Legal Minimum Wages and Employment Duration

Abstract

1. IntroductionThe effect of a legal minimum wage on employee turnover is an important consideration when evaluating the effectiveness of a minimum wage policy. If an increase in the minimum wage results in greater turnover, then firms' hiring costs are increased, and the direct benefit to workers who are paid the minimum wage may be lessened. A reduction in turnover, on the other hand, would mean more stability for employers and workers, though access to minimum wage jobs may be reduced for job seekers. Despite the recent proliferation of studies on the effects of legal minimum wages, their impact on turnover has received relatively little attention from economists. This may be due to the fact that much of the literature focuses on the teen labor where there is more churning than in the adult labor (Gardecki and Neumark 1998). The fact remains, however, that a significant proportion of workers hired at the minimum wage are adults, and the effects of the minimum wage onthe turnover hazard are understudied.1Standard economic theory suggests that a price floor such as a minimum wage results in fewer transactions and in rents for those suppliers who manage to sell. In the context of the labor market, this means workers in minimum wage jobs may be expected to receive rents and, therefore, may be less likely to quit. Another possible consequence of a minimum wage arises from imperfect information in the labor market combined with heterogeneity among workers and jobs. Prior to the start of an employment relationship, the worker does not know all the relevant aspects of the job and the employer does not know all the important characteristics of the worker. As a result, in the absence of a mandated minimum wage, job applicants may use wage offers to infer information about the nonpecuniary aspects of jobs, thereby facilitating the matching process. A binding minimum wage compresses the wage distribution so that a single wage is associated with a larger array of jobs. This means that the wage offer becomes a poor indicator of a job's nonwage characteristics, which leads to a higher proportion of poor matches and, consequently, more turnover.This paper uses data on young men and women in the 1988-1994 rounds of the National Longitudinal Survey of Youth (NLSY) to estimate the relationship between the minimum wage and the turnover hazard. The extent to which the minimum wage binds varies across states both because of differences in state laws and because of differences in wage levels across states. We exploit this variation to estimate turnover hazards as a function of the ratio of the nominal minimum wage to the state median wage. This variable measures the extent to which the minimum wage binds.We find some evidence that in states where the minimum wage is low relative to the state's median wage, men hired at the minimum wage have lower employee-initiated separation hazards than other low-wage workers. As the minimum wage rises relative to the prevailing median wage-that is, as the minimum wage becomes more binding-men hired at the minimum wage are increasingly likely to leave their jobs at any given duration. When the minimum wage is high relative to the median wage we find that men hired at the minimum wage have significantly higher employee-initiated separation hazards than other low-wage workers. We interpret these findings as evidence that while rents may accrue to minimum wage workers, the job matching process is undermined when the minimum wage binds. Our results apply to the men in our sample, but not to the women. Indeed, for women we find no connection between employment duration and the starting wage rate, though we do uncover some evidence that for women in low-wage jobs, employment duration is more elastic with respect to the presence of family-friendly fringe benefits than it is for men.The paper proceeds as follows. The next section explores the possible reasons minimum wages would affect turnover and discusses the existing empirical and theoretical research on this topic. …