Labor Law

The original purpose of this project was to assemble a simple dataset for the students in my introductory econometrics course. I did not intend to make a political statement or to recommend a particular course of public policy.

But policymakers should pay attention to the findings presented here because they refute the conventional wisdom about how an increase in the minimum wage would affect the employment prospects of their constituents.

In the United States, states with higher minimum wage rates tend to have higher employment rates. They also tend to have higher average annual pay.

Such a finding refutes conventional wisdom, but it is consistent with economic theory because "supply curves slope upward." When workers find it difficult to change jobs, firms have a degree of monopsony power over their employees.

To maximize profit, firms hire labor up to the point where the marginal revenue from labor equals the marginal cost of labor. In a competitive market, the marginal cost of labor is the market wage rate.

But under conditions of monopsony, the marginal cost of labor rises as the monopsonist hires more labor because "supply curves slope upward." Consequently, the monopsonist faces a marginal cost of labor that is greater than the wage rate, which is determined by the labor supply schedule.

And under such conditions, raising the minimum wage would increase the average cost of labor (reducing the firm's profit), but reduce the marginal cost of labor (down to the wage rate itself). That lower marginal cost would then increase the level of employment that maximizes the monopsonist's (now lower) profit.

Most microeconomics textbooks provide a good description of monopsony. For a short summary, please see the Monopsonist and Minimum Wage problem that I wrote for my students and the answers.

The data presented here suggests that higher minimum wage rates are associated with higher employment rates. This is a correlation, not a causation, but it is possible that some states have higher employment rates because they have higher minimum wage rates.

International evidence also suggests that stronger employment protection is associated with better employment outcomes. Specifically, OECD countries with stronger protection against dismissal tend to have higher employment rates. And OECD countries with tighter regulation on temporary forms of employment tend to have higher male employment rates, but lower female employment rates.