Minimum Wage & Low-Skilled Workers: More Evidence

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Ready for yet another post on the minimum wage? From a recent paper in the Journal of Public Economics:

Our empirical analysis uses the fact that the 2007 through 2009 increases in the federal minimum wage were differentially binding across states. We base our “bound” designation on whether a state’s January 2008 minimum wage was below $6.55, rendering it bound by the entirety of the July 2009 increase. In the states we describe as “unbound,” the effective minimum wage rose, on average, by $1.42 between 2006 and 2012. In the states we describe as “bound,” the effective minimum wage rose, on average, by $2.04. Of the long-run differential, $0.58 took effect on July 24, 2009.

We use monthly, individual-level panel data from the 2008 panel of the Survey of Income and Program Participation (SIPP) to implement a combination of difference-in-differences and triple difference research designs. Because we use longitudinal employment records with data on wage rates, our implementation of these research designs has two key advantages. First, we are able to pinpoint “target” groups more intensely affected by minimum wage increases than the analysis groups in many studies. Second, we are able to pinpoint workers who were not directly affected yet, as evidenced by their wage rates, were only moderately more skilled than the “target” workers. We incorporate this second group of workers into our analysis as a “within-state control” group. That is, we use this group to construct a set of counterfactuals that proxy for otherwise unobserved shocks to the low-skilled labor market (pg. 53).

What do they find?:

  • “We find that increases in the minimum wage significantly reduced the employment of low-skilled workers. By the second year following the $7.25 minimum wage’s implementation, we estimate that targeted individuals’ employment rates had fallen by 6.6 percentage points (9%) more in bound states than in unbound states. The implied elasticity of our target group’s employment with respect to the minimum wage is −1, which is large within the context of the existing literature” (pg. 54).
  • The average monthly incomes of low-skilled individuals decreased. “Relative to low-skilled workers in unbound states, targeted individuals’ average monthly incomes fell by $90 over the first year and by an additional $50 over the following 2 years. While surprising at first glance, we show that these estimates can be straightforwardly explained through our estimated effects on employment, the likelihood of working without pay, and subsequent lost wage growth associated with lost experience. We estimate, for example, that targeted workers experienced a 5 percentage point decline in their medium-run probability of reaching earnings greater than $1500 per month” (pg. 54).

The researchers conclude,

We use data from the SIPP to investigate the effects of the 2007 to 2009 increases in the federal minimum wage on the employment and income trajectories of low-skilled workers. We estimate that the minimum wage increases enacted during the Great Recession had negative effects on affected individuals’ employment, income, and income growth. The SIPP data suggest that this period’s minimum wage increases reduced aggregate employment rates by at least half of a percentage point in states that were fully bound by the federal minimum wage’s rise from $5.15 to $7.25 (pg. 67).

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