The Third Leg of the Recession?

Could the minimum wage hike of 2007 have pushed the U.S. economy into recession?

Let's begin by saying that we believe that Jim Hamilton is right in that the fallout in the housing and financial sectors alone weren't enough to produce the current recession and that it took the fallout from the oil shock to really sink the economy.

We also think that's true if the negative effects of the distress in the housing and financial sectors are combined with the negative outcomes of the most recent minimum wage hikes. You still wouldn't get to today's recession without the spike in oil prices and the corresponding change in the aggregate demand for oil or the industries it directly impacts.

But we do think that adding those negative effects of the 2007 minimum wage increase into the mix changes the timing of when the recession would have otherwise begun.

Here's the logic behind that thinking. Without the minimum wage hike of 2007, the peak of the previous business cycle, or rather, the point from which the NBER would declare a recession to have begun, would much more likely be placed in April 2008, as job losses attributable to the oil spike really took off beginning in May 2008. This impact may be seen in the chart to the left showing the change in the number of individuals counted as being unemployed for the Age 16-19 workforce from November 2006 through December 2008.

That's important because the NBER places a great deal of emphasis upon the level of payroll employment, both in dating the peak of the expansion phase of a business cycle and in dating the trough when economic contraction ends.

It may well be that the minimum wage hike of 2007, with its corresponding job losses and employer cutbacks in hours worked, was sufficient to cause the level of payroll employment to erode enough so that the start date of recession was pushed up to November-December 2007, some four to five months sooner than it might have done otherwise as the outcome of the oil shock.

And should that be the case, the increase of the federal minimum wage in 2007 would join with the bursting of the housing bubble and the fallout from the oil shock as the third leg forming the current recession.