The impact of minimum wages on job training: an empirical exploration with establishment data.

• Author: Fairris, David

1. Introduction

   Human capital theory suggests that workers must contribute toward investments in job training and that one way in which they might do so is through reduced wages (Becker 1964). Minimum wage laws might be expected to reduce on-the-job training, then, to the extent they prevent workers from accepting lower wages (Rosen 1972). (1) Existing empirical studies of the relationship between minimum wages and job training yield divergent results. However, most of these studies utilize worker survey data that lack detailed measures of job training and establishment-level variables that are important determinants of training. In this paper, we overcome these problems by using an establishment data set that possesses both good measures of job training and good establishment-level control variables. The decision to offer training is ultimately made by the firm. Even if workers pay for some or all of their training through the acceptance of lower wages, their decision to undertake training is made largely by the choice of which firm to join. Thus, we believe the firm is the logical unit of analysis for exploring the issue of job training and minimum wages.

   In the first section of the paper, we review the empirical literature on the impact of minimum wages on job training. The second and third sections discuss the empirical specification and data to be used in the analysis. The fourth section discusses the empirical results. We find little evidence linking minimum wages to reductions in the percentage of the establishment workforce receiving training and absolutely no evidence linking them to reduced hours of training per trained worker.

2. Review of the Literature

   The empirical literature on the impact of minimum wages on job training is not voluminous. The earliest efforts focused primarily on wage growth as a proxy for training, producing mixed results. Two studies found age-earnings profiles to be significantly flatter for workers whose wages were bound to the minimum (Leighton and Mincer 1981; Hashimoto 1982), while a third study (Lazear and Miller 1981) found no statistically significant relationship between minimum wages and the slope of age-earnings profiles. Recent evidence has cast serious doubt on the validity of this entire approach.

   Grossberg and Sicilian (1999) find that while minimum wages are indeed associated with reduced wage growth, they appear to have no significant impact on job training. Acemoglu and Pischke (1999) offer an insightful interpretation of these results. They claim that minimum wages eliminate part of the lower tail of the wage distribution, bunching workers around the wage minimum and thereby lowering the age-earnings profile quite independently of their impact on training. Thus, it seems clear that valid tests of the relationship between minimum wages and job training must be conducted with information on worker training and not simply wage growth.

   There are only five empirical studies offering evidence on the impact of minimum wages directly on job training. The basic approach is to regress a measure of job training on a set of explanatory variables and a variable capturing the degree to which minimum wages act as a constraint on wage reductions. The hypothesis is that the more binding the minimum wage constraint, the less job training the worker and firm will undertake. There exist two levels of analysis in the literature, one operating at the state or regional level and the other operating at the level of the individual worker. Both have flaws.

   Leighton and Mincer (1981) and Neumark and Wascher (2001) exploit variation in state wage minimums to explore the relationship between minimum wages and training. Both use data on individual workers, but their measures of the minimum wage exist at the state level. For example, Neumark and Wascher use the extent to which the state minimum wage exceeded the federal minimum over the previous three years. The results of both studies suggest that the higher the state minimum wage, the less likely it is that workers will receive on-the-job training.

   However, there are several econometric problems plaguing this approach. First, these studies use state-level measures of minimum wages with individual-level data. Because the minimum wage variable exists at a higher level of aggregation than the unit of observation, the estimated standard error may understate the inaccuracy of the estimated coefficient (Moulton 1986), leading the researcher to perhaps mistakenly conclude that minimum wages reduce training when in fact they do not. A second concern is that the minimum wage variable may capture unobserved state effects on training that are correlated with minimum wages. (2)

   Another approach to analyzing the impact of minimum wages on job training utilizes individual-level data only. Schiller (1994) and Grossberg and Sicilian (1999) adopt measures of the degree to which wages are bound by the minimum wage that vary at the level of the individual worker. Grossberg and Sicilian, for example, compare the impact on training of workers who are paid the minimum wage with those who earn both below the minimum and slightly more than the minimum. Schiller finds evidence that minimum wages reduce training, whereas Grossberg and Sicilian do not.

   The problem with using minimum wage measures that vary at the level of the individual worker is that omitted determinants of training are likely to be correlated with the wage, which itself is used to assess the degree to which the minimum wage is binding. The estimated impact of minimum wages on training may well be biased as a result, the nature of the bias depending on the exact specification employed. For example, while it is possible that binding minimum wages reduce training, it is most probable that job training raises wages and thereby makes workers' wages less bound by the minimum wage. The wage component of the minimum wage measure is, therefore, likely to be correlated with left-out determinants of training, biasing the estimated impact of minimum wages on training. And here, the bias is likely to be upward. (3)

   Acemoglu and Pischke (1999) conduct a first-difference analysis of the individual worker training equation using panel data. Fixed components of the error term will be eliminated in this approach, thereby reducing the possible bias found in cross-sectional levels regressions. Acemoglu and Pischke find no evidence of a training effect of minimum wages in their results. However, their measure of on-the-job training is also a particularly blunt one--namely, the change in whether the worker received job training at the current firm.

   Indeed, poor measures of job training plague this literature more generally. Probably the most common measure of training is a dichotomous variable indicating its existence or lack thereof. An important exception is the Grossberg and Sicilian (1999) study, which utilizes data from establishments. The job training information they use refers to the amount of job training given to the last-hired worker. Specifically, their training measure is the number of hours devoted to training over the first three months of tenure of the most recently hired worker. However, Grossberg and Sicilian are unable to account for many important establishment-level determinants of training.

   In this paper, we utilize a unique data set on establishments that offers an interesting alternative to the data used in most of the existing literature. First, we have good measures of job training--the percentage of the workforce receiving training and the average hours of training conditional on receiving training. Second, we possess good measures of a number of establishment-level control variables, including labor turnover and employee fringe benefits levels, that are absent from most existing studies.

   Efficiency wage theory suggests that firms may reduce costly turnover by paying higher wages (Akerlof and Yellen 1986). Thus, wages (and therefore the extent to which wages are bound by the minimum wage) may be negatively correlated with turnover. But turnover reduction may also be a prerequisite for on-the-job training (Prendergast 1993) and so an important determinant in the training equation. If turnover is related to both the measure of the minimum wage and to job training in the way we have claimed, the failure to control for turnover may bias upward the estimated impact of minimum wages on training. It is important to control for fringe benefits in an analysis of the minimum wage impact on training because training could be financed by accepting lower benefits levels rather than by accepting lower wages.

   Economies of scale in training and a host of other considerations suggest to us that job training is likely to exist as a matter of policy at the establishment or firm level, thereby making the establishment the appropriate unit of analysis for any investigation of job training. Workers receive training by virtue of the firm to which they attach themselves. Focusing on the determinants of training solely from the worker's point of view might make sense in a world of costless mobility, where the public-good nature of training poses no real problem for individual choice (Tiebout 1956). However, the very mention of job training typically suggests a context in which there is greater attachment between worker and firm than ideal microeconomics models posit and therefore in which firm policy and firm-level variables matter.

3. Econometric Specification

   The empirical approach we take resembles that of the existing literature, but we use two different measures of job training and incorporate a wide range of establishment-level control variables into the analysis. We begin with a simple training equation of the following form:

   (1) [t.sub.js] = [alpha] + [x'.sub.js][beta] + [m.sub.s][psi] + [[epsilon].sub.js]

   where [t.sub.js] is a measure of the job training provided by establishment j in state...