The wage and employment dynamics of minimum wage workers.

• Author: Even, William E.

1. Introduction

   An important issue in the policy debate over the merits of increasing the minimum wage is the duration of minimum wage employment. At one extreme, if minimum wage workers were entry-level workers who quickly accumulate skills that push their wages above the minimum, a minimum wage hike would have a relatively short term effect on any given worker's income. On the other extreme, if all minimum wage workers find themselves in "dead end" jobs that provide no opportunities for wage growth, a hike in the minimum wage could have long-term effects on their incomes.

   There are several studies that provide insights into the wage growth of minimum wage workers. Using 1984-4985 data from the Survey of Income and Program Participation (SIPP), Smith and Vavrichek (1992) show that over 60% of workers earning the minimum wage in 1984 were earning more than the minimum wage one year later. For those with wage gains, the typical wage increase was approximately 20%. Long (1999) finds similar results using the 1992-1993 SJPP. Using National Longitudinal Survey data from the early 1980s, Schiller (1994) finds that, after entering a minimum wage job, only 15% of continuing workers were still earning the minimum wage after three years.

   While most minimum wage workers realize sufficient wage growth to rise above the minimum wage relatively quickly, a significant minority does not. The existing literature provides some insight into which workers are most likely to be "stuck" at the minimum. A fairly consistent finding is that less educated workers and part-time workers are less likely to rise above the minimum. However, the understanding of the processes at work in determining the extent of wage growth is limited.

   Perhaps the most-studied determinant of wage growth for minimum wage workers is the extent of on-the-job training. Hashimoto (1982) argues that a hike in the minimum wage could reduce the amount of training workers receive and thereby reduce their subsequent wage growth. More recently, however, Acemoglu and Pischke (1999) argue that, in noncompetitive labor markets, a minimum wage hike could actually increase employer-provided training. Empirical evidence on the effects of a minimum wage hike on training is mixed. (1)

   This study uses 20 years of short panel data sets on minimum wage workers to improve the understanding of the wage and employment dynamics of minimum wage workers in several respects. First, it examines the degree of labor market attachment of minimum wage workers by computing transition rates into and out of minimum wage employment. The transitions could be the result of entry or exit from the labor market or from wage increases or decreases. The evidence reveals that minimum wage employment is short lived for many workers. Second, among minimum wage workers who continue employment, we explore alternative explanations for wage growth. Our study examines the importance of job training, job switching, and changes in nonwork conditions that might lead workers to accept jobs that are not the best match for their skills. We find that switching jobs is vital to significant wage growth among minimum wage workers, particularly for young workers who find themselves in "low-training" occupations. We also demonstrate t hat finishing school improves wage growth, partly by increasing the chance that a worker makes a job change. Reenrolling in school has the opposite effect.

2. Data

   The monthly Current Population Survey (CPS) Outgoing Rotation Group (ORG) files from January 1979 through December 1999 allow construction of a series of 20 separate two-year panel data sets on minimum wage workers. The CPS is structured so that a given household is sampled four consecutive months, not interviewed for eight months, and then interviewed for another four consecutive months. When the household leaves the sample at the end of the first or last four-month period of interviews, it is part of an ORG. The matched ORG files provide information on a person at the beginning and end of a one-year period. (2)

   We construct two samples of minimum wage workers from the CPS-ORG files. (3) The first includes all workers who earned the minimum wage in the reference week of the first year of the two-year panels, regardless of their earnings or employment status in the second year. This sample provides information on the wage growth, job change, and employment behavior of minimum wage workers. The second data set includes all workers who earned the minimum wage in the second year of the two-year panels, regardless of their earnings or employment status in the first year. These data allow us to investigate the path into minimum wage employment.

   In addition to the minimum wage samples, we create a comparison sample that includes workers earning above the minimum wage in the first year of the panels.

   Table 1 provides sample means for some key demographic characteristics for workers earning the minimum wage in the first year of the panels. The first-period minimum wage sample has 33,520 workers and the comparison sample 923,752 workers earning above the minimum wage.

   Compared to workers earning above the minimum wage, workers in minimum wage jobs are younger and less educated and work fewer hours. Relative to workers earning above the minimum, minimum wage workers are eight times more likely to be under age 21, nearly four times as likely to have no high school degree, and six times more likely to work less than 20 hours per week.

3. Transitions to and from Minimum Wage Employment

   In this section, we examine transitions into and out of minimum wage employment. In Table 2, the frequencies of the four transition rates into and out of minimum wage employment are listed. The transitions into minimum wage employment are from nonemployment or from employment that paid a wage at, above, or below the minimum wage. The transitions out of minimum wage employment are to no employment and from minimum wage employment to employment paying at, above, or below the minimum wage.

   Minimum wage jobs are often thought of as "entry-level" jobs. The evidence in our data supports this view. Among the workers earning the minimum wage in the second year of our panels, 39.4% were not employed in the prior year. Among the comparison sample of people earning above the minimum wage in the second period of the sample, only 8.5% reported no employment in the prior year. Hence, minimum wage workers are approximately five times more likely to be entrants from a spell of nonemployment than those earning above the minimum. Among the minimum wage workers who were not employed in the prior year, the most common reasons reported for nonemployment were that they were enrolled in school (44%), were unemployed (24%), or were doing housework (16%).

   While a large share of minimum wage workers is beginning a new spell of employment, the majority (about 60%) is not. Approximately one-quarter (22.6%) were minimum wage employees in the prior year, and another one-quarter (27.8%) were earning above the minimum wage. Among people working in both periods, this implies that the chance of earning above the minimum wage in the prior year is nearly one-half. Hence, while several studies emphasize that the majority of minimum wage workers rises above the minimum in a short period of time, it is also true that a substantial share of minimum wage workers previously earned above the minimum wage.

   Approximately 10% of the workers earning the minimum wage in the second year of the panels were earning less than minimum in the prior year. One explanation for workers earning less than the minimum wage is that minimum wage laws do not apply to all employees. Under current legislation, workers under the age of 20 can be paid a "subminimum" wage for their first 90 days of employment. There are also exemptions for disabled workers, full-time students, and students enrolled in vocational education programs. Workers who receive tip income (e.g., waiters and waitresses) can currently be paid as little as $2.13 an hour if their reported tip income is sufficient to bring their total hourly income to $5.15. Consistent with these exemptions is the fact that, among workers earning the minimum wage in the second year of the panels, the waiter and waitress occupations had the greatest fraction of workers being paid below the minimum in the prior year. (4) Also, minimum wage workers under the age of 21 are more likely to have been paid less than the minimum in the prior year.

   Minimum wage employment is short lived for the vast majority of workers. Among workers earning the minimum wage in the first year of the panels, only 21.6% of minimum wage workers are still earning the minimum by the end of the year. Nearly one-half (47.2%) of the first-year minimum wage workers report rising above the minimum wage by the end of the year. A small percentage (7.3%) remains employed but earns a wage below the minimum in the second year, and approximately one-fourth (23.9%) leave employment by the second year. The fraction of workers leaving employment by the second year is only one-third as high (8.6%) in the comparison sample of workers earning above the minimum wage in the first period.

4. Determinants of Wage Growth

   In this section, we examine the distribution of wage growth for people who are earning the minimum wage in the first year of the CPS-ORG panels. While the earlier analysis reveals that the majority of workers continuing employment from one year to the next will rise above the minimum wage, the extent of wage growth varies dramatically across minimum wage workers, the type of job in which they start, and their propensity to change employers, occupation, and industry. We also compare the wage growth of minimum wage workers with a comparison sample of workers earning above the minimum wage in the first year of the panels.

   Table 3 provides a comparison of real wage growth of minimum wage workers with the...