The Minimum Wage and Natural Rate of Unemployment

The unemployment theory of Pissarides-Mortensen-Diamond is applied to the close-by geographic comparison identification strategy to analyze the effect of the minimum wage in New York State. The increase in the minimum wage in 2018 is estimated to raise the natural rate of unemployment almost 20 percent. The elasticity of the unemployment rate with respect to the minimum wage is 2.11 in New York City and 3.3 in the suburbs. To account for varying local labor market conditions, the minimum wage rise was phased in and geographically differentiated, which permits a within-state comparison. A labor market matching function and a Beveridge-type market tightness equation are estimated in an environment of low and falling unemployment rates, thus posing a strong natural experiment test of the hypothesis that the minimum wage causes negligible employment effects. It is estimated that the higher two of the three wage tiers caused a loss of about 39,000 jobs, which is in contrast to the dominant narrative of no effect when using the geographic comparison technique.