Who Minimum Wage Increases Bite: An Analysis Using Monthly Data from the SIPP and the CPS

Abstract

1. Introduction Neoclassical competitive models of firm behavior predict that increases reduce the quantity of labor demanded by firms and, holding the rate constant, that the least valued workers are the first fired or the last hired.' Minimum legislation exogenously increases the price of labor, and data from periods when the minimum changes can be used to empirically test its effect on the employment of vulnerable workers. However, a body of research using such data suggests that minimum increases do not reduce employment and may even increase it (Card 1992a, b; Katz and Krueger 1992; Card, Katz, and Krueger 1994; Card and Krueger 1994, 1995). From a theoretical perspective, this new economics of the minimum wage has been characterized as an assault on the law of demand (Ehrenberg 1995). If modest increases in the minimum have no employment effects, then the appropriateness of this method in helping the working poor is strictly a distributional issue.2 However, if minimum increases reduce employment and if the jobs lost are concentrated among the vulnerable groups the policy claims to assist, then policy makers must consider this unintended consequence. Hence, estimating the elasticity of employment with respect to minimum increases is more than simply an empirical test of economic theory. In this paper, we use monthly data from the Survey of Income and Program Participation (SIPP) and the Current Population Survey (CPS) to examine the effect of raising the minimum on employment. In contrast to much of the minimum literature, we find that minimum increases significantly reduce employment. Moreover, we find that the elasticity of demand for labor with respect to increases in the minimum is greatest for the most vulnerable groups in the working-age population-young adults who have low levels of education, young black adults and teenagers, and teenagers. We also find that minimum increases reduce the overall employment of young adults and teenagers, though the estimated elasticities are smaller. 2. The New Economics of the Minimum Wage The minimum literature is dominated by studies that find that minimum increases have an insignificant or, in some cases, a positive and significant effect on the employment of young adults and teenagers (aged 16-24) or on other subgroups within that population (Card 1992a, b; Katz and Krueger 1992; Card, Katz, and Krueger 1994; Card and Krueger 1994, 1995). Most of these studies have now generated replies arguing that raising the minimum significantly decreases employment in these populations (Neumark and Wascher 1992, 1994, 1996, in press; Deere, Murphy, and Welch 1995; Taylor and Kim 1995; Burkhauser, Couch, and Wittenburg in press). Because these studies of the minimum vary widely in their techniques, we focus our discussion on those that use CPS data and employ an estimation strategy related to the one we use in this paper (Neumark and Wascher 1992, 1994, 1996; Card, Katz, and Krueger 1994; Card and Krueger 1995; Deere, Murphy, and Welch 1995; Burkhauser, Couch, and Wittenburg in press).3 Specifically, we review studies that use a pooled, time-series, cross-sectional approach to estimate the employment effects of minimum increases on vulnerable groups, such as teenagers, with CPS data. Deere, Murphy, and Welch (1995) also use pooled repeated cross-sectional data from the CPS to estimate the impact of minimum increases, but their specification differs in some important ways from the studies discussed above. Deere, Murphy, and Welch (1995) estimate the effect of minimum increases over the period from 1985 through 1993. They construct intervals of monthly data from 1985 through 1993 that begin on the first day of April of each year and end on the last day of Match during the following year. For each interval, they create annual averages of variables. …