Who Minimum Wage Increases Bite: An Analysis Using Monthly Data from the SIPP and the CPS.

• Author: Burkhauser, Richard V.

Richard V. Burkhauser [*]

Kenneth A. Couch [+]

David C. Wittenburg [++]

We use monthly data from the Survey of Income and Program Participation and the Current Population Survey to estimate the effect of the minimum wage. Minimum wage increases significantly reduce the employment of the most vulnerable groups in the working-age population--young adults without a high school degree (aged 20-24), young black adults and teenagers (aged 16-24), and teenagers (aged 16-19). While we also find that minimum wage increases significantly reduce the overall employment of young adults and teenagers, these more vulnerable subpopulations are even more adversely affected.

1. Introduction

   Neoclassical competitive models of firm behavior predict that wage increases reduce the quantity of labor demanded by firms and, holding the wage rate constant, that the least valued workers are the first fired or the last hired. [1] Minimum wage legislation exogenously increases the price of labor, and data from periods when the minimum wage changes can be used to empirically test its effect on the employment of vulnerable workers. However, a new body of research using such data suggests that minimum wage increases do not reduce employment and may even increase it (Card 1992a, b; Katz and Krueger 1992; Card, Katz, and Krueger 1994; Card and Krueger 1994, 1995). From a theoretical perspective, this "new economics of the minimum wage" has been characterized as an assault on the law of demand (Ehrenberg 1995).

   If modest increases in the minimum wage have no employment effects, then the appropriateness of this method in helping the working poor is strictly a distributional issue. [2] However, if minimum wage increases reduce employment and if the jobs lost are concentrated among the vulnerable groups the policy claims to assist, then policy makers must consider this unintended consequence. Hence, estimating the elasticity of employment with respect to minimum wage increases is more than simply an empirical test of economic theory.

   In this paper, we use monthly data from the Survey of Income and Program Participation (SIPP) and the Current Population Survey (CPS) to examine the effect of raising the minimum wage on employment. In contrast to much of the new minimum wage literature, we find that minimum wage increases significantly reduce employment. Moreover, we find that the elasticity of demand for labor with respect to increases in the minimum wage is greatest for the most vulnerable groups in the working-age population--young adults who have low levels of education, young black adults and teenagers, and teenagers. We also find that minimum wage increases reduce the overall employment of young adults and teenagers, though the estimated elasticities are smaller:

2. The New Economics of the Minimum Wage

   The new minimum wage literature is dominated by studies that find that minimum wage increases have an insignificant or, in some cases, a positive and significant effect on the employment of young adults and teenagers (aged 16-24) or on other subgroups within that population (Card 1992a, b; Katz and Krueger 1992; Card, Katz, and Krueger 1994; Card and Krueger 1994, 1995). Most of these studies have now generated replies arguing that raising the minimum wage significantly decreases employment in these populations (Neumark and Wascher 1992, 1994, 1996, in press; Deere, Murphy, and Welch 1995; Taylor and Kim 1995; Burkhauser, Couch, and Wittenburg in press).

   Because these new studies of the minimum wage vary widely in their techniques, we focus our discussion on those that use CPS data and employ an estimation strategy related to the one we use in this paper (Neumark and Wascher 1992, 1994, 1996; Card, Katz, and Krueger 1994; Card and Krueger 1995; Deere, Murphy, and Welch 1995; Burkhauser, Couch, and Wittenburg in press). [3] Specifically, we review studies that use a pooled, time-series, cross-sectional approach to estimate the employment effects of minimum wage increases on vulnerable groups, such as teenagers, with CPS data.

   These studies use variation across states and over time in the minimum wage to identify employment changes. The typical reduced-form equation is

   [E.sub.it] = [[alpha].sub.0] + [MW.sub.it][beta] + [X.sub.it][gamma] + [T.sub.t][tau] + [S.sub.i][delta] + [[epsilon].sub.it], (1)

   where [E.sub.it] is the ratio of employed teenagers to the teenage population, [MW.sub.it] is a variable representing the minimum wage, [X.sub.it] is a set of explanatory variables, [T.sub.t] is a set of year dummy variables, and [S.sub.i] is a set of state dummy variables. The key coefficient of interest is [beta], which represents the effect of minimum wage increases on employment.

   Neumark and Wascher (1992) estimate the effect of the minimum wage using the Kaitz index to measure minimum wage increases and find that this variable has a negative and significant effect on employment. [4] Based on the estimated coefficient on the Kaitz index, they conclude that the employment effect of the minimum wage on teenagers and on young adults and teenagers is negative and significant. They report elasticities ranging from -0.1 to -0.2 for teenagers and from -0.15 to -0.2 for young adults and teenagers. While the sign of the elasticities is consistent with the view that minimum wage increases cause employment decreases, they do not find consistent evidence that the effects are larger among younger, and presumably less skilled, teenage workers. They note the possible theoretical inconsistency of this result and discuss it at some length in later work (Neumark and Wascher 1996).

   In an interchange with Neumark and Wascher (1994), Card, Katz, and Krueger (1994) (and later, Card and Krueger 1995) argue that the variables Neumark and Wascher (1992) use, particularly the Kaitz index, are inappropriate and drive their results. As an alternative to the Kaitz index, which Card, Katz, and Krueger (1994) argue is a flawed measure of the effect of minimum wage increases, they use the logarithm of the higher of the state or the federal minimum wage. [5] When Neumark and Wascher (1994) use this same model, they also find that minimum wage increases have no significant effect on teenage employment. Card and Krueger (1995) expand their argument regarding the misspecification of the Neumark and Wascher (1992) model and once again find no evidence that increases in the minimum wage reduce teenage employment. In some specifications, they actually find the effect on teenage employment is significantly positive.

   Deere, Murphy, and Welch (1995) also use pooled repeated cross-sectional data from the CPS to estimate the impact of minimum wage increases, but their specification differs in some important ways from the studies discussed above. Deere, Murphy, and Welch (1995) estimate the effect of minimum wage increases over the period from 1985 through 1993. They construct intervals of monthly data from 1985 through 1993 that begin on the first day of April of each year and end on the last day of March during the following year. For each interval, they create annual averages of variables. These intervals correspond with the federal minimum wage increases that occurred in April 1990 and April 1991. Unlike the studies discussed above, they ignore the effects of state minimum wage increases and only focus on federal changes.

   Another important difference between the Deere, Murphy, and Welch (1995) approach and others in this literature is that their specification excludes year effects. The minimum wage variables they use are year dummies that capture the effect of the 1990 and 1991 federal minimum wage increases. The first minimum wage dummy variable equals one in the period that the minimum wage was $3.80 per hour (from April 1990 to March 1991). The second minimum wage dummy variable equals one in the period that the minimum wage was $4.25 (April 1991-March 1993). Over the remaining periods in their data, the minimum wage was $3.35, and those year effects are captured in the constant. Hence, the two key dummy variables of interest measure the effect of raising the minimum wage relative to $3.35. [6]

   They estimate the effect of the minimum wage on the employment of six demographic groups. They report employment declines of -4.8, -6.6, and -7.7%, respectively, for teenagers (aged 15-19) who are male, female, and black and employment declines of -1.5, -2.5, and -4.4%, respectively, for high school dropouts (aged 20-54) who are male, female, and black as a result of the increase in the minimum wage from $3.35 to $3.80 per hour in 1991. Although they do not calculate elasticities in their work, the implied elasticities given the 13.4% minimum wage increase from $3.35 to $3.80 are -0.37, -0.49, and -0.56, respectively, for teenagers who are male, female, and black and -0.12, -0.19, and -0.32, respectively, for high school dropouts who are male, female, and black.

   Burkhauser, Couch, and Wittenburg (in press) examine each of the studies discussed above and conclude that the main difference between the Card and Krueger (1995) specification (and other papers in the literature based on Eqn. 1) and the Deere, Murphy, and Welch (1995) specification is in the interpretation of the year effects. Deere, Murphy, and Welch (1995) use a set of year dummies to capture the effects of federal minimum wage increases. In contrast, Card and Krueger (1995) include a minimum wage variable and individual year controls in their analysis. Conceptually, Card and Krueger (1995) attempt to distinguish between individual year effects and minimum wage increases, while Deere, Murphy, and Welch (1995) directly interpret the year variables as the federal minimum wage effect.

   Burkhauser, Couch, and Wittenburg (in press) show that all of the variation associated with federal minimum wage increases is eliminated when year effects are included in Equation 1. This occurs because federal minimum wage rates are raised in...