More on recent evidence on the effects of minimum wages in the United States

David Neumark,William Wascher,Jm Ian Salas

doi:10.1186/2193-9004-3-24

Abstract

Abstract A central issue in estimating the employment effects of minimum wages is the appropriate comparison group for states (or other regions) that adopt or increase the minimum wage. In recent research, Dube et al. (Rev Econ Stat 92:945-964, 2010) and Allegretto et al. (Ind Relat 50:205-240, 2011) argue that past U.S. research is flawed because it does not restrict comparison areas to those that are geographically proximate and fails to control for changes in low-skill labor markets that are correlated with minimum wage increases. They argue that using “local controls” establishes that higher minimum wages do not reduce employment of less-skilled workers. In Neumark et al. (Ind Labor Relat Rev 67:608-648, 2014), we present evidence that their methods fail to isolate more reliable identifying information and lead to incorrect conclusions. Moreover, for subsets of treatment groups where the identifying variation they use is supported by the data, the evidence is consistent with past findings of disemployment effects. Allegretto SA, Dube A, Reich M, Zipperer B (2013a) Credible research designs for minimum wage studies. IZA Discussion Paper No. 7638, Bonn, Germany have challenged our conclusions, continuing the debate regarding some key issues regarding choosing comparison groups for estimating minimum wage effects. We explain these issues and evaluate the evidence. In general, we find little basis for their analyses and conclusions and argue that the best evidence still points to job loss from minimum wages for very low-skilled workers – in particular, for teens. JEL codes J23; J38

Highlights

Recent debate on the employment effects of minimum wages has focused on the proper specification of the control groups for estimating the effects of minimum wages
Our original paper (NSW, 2014) faulted two previous analyses by authors of ADRZ implementing research designs that change the comparison groups used in estimating the employment effects of minimum wages (ADR, 2011; DLR, 2010)
Focusing on the key innovation in these papers – the use of geographically proximate areas as local controls – we concluded that while these research designs have some intuitive appeal a priori, the key identifying assumption underlying them – which generated the finding of no disemployment effects – was not supported by the data

Summary

Introduction

Recent debate on the employment effects of minimum wages has focused on the proper specification of the control groups for estimating the effects of minimum wages. ADRZ present a synthetic control analysis that does not use minimum wage increases to identify treatment observations, but randomly assigns a placebo minimum wage law to an individual state in a time period and calculates the synthetic control donor weights for all remaining states They suggest that this approach is informative because it “dispenses with the shortcomings” Issue 2: Pre-trends as evidence of spatial heterogeneity ADRZ assert that the standard panel data model with only fixed state and year effects exhibits spurious pre-trends, with large negative leading effects of minimum wages up to three years prior to minimum wage increases (their Figures 6 and B1) They argue that the models with division × quarter fixed effects and state-specific linear trends do not exhibit these pre-trends. The estimates shown are the cumulative sum of these, beginning at a lead of 12

With Leads Only

Standard Panel Data Model

Include state- and spell-specific recession dummy variables

Findings

Conclusions

Discussion