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Minimum Wage Effects on Hours,Employment, and Number of Firms:The Iowa Case*
PETER E ORAZEM and J. PETER MATTILA
Iowa State University, Ames, IA 50011I. Introduction
Until recently, economists were uniquely united in the opinion that increases in theminimum wage reduced employment. Frey et al. (1984, p. 991) reported that almostnine of ten U.S. economists agreed with the statement "A minimum wage increasesunemployment among young and unskilled workers." The consensus empirical result,as summarized by Brown et al. (1982), was that a 10 percent increase in the minimumwage reduced teenage employment by 1-3 percent. The least skilled segments of thepopulation (especially school dropouts) appear to have been most adversely affected.This consensus was challenged in highly publicized studies by Card and Krueger(1995) and Katz (1992). Their findings, as summarized in Card and Krueger (1995, p.1), constitute "a new body of evidence showing that recent minimum-wage increaseshave not had the negative employment effects predicted by the textbook model." Infact, "some of the new evidence points toward a positive effect of the minimum wageon employment; most shows no effect at all." Their research was used to buttress argu-ments for increasing the federal minimum wage in 1996.Although several critiques of Card-Krueger ("Review Symposium," 1995; Bel-lante and Picone, 1999; Burkhauser et al., forthcoming) and several studies using newdata sets (Partridge and Partridge, 1999; "Symposium," 1999) have subsequently beenpublished, the minimum wage debate is yet to be resolved. No consensus will likelyprevail until the weight of scientific evidence tends to dominate one side or other ofthe debate.Given this situation, it is important to investigate new data sets and make improve-ments in methodology if economists and policy makers are ever to reach a consensus.We contribute to the dialogue using a new data set and making, in our view, innova-tions and improvements in the methodology of minimum wage analysis.Our study is in the spirit of the longitudinal methodology used by Card-Kruegerand others but has several important advantages. In order to minimize problems asso-ciated with aggregation bias, we use both firm-level and county-level data sets withina state (Iowa) rather than the more aggregate state-level data sets used in some stud-ies (e.g., Partridge-Partridge). Like Card-Krueger, we collect our own primary data
JOURNAL OF LABOR RESEARCH
Volume xxIn, Number 1 Winter
2002
 
4 JOURNAL OF LABOR RESEARCHset (a survey of retail and service firms), but we go beyond this and supplement it withgovernment data from payroll and tax records. These data provide information onwhether firms are covered by the law as well as demographic characteristics, wages,and hours of their workers.One of the major advantages of our data set is that it allows us to disaggregateworkers and impacts. That is, we separate workers paid less than the new minimumwage, and hence potentially directly impacted by an increase in the minimum, fromworkers who already earn more than the new minimum, who are less likely to beaffected. Few other studies have been able to incorporate this dichotomy into theiranalysis (Linneman, 1982, is an exception). Such a dichotomy is important if one isto more precisely measure the magnitude of impact and distributional effects of min-imum wage increases. These two groups of workers are likely to be substitutes suchthat declining employment of low-wage workers may be offset, in part, by risingemployment of high-wage workers. Studies that aggregate these two groups of work-ers may underestimate minimum wage impacts on low-wage workers.Our data set also has the advantage of allowing us to estimate the impact on hoursas well as numbers of workers. As we will demonstrate, demand for low-skilled hoursis more elastic to wage increases than is demand for numbers of workers. Previous lit-erature has been content to focus on the impact of rising minimum wages on employ-ment. In contrast, we stress that the most meaningful approach is to analyze minimumwage impacts in terms of more conventional elasticities of demand for labor hours.We also have information on the number and size of firms which is rarely avail-able. In recent years, economists have paid more attention to the creation and destruc-tion of firms as part of labor market dynamics. An additional advantage is that ourdata span the years 1989-1992 when the newly legislated Iowa minimum wageincreased rapidly and exceeded most other minimum wage rates. Hence, we observea large shock which should help to identify employment effects.Briefly, Iowa was subject only to the federal $3.35 minimum wage, having no stateminimum wage law prior to 1990. Despite being a relatively low-wage state, Iowa estab-lished its first state minimum wage on January 1, 1990, which at $3.85, exceeded thefederal rate. I At the same time, Iowa expanded coverage to small retail and service firmshaving annual sales as low as 60 percent of the federal threshold. 2 Iowa's minimum roseto $4.25 on January l, 1991 and to $4.65 on January 1, 1992. Throughout this period,Iowa's rates exceeded both the federal minimum and the minimum wage rates of sur-rounding states. One advantage of our data set is that we can study the impact of high-legislated rates in a relatively low-wage state. Many other minimum wage studies havefocused on high-wage states such as New Jersey, Pennsylvania, and California.In Section II, we analyze Iowa county-level data for retail and nonprofessionalservice industries, based primarily on Unemployment Insurance records and Censusdata. This analysis has the advantage of completeness, covering all firms and work-ers, and provides a benchmark with which to compare the firm-level analysis that fol-lows. However, the county-level data suffer the limitations inherent in aggregation. In
 
PETER E ORAZEM and J. PETER MATTILA 5particular, they don't allow us to separate low-wage workers who may be directlyimpacted from higher wage workers who already earn more than the minimum wage.In Sections III and IV we analyze firm-level data generated from our own sur-vey. We measure employment and wage rates by worker so that they can be dichot-omized into groups below and above the new minimum wage. Although small samplesizes and other data limitations necessitate caution in interpreting some of our results,our estimates suggest that dichotomizing worker effects is important. That is, mini-mum wage impacts tend to be larger when workers are dichotomized by level of earn-ings than when they are not. Equally important, our methodology can fruitfully beapplied as other micro-level data sets become available.II.
County-Level Analysis
One advantage of using county-level aggregate data is that one can study the impactof minimum wages on the number and size of firms. In other contexts, economistshave studied job creation and destruction associated with the birth and death of firms(Hamermesh, 1993), but relatively little is known about the impact of minimum wageson firms and firm size. In addition, county-level data can provide an aggregate bench-mark of employment and earnings effects against which to compare estimates usingfirm-level data.Our strategy is to analyze changes in county-industry cell employment (or earn-ings or number of firms) as a function of changes in the minimum wage relative tocounty-industry wage levels, while controlling for national changes in industry employ-ment and wage levels and for county changes in income levels. In addition, we allowfor minimum wage interactions with county-industry measures of coverage under thelaw and county measures of the rural composition of the population as shown in equa-tion 1:
in
Yiijt/Yijt_l
= 0r 0 + (0~ I +
o~2Cij + 0r i + (%4Cij * Ri)
In
[MWt/Wiijt_l]
(1)+ c~5 In
(E~/E~_I)
+ cz6 In
(W~/WjN_I) + 0~7
In
(lJlit-l) + uij,,
where Y is alternatively number of firms, number of employees, or quarterly earningsin the county/industry cell; C is the proportion of firms covered by the Fair Labor Stan-dards Act in the county-industry cell; R is a dummy variable if the county is rural;MWt is the Iowa minimum wage;
Wijt-l
is the predicted hourly wage rate by industryand county as described below; ENis national employment in the industry at time t;WNis the national average hourly wage in the industry at time t; and It is per capitaincome in the county in period t. Changes in national industry employment and wagescontrol for exogenous shifts in industry demand, while changes in county income con-trol for localized demand shifts. The national data came from Employment and Earn-ings. By law, Iowa firms must comply with the minimum wage if their sales exceed$300,000 per year. Data on the proportion of firms by county and industry with salesabove $300,000 were obtained from the Iowa Department of Revenue and Finance)County per capita income was obtained from tapes provided by the Bureau of Eco-
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