is then compared to the economic state of that person in
Year 1 in order to determine changes in wage, usual working hours per week, employment, and
total income based on changes in the minimum wage. While CPS records show comprehensive
household statistics, results for individuals are not clearly defined and this could potentially
become an issue if steps are not taken to properly ensure a correct match is made. In order to
accurately match an individual from the Year 1 to the Year 2 Neumark and his colleagues use
specific attributes to vet the observations, beginning with age and sex. For a successful match to

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occur household characteristics must coincide with individual attributes over a two year period,
such as a 31 year old female being at a particular residence and then the following year a 32 year
old female is a resident at the same location. If multiple matches were to occur for the same
individual subsequent, more refined characteristics, such as education, would be applied to arrive
at a singular match. The study found that roughly 20% of individuals could not be matched and
was likely due to a change in residence in which case the observation was not used in the study.
Descriptive Statistics
The data used by Neumark and his colleagues for the Minimum Wage Effects through the Wage
Distribution, 2004, study was gathered from a random sample of 847, 175 observations in the
dummy variable Year 1, the base year of the study. A one year interval in observation would
define the second dummy variable Year 2 of the study in order to allow for the test for a time
lapse effect and the hypothesized negation of minimum wage hike benefits. Year 2 results would
be supported by 749,510 observations that were able to be accurately matched with previous
correspondents to CPS inquiries. The proportions and demographics of the study are listed in the
table on the following page.

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Table 1: Employment Effects

For the time lapse test to effectively isolate causative factors the independent variables
are partitioned according to like attributes specific to each population group and subgroup, and a
grand mean for each variable is identified. Variables included in the study and test for a time
lapse effect and long term negative outcome of a wage hike were the proportion of populations
within the sample group, weekly income, age, gender, and race. Neumark states that the low

17

income population is disproportionately Hispanic despite the fact that the un-weighted majority
for each class is neither black nor Hispanic, making up 83% of the sample population. There is
also a heavy bias towards age where a majority of the sub, equal, or slightly above minimum
wage working populations is younger. Age represents somewhat of a weakness to most analyses
of the minimum wage effect because the political focus and primary supporting argument for
hikes in federally mandated wages is aimed at the alleviation of poverty. However, as stated
earlier in this study, the vast majority of young workers earning minimum wage salaries are not
the head earner of households and are members of wealthy families. From the data set it can be
seen that only 6% of the total sample population are youth workers, yet youth workers make up
36% of the total minimum wage earners. Neumark will discount this population from the
hypothesis testing for this reason, focusing the analysis instead on primary earners
predominantly living just above or above the poverty line. Specifying this population as the focal
point of the test will more accurately identify the hypothesized equalization effect and drawing
of higher paid workers to the poverty line. Macroeconomic inflation and increased employer
costs, it is argued, will only weaken the dollar and economy as a whole rather than push lower
paid workers into a higher standard of living.

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Figure 1: Wage Distribution

w = Actual WageMW = Minimum Wage

30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

To further examine the influence of the more affected higher salaried workers the sample
population is arranged into hourly wage brackets derived from the minimum wage. There is a

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near normal distribution centering on the lower side of the2 < w/MW 3 bracket, or between 2
and three times the minimum wage in hourly pay. There are two obvious groupings of wages
seen in the bar graph from the data set, one near the true mean of two times the minimum wage
per hour and the other centered between $.10 above the minimum wage and 1.1 times the
minimum wage. It is also notable that only 10.3% of the total sample population, youth included,
are earning less than or equal 110% of the minimum wage, already signifying a potential
disproportionate adverse affect to higher earners in the event of a minimum wage hike. This is
the first indication that a heavy handed approach to the manipulation of labor costs will have
nearly guaranteed adverse affects on higher wage earners founded on the very basic reality that
wealth cannot simply be created arbitrarily but must be generated through productive labor.
An expansion on the marginal utility of a minimum wage hike are the mean weekly
wages of the sample population and mean worked hours. The initial data set includes begins with
the incident year of the minimum wage increase and the test will weigh the reaction of these
figures to the following year so that the time lapse factor can be established and accounted for. In
Year 1 the mean weekly wage for the total population is $377.30 with a standard deviation of
$337.10. Mean of weekly hours worked in the following year was 38.8 with a standard deviation
of 4.944 hours per week. There is an obvious grade upwards as income bracket rises where the
highest earners are working 40 or more hours per week. This hourly labor report takes place one
year following the minimum wage hike and implies correlation between higher costs of labor for
low income workers pushing employers to cut hours on average for these workers. Such a shift
away from full time allows companies to skip out on benefits they would otherwise have to
provide for their full time employees and signifies a forced cost saving tactic by the firms to
compensate for higher hourly labor costs. In addition a rising supply of workers due to the higher

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minimum wage means low wage workers will be willing to do more for less and a company will
be able to hire more part time workers much easier than before.
U.S. Methodology
In order to prove the existence of a time lag effect and the negative impact of minimum wage
increases during the time period of 1979 1996 a comprehensive regression must be established
to calculate the correlation of minimum wage increases against a workers multidimensional real
wealth. The real wealth figure is derived from wage, usual weekly work hours, and income. To
test the dual hypothesis of a negative monetary impact on worker welfare as well as the masking
effect of time lag a theoretical one time minimum wage increase is applied to a sample of normal
workers from the population group in order to measure expected response. In simply proving the
negative fiscal impact the presence of time lag is also verified as the results of minimum wage
increases in the short run always appear positive. Investment in technology and management in
order to reformat a workforce takes what is estimated in Neumarks study as at least one year in
which case all previous studies that do not include a time element for the reaction to minimum
wage hikes cannot be held true.
Hypothesis Testing
In testing for the existence of a negative Neumark has developed an equation using the
Year 1, Year 2 model as follows.
Equation 1:

([

w2w1
1
w

]|
j

MW 2MW 1
MW 1 MW 0
=C
,
=0, X j , S Y j , M j , w 1j
1
0
MW
MW

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In this equation the expected change of the dependant variables is calculated using the
individuals actual wage (w) in Year 2 minus the actual wage in Year 1 divided by actual wage in
Year 1. This is then multiplied by the minimum wage (MW) in Year 2 minus the previous Year 1
minimum wage divided by the Year 2 MW and set equal to an artificial rate of change. This
invented rate of change (C) is multiplied by the differential of the Year 1 minimum wage where
the increase occurred subtracted from the previous minimum wage prior to Year 1 divided by the
new MW in Year 1. This can be applied to the various variables and calculated independently to
determine what significant changes, if any, have taken place over the course of one year from the
minimum wage hike. Results are listed in the data set below.

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In addition to the algorithm ran by Neumark I compiled U.S. Department of Labor data in
order to provide supplemental evidence of the minimum wage effect over the same time period.
Three variables, consumer price index, year to year percent change of CPI, and annual
unemployment rates were tested for their correlation to the minimum wage (U.S. Department of
Labor). This test used data over the time period of 1979 through 1996, a time of successive
minimum wage increases, in order to determine what correlation existed within these variables.
Minimum wage was set equal to Y, the independent variable, and CPI, percent change of CPI,
and unemployment served as the independent X variables.

U.S. Results
The hypothesis poised by Neumark was validated by the mathematical model as there were short
term fiscal benefits in the short term but they were reversed within one year. Most affected
adversely in fact were the low income populations, particularly those already earning the
minimum wage, where the short term gains sought by a minimum wage hike were more potently
reversed in labor hours, weekly earnings, and wages within a year. Surprisingly, though,
individuals earning wages within $.10 per hour greater than the minimum wage and 110% did
actually benefit in terms employment. Within one year employment rates had risen 10% but were
first adversely hurt roughly 70% of the gain. This can likely be explained by the fact that, earning
slightly higher than the minimum wage prior to the increase, these workers probably had more
experience or skill at their professions. Responding to higher forced labor costs, employers
would desire the most efficient and effective workers they could get and these workers were
already making higher wages earlier. The initial 70% decline and employment supply shock

23

would have come from a general increase in the cost of labor to all employers dealing with lower
income workers. This is paralleled as the income brackets ascend in Table 2revealing how higher
income worker population were less affected by the legal wage increase. This too is not overtly
surprising given the nature of much higher income and professional businesses which are only
reliant on minimum wage workers for tasks such as building and grounds maintenance.
Most troubling from the regression data is the drawing effect illustrated in the lag period
towards those living just out of poverty that may now be forced to care for their families at a subpar rate of compensation. As real wages fall and cost of living rises due to the minimum wage
hike low income families now are considered impoverished and in the very long term poverty
rates would likely rise. Evidence for this reaction is visible in the first class of worker above
minimum wage labor but beneath 110% of the minimum rate hourly. They experience an
immediate 74% increase in income but in the lag period wages fell 24%, still a gain but the other
factors are also necessary for a complete analysis of the situation. Discounting even the potential
loss of benefits from a shift to part time labor workers in this income bracket also incurred an
immediate 5% drop in employment. Within one year another 23% decrease would occur, coupled
with a net loss of 4.5% drop in average working hours and an 11% drop in average weekly
wages. As well the risk of inflation eroding the real value of what income these workers are still
receiving is dictating a disturbing trend. The poverty line is being pushed up; people are not
being pushed out of poverty.
Test for Correlation of Variables
The results of the SPSS linear regression showed a high correlation between the three
independent variables and the minimum wage. An R value of 0.944 and an R squared value of

24

0.891 verify a correlation between minimum wage and the unemployment rate and CPI, and CPI
annual percent change. CPI had a beta value of 0.31 meaning that the minimum wage rate was
increased 31 cents for every dollar increase in the aggregate CPI, denominated in 1983 dollars.
CPI had a significance of 0.00 meaning there was a very high level of correlation to minimum
wage and defines a very direct impact of CPI on cost of labor. CPI percent change annually had a
beta value of 0.51 showing a 51 cent increase in minimum wage resulting from a 1 percent
increase in consumer price index annually. The significance level for this variable was lower
however, at 0.069, where the data is less reliable than the basic CPI figure. This data collectively
shows correlation between the rising price of goods and the rising minimum wage showing a
mutually causation affect between the rising cost of labor and the rising cost of living.
Compounding Neumarks research, this regression function helps to verify that there is a direct
effect on inflation and cost of living that results from and contributes to a rising minimum wage,
defining an unsustainable inflation of the dollar. The third independent variable, unemployment,
had a beta value of 0.138 and a significance of 0.029. This factor is slightly more significant than
the CPI percent change figure and is still relevant, just not to the level that basic CPI was. A beta
of 0.138 in this case implies that for every additional percent of unemployment to the workforce
the minimum wage will rise 0.138 USD. There is correlation here but it is not as strong as the
CPI in proving that there is a cost of living adjustment that will be made in response to an
increase in minimum wage. Collectively this data does show a high level of correlation between
cost of living, CPI change over time, and unemployment with the federal minimum wage and
that a change in one of these factors will have a significant effect on the other. This validates the
hypothesis that the increase of minimum wage has an inflationary impact on cost of living and in

25

fact hurts the poor working class of Americans living just above the minimum wage but still
living in a state of poverty.
Canadian Data
A portion of the empirical and statistical evidence presented in this report deals with the
economy of Canada. Reasons for this focus arenoted earlier in the paper and cover the similarity
between the two nations commercial and industrial structures, a near equivalent exchange rate,
and similar worker population distributions. It can be reasonably assumed that there would be a
similar cause and effect relationship between a minimum wage increase and post factor labor
market adaptation in both Canada and America. Campolietis data, the core statistical analysis to
be analyzed will discuss the relationship between the minimum wage labor price and the relief of
poverty. This data is reported during the period of 1997 through 2007, during the 11 years there
were 78 minimum wage increases across 10 provinces (Campolieti, 2012). Raw data for the
statistical analysis comes from the governments Survey of Labor and Income Dynamics (SLID)
which aggregates confidential microeconomic records for workers both before and after taxation.
In addition data to be used for an economic simulation for a minimum wage increase comes from
a March 2008 Labour Force Survey (LFS) which is the Canadian counterpart of the American
Census Population Survey (CPS). This data provides unemployment and income level data
arranged by significant characteristic delimiters, such as age group. The Canadian measure of
poverty is measured by a statistic know as the Low Income Cut Off (LICO), below which
families are likely to spend at least 20% more of their incomes on food, clothing, and housing
than the average family in a community. LICO establishes a comprehensive poverty measure by
which the actual economic cost of living can be accurately scaled and effects of changes to the
minimum wage policy can be quantified for statistical assessment.

26

CN Methodology
Compolieti is testing the hypothesis that there is an aggregate decline in the real wealth position
of the low income working populations and all benefit from the wage increase is either
temporary poverty alleviation or received by the upper class. What benefit the poor do receive is
mitigated over time by job loss and decline in hours and benefits. Evidence for the non
effectiveness of federal wage hikes towards impoverished populations and the mitigation effect
is derived through the use of an OLS regression presented by Campolieti.
Equation 2:
POVRATE it = MINWAGE it + X it +T t + R i + U i

Equation 1.sets the dependant Y value,

POVRATE it

, as the natural log of the rate of

poverty in Canada. Supscripts i and t define province and time respectively meaning the
effects of a wage increase will be delimited locally and scaled proportionally for a dummy time

variable. The first independent variable is

MINWAGE it

which defines the natural log function

of the minimum wage given the i subscript of province and at t time. Factor

X it

represents a vector that can be artificially manipulated to observe the impact of a wage hike on

individual population characteristics such as worker age (Campoleti, 2012).

Tt

Represents a

time trend variable, accounted for as a quadratic function of subscript t as time and variable T

27

as time squared. Factor

Ri

represents a dummy variable that will reflect the provincial,

subscript i, minimum wage law.

The X vector testable characteristics can be used to define: 25 -54 year old men (the
population with the highest propensity to increase poverty); the natural log of the average adult
wage (an increase here would typically be understood as a reduction in poverty); the percentage
age 54 64 and the percentage age 16 24 (to restrict false readings by age grouping effects)

(Campolieti, 2012). Whether the

MINWAGE it

coefficients sign is positive or negative does

not determine the effectiveness of a wage increase since a higher minimum wage can either
relieve or intensify poverty depending on the importance of wage gains, primarily through 25
54 year old males, and net employment losses (Campolieti, 2012). Campiolieti also cites authors
Sabia and Neumarks work in the field in identifying that the majority of primary household
income earners fall in the 25 54 year old population distribution. For this reason the focus of
the analysis will be in determining the effectiveness of minimum wage legislation on alleviating
poverty among this population. The population income brackets used for Campolietis study
include income from 1 to 1.5 times the LICO level in order to include not only the immediately
poor, but, near poor populations as well. These near poor populations, as mentioned early, are
also of great interest to a study measuring minimum wage effectiveness and are also more
volatile to changes than wealthier populations.
CN Results
Campolietis minimum wage effects results for low income families are measured by the three
poverty indicators described before. The equivalent, 1 to 1.25 times, and 1.25 to 1.5 times LICO

28

rate. This encompasses the mathematically understood poor, and the near poor by community
economic standards centered on the basic cost of living and provides a comprehensive approach
to scaling real poverty based on prices and not nominal wages. Statistical results from
Campolietis equation are provided in the following table.
Table 2:
Effect of Minimum Wages and Controls on
Tax LICO's)
(standard errors in
parenthesis)
Income < 1.0
LICO
(1)
Log (MinWage)
-0.169
[0.247]
Prime age Male
Unemployment Rate
6.153
[0.868]
Log (Average Adult Wage
Rate)
-2.416
[0.548]
Percentage aged 54-64
-0.613
[2.415]
Percentage Aged 16-24
3.963
[1.987]
Province Effects
Y
Year
Y
Year Squared
Y
Mean of Dependent Variable
0.156
N
110

Log Poverty Rates (Before-

Income < 1.25

LICO
(2)
-0.12
[0.180]

Income <1.5
LICO
(3)
-0.037
[0.119]

5.43
[0.694]

4.425
[0.507]

-2.039
[0.366]
-0.148
[2.086]
1.963
[1.698]
Y
Y
Y
0.217
110

-2.084
[0.255]
-1.811
[1.809]
0.818
[1.179]
Y
Y
Y
0.285
110

As implied by the first column in Table 2 there is no significant measurable effect on

poverty during Campolietis study of the effect of minimum wages. The case is the same when
the populations examined are expanded to include the first and second tier of near poor workers.

29

This is in accordance with the hypotheses of both this and Campolietis reports that minimum
wage increases have no positive impact on alleviating the poverty levels of low income workers.
While this is the case that minimum wage increases do not alleviate the poverty of these low
income workers, it is also true that these wage increases are not found to increase poverty rates
directly either. This statement does not mean that minimum wage increases do not deteriorate net
economic health by artificially raising prices and reducing total real income of all workers, but it
cannot be directly proven by this particular statistical analysis. What can be definitively stated
with a validation of the non-effectiveness of a wage increase on poverty is that, as stated earlier
in the paper as a hypothesis, if real wealth is not being transferred to poor there can only be a
loss of net real wealth. The higher prices of labor are taxing businesses, particularly small
businesses, who cannot cope with the higher cost of labor causing a consolidation to larger
corporations such as Walmart and other large retailers which utilize offshore practices. With a
zero gain at the level of poor workers there mathematically can only be a net loss within the
economy that opts to raise its minimum hourly labor cost.
The second half of Campolietis Canadian employment regression comes in the form of
projected employment losses directly resultant from prospective minimum wage hikes. Earnings
levels of workers are scaled in the same way dividing populations into income ratios defined by
the standard LICO. Unemployment risk data is expanded to include all workers, even beyond the
non-poor populations in order to define an entire perspective of the widespread economic impact.
The results are listed below.
Table 3:
Simulated Employment Losses from Minimum Wage
Increases

30
Employment Losses
%
Potentiall
y
Affected

Number
Potentia
lly
Affected
(1)
(2)
Assuming Minimum Wage Increase of
$0.50
<1 i.e., In
Poverty
25.6%
224,326
1 - 1.24 Near
Poor
6.7%
58,509
1.25 -1.49 Near
Poor
7.0%
60,971
1.5 to 1.99
12.2%
107,362
2 to 1.99
18.1%
158,810
3 or Above
30.4%
266,771
100%
Total
876,749
Assuming Minimum Wage Increase of
$1.00
<1 i.e., In
Poverty
24.70%
317,790
1 - 1.24 Near
Poor
7.50%
96,232
1.25 -1.49 Near
Poor
6.90%
89,029
1.5 to 1.99
11.90%
152,541
2 to 1.99
18.80%
241,541
3 or Above
30.20%
387,737
1,285,0
Total
100%
00
Ratio Income/
Poverty Line

Elasticity
-0.3

Elasticity
-0.6

% of Job
Losses

(3)

(4)

(5)

8,634

17,268

2,241

4,482

1,638
3,513
4,615
6,082
26,724

3,276
7,026
9,231
12,164
53,448

6.1%
13.1%
17.3%
22.8%
100%

13,431

26,863

29.7%

3,545

7,090

2,888
5,791
7,963
11,569

5,776
11,581
15,926
23,137

45,186

90,373

32.3%
8.4%

7.8%
6.4%
12.8%
17.6%
25.6%
100%

The prospective increases examined in this data set are an in crease of $0.50 and $1.00
per hour. Projected elasticities of -0.3 and -0.6 are used as they were found to be most likely
based off of previous Canadian labor statistics (Campolieti, 2012). Column 1 of the previous
table shows an approximate 26% of potentially affected workers are currently living below the
poverty line. 13.7% fall into the near poor category of between 1 and 1.5 times the LICO rate,
collectively accounting for 40% of workers with potential of benefitting from a wage hike being

31

near poor or below the LICO poverty line. As well, nearly a third of the working population are
potentially affected by a wage hike are living in families that earn three or more times the LICO
poverty rate. The 25% potential benefit serving poor workers implies that there could be
potential for an alleviation of poverty amongst the poor working populations, however, this does
not account for the risk of job loss following the prospective increase. Job loss is distributed
disproportionately towards the poor workers where one can clearly identify a 7% higher rate of
job loss for poor workers than the 25% of potential income increase in the $0.50 increase case. In
the $1.00 increase case there is also a 5% higher rate of job loss than rate of benefit for the poor
population. Conversely the three times LICO rate population group has an 8% higher rate of
benefit than potential job loss in the $0.50 increase case. In the $1.00 case there is also a 5%
higher rate of benefit than potential job loss. There is an obvious favoring towards the wealthier
populations in this prospective scenario and the data shows that poor workers are always at a
higher risk of losing their jobs in the event of a minimum wage increase.
Conclusion
The disproportionate impact of a minimum wage increase that affects only 10% of the United
States population, yet, carries such a heavy macroeconomic weight defines much of the risk
associated with generalized forced labor cost requirements to employers. This characterizes the
reality of the drawing effect that would pull more workers into poverty while simultaneously
pushing real wages for higher earners down as inflation rises to stabilize the markets offset labor
costs to employers. As well, this defines much of the neutralization hypothesis in which
immediate increases to the bottom earners, predominantly youth and non-head earners of
households, will show financial benefit in the short run but in no way alleviates any degree of
poverty. The changes are not stable and statistical analysis will show that equilibrium will be

32

restored to the market given adequate time. Neutralization comes primarily from macroeconomic
inflation which will always want to maintain the minimum wage, the lowest rate anybody will
work for, and the poverty line, the most basic livable salary, in tandem. As inflation pushes the
real cost of living up, the real wages for all earners will fall. In addition, given adequate time,
employers will reformat their workforce in order to maximize their own efficiency. By means of
shifting from a full time to a part time workforce, dumping benefits packages, or reducing
workforce which harms mostly those living just above poverty who may now be left unable to
care for their families without further government intervention, the pathway to socialism.

33

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34

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