By Felix Field and Brandon Kahn
What if a single government policy could change the lives of millions of workers overnight? The minimum wage was first established in 1938 through the Fair Labor Standards Act (FLSA), a key component of President Franklin D. Roosevelt’s New Deal. The New Deal aimed to revive the economy from the depths of the Great Depression and address the widespread struggles of workers seeking fair employment and livable wages. The FLSA marked an important early step in the federal government’s recognition of workers’ rights. Today, the minimum wage remains a major topic of debate, as many hold differing opinions on its potential economic impact. Some argue that raising it could cause inflation and higher unemployment rates. In contrast, others contend that it is a necessary tool for improving workers’ quality of life and reducing economic inequality.
We studied how state minimum wage changes might impact unemployment rates to find evidence of either a positive or negative impact on the economy using a method similar to that of economists Card and Krueger. David Card and Alan Krueger use a “natural experiment” method to study the impact of minimum wage changes on employment in New Jersey and Pennsylvania. In their study on the impact of minimum wage changes on employment, they looked at two similar states, New Jersey and Pennsylvania, with the only difference being New Jersey’s recent increase in state minimum wage. In these two states, they compared the employment numbers of fast food chains. Fast food chains were chosen as they are one of the biggest minimum wage employers. They found that employment numbers were relatively similar between the two states despite New Jersey’s minimum wage increase (Card and Krueger 776). These findings challenged the predominant economic theory, which said that raising the minimum wage would lead to higher unemployment. We hope to replicate a similar experiment to Card and Krueger’s using Delaware’s unemployment rate after minimum wage changes in 1988 compared to Maryland’s unemployment rate during the same time.
Data Analysis
Delaware and Maryland are good candidates for a comparative study because they are relatively small states bordering each other. More importantly, one had a significant minimum wage change. Figure 1 shows the yearly comparison in minimum wage between Delaware and Maryland during the four years from 1987 to 1990. According to Figure 1, Delaware significantly increased its minimum wage from $2.00 to $3.35 in 1988, while Maryland’s remained constant.
Figure 1
Source: U.S. Department of Labor, obtained via the St. Louis FRED
We compared unemployment rates across states. We used data from the U.S. Bureau of Labor Statistics, obtained via the St. Louis FRED, which, unfortunately, does not have specific data on employment in fast food or other sectors, so we used the full state totals instead. Figure 2 shows the yearly comparison in unemployment rates between Delaware and Maryland on January 1st of the same year as the minimum wage comparison. As the chart shows, after Delaware’s minimum wage increase in 1988, the difference between the states’ unemployment rates narrowed. In 1987, the difference in unemployment rates was 1.3%. In the following three years after the minimum wage change, the difference in unemployment rates consistently shrank, reaching 0.9% in 1989 and 0.2% after only three years. This data analysis shows that when Delaware raised the minimum wage in 1988 it caused the unemployment rate to be higher than it would otherwise have been.
Figure 2:
Source: U.S. Bureau of Labor Statistics, obtained via the St. Louis FRED
We note that Delaware’s unemployment rate actually went down. However, we believe that the best modeling approach is to look at the difference between the change in the unemployment rate in Delaware compared to Maryland. These states are geographically close, and we would expect most economic factors to affect the states equally. However, the change in the minimum wage in Delaware would only affect Delaware. So, our modeling approach would remove most of the effects that would distort our results.
In some ways, this is surprising as Card and Krueger’s study showed that employment and unemployment numbers remained relatively the same. This contradiction may be due to several factors, but a likely factor is that our data set includes a larger set of workers, many of whom do not work at minimum wage. This difference in the data could overshadow the minimum wage change. Card and Krueger’s study looked more into the industry where the minimum wage has the most impact, while ours was broader and less focused. However, at the same time, our result matches the prediction of economic principles. This shows that depending on the situation, some economic models will work better than others.
Depending on the circumstances, one model may be more accurate than another. It all depends on the economy being analyzed. The impacts of minimum wage changes are challenging to measure as only a small portion of the population is paid at minimum wage. It is hard to control for other factors with such broad data, so when conducting a study, it is essential to try and create a controlled system where the only change is in the minimum wage. The variations in the results are most likely due to the inability to control for all other external factors.
Conclusion
We examined how minimum wage changes affect unemployment rates in the United States. To do so, we compared the differences between the similar states Maryland and Delaware, with the main difference being a change in the minimum wage. After analyzing the data, we found that the change impacted Delaware’s unemployment rates. Maryland’s unemployment rate steadily decreased. However, after the minimum wage change, Delaware’s unemployment rate acted differently than Maryland’s, even going up in 1990. This result shows that unemployment rates can rise with an increase in the minimum wage and that lawmakers should be careful before implementing the wages. The change is not so dramatic as to dissuade all minimum wage changes, but it is worth considering the possible employment impacts before implementing such a policy.
References
- Card, David, and Alan Krueger. Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania, Oct. 1993, https://doi.org/10.3386/w4509.
- U.S. Department of Labor, State Minimum Wage Rate for Delaware [STTMINWGDE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/STTMINWGDE, May 10, 2025.
- U.S. Department of Labor, State Minimum Wage Rate for Maryland [STTMINWGMD], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/STTMINWGMD, May 10, 2025.
- U.S. Bureau of Labor Statistics, Unemployment Rate in Delaware [DEUR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DEUR, May 10, 2025.
- U.S. Bureau of Labor Statistics, Unemployment Rate in Maryland [MDUR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MDUR, May 11, 2025.