Minimum Wage Hikes Research Articles

Macroeconomics and Monetary Economics: The Redistribution Recession: How Labor Market Distortions Contracted the Economy

Christopher L. Foote of Federal Reserve Bank of Boston reviews, “The Redistribution Recession: How Labor Market Distortions Contracted the Economy” by Casey B. Mulligan. The Econlit abstract of this book begins: “Explores the decline of employment in the United States after the financial crisis and its failure to recover and considers the role of economic activity and public policy. Discusses the rise of labor productivity; the expanding social safety net; supply and demand—labor market consequences of safety net expansions; means-tested subsidies and economic dynamics since 2007; cross-sectional patterns of employment and hours changes; Keynesian and other models of safety net stimulus; recession-era effects of factor supply and demand—evidence from the seasonal cycle, the construction market, and minimum wage hikes; incentives and compliance under the federal mortgage modification guidelines; and uncertainty, redistribution, and the labor market. Mulligan is Professor of Economics at the University of Chicago.”

MINIMUM WAGE HIKES AND THE WAGE GROWTH OF LOW‐WAGE WORKERS

ABSTRACTThis paper presents difference‐in‐differences estimates of the impact of the British minimum wage on the wage growth of low‐wage employees. Estimates of the probability of low‐wage employees receiving positive wage growth have been significantly increased by the minimum wage upratings or hikes. However, whether the actual wage growth of these workers has been significantly raised or not depends crucially on the magnitude of the minimum wage hike considered. Findings are consistent with employers complying with the legally binding minimum wage but holding down or offsetting the wage growth that they might have awarded in periods of relatively low minimum wage hikes.

Underreporting and Minimum Wage

We propose a theory of firm that is consistent with empirically observed phenomenon of firms simultaneously engaging in both formal and informal activities. Firms face endogenous probability of auditing that depends on the scale of underreporting of both sales and wages. We characterize the conditions for a firm facing corporate, value added and payroll taxes to hide a part of its activities. Underreporting gives rise to employment levels above those expected for firms that report truthfully. We also show that an underreporting firm is less affected by the introduction of the minimum wage. It further decreases the level of reported sales to mitigate the adverse effect that the minimum wage causes and decreases optimal employment by relatively less than an honest firm. The latter hypotheses is tested empirically using a matched employer-employee data set for Slovenia during the period of several minimum wage hikes (2007-2010).

The Spending and Debt Response to Minimum Wage Hikes

Immediately following a minimum wage hike, household income rises on average by about $250 per quarter and spending by roughly $700 per quarter for households with minimum wage workers. Most of the spending response is caused by a small number of households who purchase vehicles. Furthermore, we find that the high spending levels are financed through increases in collateralized debt. Our results are consistent with a model where households can borrow against durables and face costs of adjusting their durables stock. (JEL D12, D14, D91, J38)

Less Myth, More Measurement: Decomposing Excess Returns from the 1989 Minimum Wage Hike

In the book Myth and Measurement, Card and Krueger (1995) examine the economic impact of the 1989 minimum wage hike on the welfare of 110 firms which employ a disproportionate number of minimum-wage workers. Their results show mixed evidence that excess returns associated with news about the 1989 minimum-wage legislation. This paper re-examines this question by decomposing excess returns. Our simple and intuitive approach attributes excess returns to either differences in market performances (economy-wide factors) or firm-specific traits (individualistic factors). We likewise show that, generally, minimum wage legislation had little or no effect on employer wealth. However, by decomposing total excess returns, we find that the apparent lack of an effect is a consequence of two off-setting forces: (1) a negative effect arising from firm-specific traits (adverse information on minimum-wage worker employers) and (2) a positive effect arising from market performance. In other words, we show that while the aggregate effect of the 1989 minimum wage hike was neutral, there was a significant negative impact on firms that was neutralized by positive market performance.

Minimum wage and tax evasion: Theory and evidence

This paper examines the interaction between minimum wage legislation and tax evasion by employed labor. I develop a model in which firms and workers may agree to report less than the true amount of earnings to the fiscal authorities. I show that introducing a minimum wage creates a spike in the distribution of declared earnings and induces higher compliance by some agents, thus reducing their disposable income. The comparison of food consumption and of the consumption–income gap before and after the massive minimum wage hike that took place in Hungary in 2001 reveals that households who appeared to benefit from the hike actually experienced a drop compared to similar but unaffected households, thus supporting the prediction of the theory.

THE LIGHTHOUSE EFFECT AND BEYOND

A large body of empirical literature indicates that, contrary to predictions from economic theory, wages in the informal sector increase after a minimum wage hike. This phenomenon was so far explained as a byproduct of a signal (a lighthouse) conveyed by statutory minima to wage setting in the informal sector. A simple matching model shows that an increase in wages in the informal sector may also be induced by significant sorting and composition effects between the formal and the shadow sectors in the aftermath of the increase in the minimum wage. Using data on Brazil, we find that sorting accounts for at least one third of the increase in average wages in the informal sector after a minimum wage hike. This contribution of endogenous sorting to wage dynamics in the informal sector is also increasing over time.

Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes

Factor supply increases (depresses) output for many of the same reasons that the government spending multiplier might be less (greater) than one. Data from three 2008-9 recession episodes—the labor supply shifts associated with the seasonal cycle, the 2009 federal minimum wage hike, and the collapse of residential construction spending—clearly show that markets absorb an increased supply of factors of production by increasing output. The findings contradict the “paradox of toil” and suggest that government purchases and marginal tax rates reduce private consumption, even during the recession.

The Distributional Impacts of Minimum Wage Increases When Both Labor Supply and Labor Demand Are Endogenous

We develop and estimate a one-shot search model with endogenous firm entry, and therefore zero expected profits, and endogenous labor supply. Positive employment effects from a minimum wage increase can result as the employment level depends upon both the numbers of searching firms and workers. Welfare implications are similar to the classical analysis: workers who most want the minimum wage jobs are hurt by the minimum wage hike with workers marginally interested in minimum wage jobs benefiting. We estimate the model using CPS data on teenagers and show that small changes in the employment level are masking large changes in labor supply and demand. Teenagers from well-educated families see increases in their employment probabilities and push out their less-privileged counterparts from the labor market. This article has supplementary material online.

Behind the Lighthouse Effect

A large body of empirical literature indicates that, contrary to predictions from economic theory, wages in the informal sector increase after any minimum wage hike. This phenomenon was so far explained as a byproduct of a signal conveyed by statutory minimum wages to wage setting in the informal sector, as if workers in the latter had significant bargaining power. A simple matching model shows that the lighthouse effect may be induced by significant sorting and composition effects between the formal and shadow sectors in the aftermath of the increase in the minimum wage. Using data on Brazil, we test this alternative explanation of the lighthouse effect, associated with the endogenous sorting of workers by skill in the formal and informal sectors. We find that sorting accounts for at least one third of the increase in average wages in the informal sector after the minimum wage hike. This contribution of sorting to wage dynamics in the informal sector is also increasing over time.

The state–federal dichotomy in the effects of minimum wages on teenage employment in the United States

For the period 1984–1997, we find that state-level minimum wage hikes had no negative employment impact whereas federal hikes did. This dichotomy may account for the differences between the results of the ‘new economics of the minimum wage’ and time series studies.

Minimum wages and the economic well‐being of single mothers

AbstractUsing pooled cross‐sectional data from the 1992 to 2005 March Current Population Survey (CPS), this study examines the relationship between minimum wage increases and the economic well‐being of single mothers. Estimation results show that minimum wage increases were ineffective at reducing poverty among single mothers. Most working single mothers were not affected by minimum wage hikes because they already earned wages above state and federal minimum wages. And less‐educated single mothers who were affected did not see a rise in net income because of negative employment and hours effects. For this low‐skilled population, a 10 percent increase in the minimum wage was associated with an 8.8 percent reduction in employment and an 11.8 percent reduction in annual hours worked. © 2008 by the Association for Public Policy Analysis and Management

The Effects of Minimum Wage Increases on Retail Employment and Hours: New Evidence from Monthly CPS Data

Proponents of state and federal minimum wage increases argue that past minimum wage hikes have not adversely affected retail employment. However, the existing empirical evidence is mixed. This study uses monthly data from the 1979–2004 Current Population Survey to provide new estimates of the effect of minimum wage increases on retail employment and hours worked. The findings suggest evidence of modest adverse effects. A 10% increase in the minimum wage is associated with a 1% decline in retail trade employment and usual weekly hours worked. Larger negative employment and hours effects are observed for the least experienced workers in the retail sector. These results are robust across a number of specifications, but are sensitive to controls for state time trends.

The Spending and Debt Response to Minimum Wage Hikes

Following a minimum wage hike, household income rises on average by about $250 per quarter and spending by roughly $700 per quarter for households with minimum wage workers. Most of the spending response is caused by a small number of households who purchase vehicles. Furthermore, we find that the high spending levels are financed through increases in collateralized debt. Our results are consistent with a model where households can borrow against durables and face costs of adjusting their durables stock.

The Minimum Wage, Restaurant Prices, and Labor Market Structure

Using store-level and aggregated Consumer Price Index data, we show that restaurant prices rise in response to minimum wage increases under several sources of identifying variation. We introduce a general model of employment determination that implies minimum wage hikes cause prices to rise in competitive labor markets but potentially fall in monopsonistic environments. Furthermore, the model implies employment and prices are always negatively related. Therefore, our empirical results provide evidence against the importance of monopsony power for understanding small observed employment responses to minimum wage changes. Our estimated price responses challenge other explanations of the small employment response, too.

Minimum Wage and Tax Evasion: Theory and Evidence

The paper investigates the role of the minimum wage in a competitive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low-productivity workers and transforms a nominally neutral fiscal system into a regressive one. A spike in the wage distribution at the minimum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose officially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction finds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.

The Minimum Wage, Restaurant Prices, and Labor Market Structure

Using store-level and aggregated Consumer Price Index data, we show that restaurant prices rise in response to minimum wage increases under several sources of identifying variation. We introduce a general model of employment determination that implies minimum wage hikes cause prices to rise in competitive labor markets but potentially fall in monopsonistic environments. Furthermore, the model implies employment and prices are always negatively related. Therefore, our empirical results provide evidence against the importance of monopsony power for understanding small observed employment responses to minimum wage changes. Our estimated price responses challenge other explanations of the small employment response too.

Youth Crime and the Minimum Wage

This study examines the relationship between the minimum wage and youth criminal activity. I show that a priori economic reasoning cannot predict the sign of the relationship - while a minimum wage hike reduces the attractiveness of crime as a source of income relative to legitimate work, it may also disemploy young workers and so induce their participation in crime. I then present three empirical analyses to fill this gap: a panel approach using state-level data covering the period from 1982 to 2001, a cross-sectional examination of the varying impact of the 1990-1991 and 1996-1997 federal minimum wage hikes across states, and an investigation of self-reports of crime by respondents to the National Longitudinal Survey of Youth 1997. In each analysis I find evidence that the effect of the minimum wage on youth crime is negative for crimes that have a strong pecuniary component. This implies that any criminogenic disemployment impact of the minimum wage is outweighed by the incentives against crime that higher legitimate wages create for young workers.

Firm‐level Consequences of Large Minimum‐wage Increases in the Czech and Slovak Republics

Abstract. After an initial decline in the level of real minimum‐wage rates, there were series of unusually large increases in their levels — 70 and 50 per cent — during the years 1999–2002 in the Czech and Slovak Republics, respectively. Using information from matched employee–employer data sets, we look at the impact of minimum‐wage hikes on both wages and employment. Our results suggest that there are some, but not substantial, job losses in reaction to minimum‐wage hikes and that the impact on firm wages is rather large, implying that further increases of similar magnitude might very well have negative consequences for employment.

The Wage and Employment Dynamics of Minimum Wage Workers

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.