Minimum Wage Effect on Small Businesses a presentation by Lindsey Terry

The Issue Mandatory wage increases hurt not only small businesses, but their employees as well. Big corporations do not have to absorb the cost because most minimum-wage jobs are offered by small businesses. Government manipulation of the starting wage has failed as tool of social and/or economic justice. It has not been proven to reduce poverty or narrow the income gap and puts a stranglehold on America's top job creators: small businesses. The overwhelming majority of economists continue to affirm the job-killing nature of mandatory wage increases. Mandatory minimum-wage increases end up reducing employment levels for those people with the lowest skills. (NFIB, National Federation of Independent Business )

The Research Question: What are the effects of increasing minimum wages in regard to its effects on small businesses?

The Dependent Variable Each state’s # of small businesses

The Independent Variables Each state’s minimum wage X1 Each state’s population growth rate X2 Each state’s per capita income X3 Each state’s percentage change in real gross state product X4 Each state’s population X5

The Sources and Data SBA (United States Small Business Association sba.gov) US Department of Labor dol.gov US Bureau of Economic Analysis bea.gov 2005 information

# of Small Businesses State # of small businesses (Y) AL AK AZ AR CA CO CN DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND59158 OH OK OR PA RI95390 SC SD72949 TN TX UT VT74957 VA WA WV WI WY56740

Each State’s Minimum Wage StateMinimum Wage (X1) AL5.15 AK7.15 AZ5.15 AR6.25 CA8 CO7.02 CN7.65 DE7.15 DC7 FL6.79 GA5.15 HI7.25 ID5.85 IL7.5 IN5.85 IA7.25 KS2.65 KY5.85 LA5.15 ME7 MD6.15 MA8 MI7.15 MN5.15 MS5.15 MO6.65 MT6.25 NE5.85 NV6.33 NH6.5 NJ7.15 NM6.5 NY7.15 NC6.15 ND5.85 OH7 OK5.85 OR7.95 PA7.15 RI7.4 SC5.15 SD5.85 TN5.15 TX5.85 UT5.85 VT7.68 VA5.85 WA8.07 WV6.55 WI6.5 WY5.15

Each State’s Population Growth Rate State Population Growth Rate (X2) AL2.5 AK5.9 AZ15.8 AR4.0 CA6.7 CO8.4 CN3.1 DE7.6 DC-3.8 FL11.3 GA10.8 HI5.3 ID10.4 IL2.8 IN3.1 IA1.4 KS2.1 KY3.2 LA1.2 ME3.7 MD5.7 MA0.8 MI1.8 MN4.3 MS2.7 MO3.6 MT3.7 NE2.8 NV20.8 NH6.0 NJ3.6 NM6.0 NY1.5 NC7.9 ND-0.9 OH1.0 OK2.8 OR6.4 PA1.2 RI2.7 SC6.1 SD2.8 TN4.8 TX9.6 UT10.6 VT2.3 VA6.9 WA6.7 WV0.5 WI3.2 WY3.1

Each State’s Per Capita Income MS25,015 MO31,231 MT29,015 NE32,923 NV35,744 NH37,768 NJ43,831 NM27,889 NY39,967 NC31,041 ND31,357 OH31,860 OK29,948 OR32,289 PA34,937 RI35,324 SC28,285 SD32,523 TN30,969 TX32,460 UT27,321 VT32,717 VA37,503 WA35,479 WV26,419 WI33,278 WY37,305 StatePer capita Income (X3) AL29,623 AK35,564 AZ30,019 AR26,681 CA36,936 CO37,510 CN47,388 DE37,088 DC52,811 FL34,001 GA30,914 HI34,489 ID28,478 IL36,264 IN31,173 IA31,670 KS32,866 KY28,272 LA24,664 ME30,808 MD41,972 MA43,501 MI32,804 MN37,290

Each state’s Population StatePopulation AL4,539,611 AK669,411 AZ5,952,083 AR2,772,152 CA35,990,312 CO4,673,724 CN3,486,490 DE840,558 DC582,049 FL17,736,027 GA9,107,719 HI1,267,581 ID1,425,894 IL12,719,550 IN6,257,121 IA2,955,587 KS2,741,665 KY4,171,016 LA4,495,670 ME1,312,222 MD5,573,163 MA6,429,137 MI10,107,940 MN5,113,824 MS2,900,456 MO5,787,885 MT935,784 NE1,754,042 NV2,408,948 NH1,303,112 NJ8,657,445 NM1,916,331 NY19,262,545 NC8,679,089 ND635,938 OH11,459,776 OK3,535,926 OR3,629,959 PA12,367,276 RI1,066,721 SC4,254,989 SD780,046 TN5,989,309 TX22,843,999 UT2,505,013 VT619,736 VA7,557,588 WA6,270,838 WV1,805,626 WI5,540,473 WY506,541

The First Attempt SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations51 ANOVA dfSSMSF Regression E E Residual E E+09 Total E+13 CoefficientsStandard Errort StatP-value Intercept Minimum Wage (X1) Population Growth Rate (X2) Per capita Income (X3) % change in real gross state product (X4) Population (X5) E-43

The Problem Glejser Test ran positive for Heteroscedasticity!! Coeffici ents Standard Errort StatP-value Intercept Predicted Number of small businesses (Y) E-08

The Solution Put the dependent variable in terms of population and eliminate population and as an independent variable State Number of small businesses (Y) Population Growth Rate (X2) Populat ion Population /1000 Small Business/thousand pop. AL323, ,539,6 114,54071 AK63, , AZ396, ,952,0 835,95267 AR55, ,772,1 522,77220 CA3,320, ,990, 31235,99092 CO493, ,673,7 244, CN322, ,486,4 903,48693 DE68, , DC59, , FL1,633, ,736, 02717,73692

The Second Attempt SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations51 ANOVA dfSSMSF Significance F Regression Residual Total CoefficientsStandard Errort StatP-value Intercept Minimum Wage (X1) Population Growth Rate (X2) Per capita Income (X3) % change in real gross state product (X4)

The Results of the Second Attempt No Heteroscedasticity (YAY!) Lower R-Squared (went from.98 to.19)  Per Capita Income (X3) only significant independent variable 3 rd Attempt - Restricted Regression (that is, dropping all variables except X3)

The 3 rd Attempt (Restricted) SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations51 ANOVA dfSSMSFSignificance F Regression Residual Total Coefficients Standard Errort StatP-valueLower 95% Intercept Per capita Income (X3)

The F Test

The Results of the F-Test R2(ur)=.1982 n=51 k(ur)= 4 R2 (r)=.1743 n=51 k(r)=1 m= k(ur)-k(r) = 4-1=3 F = ( )/3 ( )/(51-4) F=.47 Not Significant At less than 10% Adding the 3 exp. var. does not significantly increase explanatory power

The Conclusions Drop Excess Variables for BEST regression Y= X Holding other variables constant, for every change in per capita income there is a positive.0012 change in the number of small businesses. Results not definitive Question of Reverse Causality (the states that adopted minimum wages were those states that were less expected to suffer adverse effects) Further Research is needed to find the factors that could influence small business success