Minimum wages, on-the-job training, and wage growth.

• Author: Grossberg, Adam J.

1. Introduction

   It has long been recognized that firms may react to imposition of a legal minimum wage by reducing nonpecuniary attributes of jobs. Hashimoto (1982) and Leighton and Mincer (1981) suggest that, since human capital models predict workers will pay for at least part of any on-the-job training through reductions in wages, a binding minimum wage will reduce training opportunities. They present similar empirical tests of this hypothesis that, they argue, support the theory.

   Though routinely cited as examples of the effects of binding minimum wage constraints (e.g., Ehrenberg and Smith 1997), their tests are unconvincing for theoretical reasons and because of data limitations they faced. In fact, neither researcher had direct evidence on training. Instead, they inferred the amount of on-the-job training received by observing wage growth over a fixed period of time without accounting for the possibility that individuals may change jobs during the period of observation. Thus, the data they use do not allow one to be sure that wage growth within the firm is lower on jobs starting at the minimum wage. Lazear and Miller (1981) also attempt to measure the effects of minimum wages on wage growth. Like the other researchers, they expect that binding minimum wages may inhibit wage growth, though they do not insist that reduced training is the only explanation for the expected lower wage growth. based on their empirical work, they conclude that, "There are no obvious retardation effects of the minimum wage on wage growth" (p. 350). Comparing their empirical method and findings to those of Hashimoto (1982) and Leighton and Mincer (1981), they argue that, "The lack of robustness of results across studies suggests that the issue raised is one worthy of study, but one that has not been shown to be important conclusively" (p. 378).

   This paper uses data from the Employment Opportunities Pilot Project (EOPP) to examine directly the relationships between minimum wages, wage growth, and on-the-job training. We find that wage growth is slower on minimum wage jobs than on other jobs. However, the amount of training provided to workers on minimum wage jobs is not significantly different than the amounts of training other low-wage workers receive. Thus, the EOPP data indicate that, while workers on minimum wage jobs do experience slower wage growth than other low-wage workers, this outcome is not due to reduced on-the-job training.

   The remainder of the paper is organized as follows. The next section provides a critical review of the research on minimum wage effects on wage growth and training. Section 3 discusses the EOPP data and defines the variables used in our empirical procedures. Section 4 presents the results of our estimation, and the final section presents our conclusions and suggestions for further research.

2. Previous Research

   As mentioned above, there are three existing studies of the effects of minimum wages on wage growth - Hashimoto (1982), Leighton and Mincer (1981), and Lazear and Miller (1981).(1) All three use samples of young men from the 1960s and/or early 1970s. Hashimoto uses the National Longitudinal Survey (NLS), Lazear and Miller use both the NLS and the National Longitudinal Study of the High School Class of 1972, and Leighton and Mincer use both the NLS and the Panel Study of Income Dynamics (PSID).

   Hashimoto (1982) and Leighton and Mincer (1981) explicitly attempt to measure the effects of minimum wages on training. Their method - using wage growth to proxy the amount of on-the-job training - has been used by other researchers studying the effects of training (Lazear 1976; Landes 1977). While this method is an ingenious attempt to get around data limitations regarding on-the-job training, there are several shortcomings to this research. First, human capital theory suggests that the rate of wage growth for a given amount of training depends on the proportion of that training that is specific and on the relative bargaining power of the employer and employee (Hashimoto 1981). Thus, different rates of wage growth do not necessarily imply different amounts of on-the-job training. Moreover, several theories of compensation suggest that wage growth may be independent of increases in productivity. For example, Salop and Salop (1976) develop an adverse selection model, which suggests that firms will offer back-loaded compensation packages to attract workers with lower turnover propensities. Also, principal-agent models argue that inclined earnings profiles provide incentives for greater employee effort on the job (Lazear 1979). As Lazear and Miller (1981) point out, even if there is convincing evidence that wage growth is retarded by minimum wages, it may not be because of reduced investments in human capital. Instead, "the current retardation in wage growth may reflect minor shifting of the age-earnings profile, paying out more of lifetime wealth to young workers" (p. 353). Card and Krueger (1995) present evidence to this effect using data from surveys of fast food restaurants in Texas. They show that these employers neither delayed the time of the first raise nor reduced the size of the raise in response to increases in the minimum wage.

   Finally, in both the Hashimoto (1982) and Leighton and Mincer (1981) studies, wage growth is measured as the change in wages observed over the same fixed calendar time period for all individuals. Thus, wage growth is observed at potentially very different points in each person's tenure and, in fact, may represent wages at two different jobs. Since human capital theory suggests that most training will occur at or near the beginning of a job, the best test of the training hypothesis would be to observe workers at the start of employment spells. Because the EOPP includes direct and relatively detailed measures of on-the-job training, we are able to avoid the disadvantages of the indirect method described above.

3. Data

   The EOPP is a two-wave survey of approximately 3000 firms conducted in 1980 and 1982. This study uses the 1982 data. The firms in the EOPP are concentrated in the South and Midwest(2) and are predominately small and low-wage employers. Given the well-known differences in pay and personnel policies between large and small employers, one should be circumspect in generalizing the results presented in this paper.(3) The survey directs the employer to consider "the last new employee your company hired prior to August 1981" and asks questions dealing with both "that person and the position he or she was hired to fill." Wage information includes the current wage of the employee (or, if the worker has left the firm, the wage at the time of the separation) and the starting wage. Thus, we are able to measure wage growth within the firm precisely. Moreover, we are able to determine whether the employee started at the minimum wage.(4) The dummy variable MINIMUM WAGE is equal to one if the individual started at the minimum wage. Also, to differentiate minimum wage jobs from other low-paying jobs, we include two other starting wage dummy variables. BELOW MINIMUM WAGE is equal to one if the starting wage is less than the minimum wage, and JUST ABOVE MINIMUM WAGE is equal to one if the starting wage is no more than 25 cents above the minimum wage.(5) Table 1, which presents tabulations of starting wages by occupation and industry, shows that both minimum wage and other low-wage jobs are concentrated in the service and clerical occupations and in the service and retail industries.

   The EOPP provides relatively detailed information regarding on-the-job training. Specifically, we know, during the first three months the number of hours management, supervisors, and coworkers devote to formal and informal training of the newly hired worker. TRAINING INTENSITY is the sum of the first three months of training activities.(6) Since not all workers [TABULAR DATA FOR TABLE 1 OMITTED] in our sample have completed...