The Response of Hours of Work to Increases in the Minimum Wage.

• Author: Couch, Kenneth A.

Kenneth A. Couch [*]

David C. Wittenburg [+]

This paper examines the effect of minimum wage increases on the hours of work of teenagers (ages 16 to 19) using monthly data from the Current Population Survey. Our findings are consistent with the prediction from neoclassical theory that minimum wage increases have a negative effect on labor demand. However, the estimates we provide here for the elasticity of hours of teen labor demanded with respect to the minimum wage suggest that alternative estimates based on aggregate employment consistently understate the total impact of minimum wage increases on teenage labor utilization.

1. Introduction

   While raising the minimum wage has long been thought to be associated with a reduction in the utilization of labor by profit-maximizing firms, measures of the responsiveness of labor demand other than employment to changes in the minimum wage are seldom examined. The most recent literature on the impact of minimum wage increases focuses almost exclusively on its impact on overall employment (Neumark and Wascher 1992, 1994; Card and Krueger 1995; Deere, Murphy, and Welch 1995; Burkhauser, Couch, and Wittenburg 2000a, b). Well-known surveys point out the potential importance of alternative measures of labor utilization (Hamermesh 1993, p. 62). In this paper, we examine the impact of minimum wage increases on the number of hours worked by teenagers using an estimation strategy from our previous research (Burkhauser, Couch, and Wittenburg 2000a, b).

   The primary reason for examining hours is that changes in aggregate employment might obscure an increase or decrease in labor demand as measured by hours of work. Consequently, the elasticities of labor demand estimated from employment data might provide a biased depiction of the overall responsiveness of labor utilization to changes in the minimum wage. Whether such a bias exists, along with its direction and magnitude, is the topic of this paper.

   In the remaining sections, we first highlight results from the recent literature on the relation between the minimum wage and employment. Then we discuss the data and estimation strategy used to calculate the impact of minimum wage increases on hours. Next, we present our empirical results and compare them to estimates of the effect of minimum wage increases on employment from our previous research. We show that hours of work are reduced proportionately more than employment when the minimum wage is increased, and accordingly, we conclude that elasticity measures based on employment data understate the total responsiveness of labor demand as measured by hours of work to changes in the minimum wage.

2. Literature Review

   We confine our literature review to studies that examine the impact of minimum wage increases on state teenage employment levels using data from the Current Population Survey (CPS) (Neumark and Wascher 1992, 1994; Card, Katz, and Krueger 1994; Card and Krueger 1995; Deere, Murphy, and Welch 1995; Burkhauser, Couch, and Wittenburg 2000a, b). [1] A standard equation from this literature is:

   [E.sub.it] = [[alpha].sub.0] + [MW.sub.it]B + [X.sub.it][[chi].sub.n] + [T.sub.t] [t.sub.t] + [S.sub.i][s.sub.i] + [[epsilon].sub.it] (1)

   where [E.sub.it] is the employment to population ratio of the group of interest in state i in year t; [MW.sub.it] is a variable representing the minimum wage in state i in year t; [X.sub.it] is a set of explanatory variables; [T.sub.t] is a set of dichotomous time variables; and [S.sub.i], is a set of dichotomous locational (state) variables. The key coefficient of interest is B, which represents the effect of minimum wage increases on employment.

   Similar to other papers in the minimum wage literature, the central papers using this estimation strategy draw conflicting conclusions. [2] Neumark and Wascher (1992) were the first to use the model described above and found that the impact of minimum wage increases on the employment of teenagers was negative and significant. Card, Katz, and Krueger (1994) and Card and Krueger (1995) reviewed Neumark and Wascher's analysis and found that when a more direct measure of the minimum wage was used, the impact of minimum wage increases on employment was insignificant, and, in some cases, positive. Finally, Deere, Murphy, and Welch (1995) found a negative and significant effect of minimum wage increases on employment using a nonlinear measure of the minimum wage, though, unlike the studies above, they excluded year effects from their specification.

   Recently, we reviewed the above studies and showed that the estimates are very sensitive to the specification of year effects (Burkhauser, Couch, and Wittenburg 2000a, b). We demonstrated empirically that when year effects are included, all of the variation that originates from federal increases is eliminated from the variable that represents levels of the minimum wage across locations. [3] Hence, specifications that include year effects only capture the small amount of variation...