The Wage and Employment Dynamics of Minimum Wage Workers

Abstract

This study uses panel data to examine the wage and employment dynamics of minimum wage workers. Compared with workers earning above the minimum, minimum wage workers are much more likely to be new entrants or to exit the labor market. Changes in industry, occupation, and access to job training are particularly important to improving the wages of minimum wage workers. Many minimum wage workers earn less than their potential wage temporarily because of nonwork circumstances that make higher-paying jobs less attractive. 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 1984-1985 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 SIPP. 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.