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The Impact of theMinimum Wage in West Virginia:A Test of the Low-Wage-Area Theory
MARVIN
E.
DODSON III*
University of Central Arkansas, Conway, AR 72035I. Introduction
Hypotheses suggesting that low-wage areas may be more affected by minimum wageincreases than higher wage areas are not new. Like the teenage demographic theoryof minimum wage effects, the proportion of workers who earn a wage equal or closeto the legislated minimum drives the low-wage-area theory. This theory only changesthe focus from the age group of workers to the geographical location of employment.Accordingly, the theory predicts any negative employment effects due to minimumwage increases will be more prevalent in a low-wage area.Figure 1 depicts the argument. Assume that the labor demand curve, L l relates theshort-run profit maximizing quantities of labor demanded for the total U.S. labor mar-ket. Also assume that the labor supply curve, S, represents the quantities of labor sup-plied at each wage level for the average worker. Consequently, the market clearingwage and employment combination is given by w* and E*, respectively. In this case,a minimum wage, denoted by
wM1N,
has no impact on the equilibrium. However, ifthe analysis focuses on teenagers or workers in a low-wage area rather than the totalU.S. labor market, the result may be different. Like teenagers, workers in a low-wagearea may have a lower marginal product thus resulting in a new demand schedule. Inthe case of West Virginia, smaller amounts of human capital or lack of representationby firms that produce highly valued products may be the culprit in producing this shift.Regardless, with this new demand for labor, denoted by L 2, the minimum wagebecomes binding. In the absence of the minimum wage, the equilibrium level ofemployment would be E I. However, since the firm must pay all workers a wage of
WMIN
or greater, employment falls to E 2.Volumes of economic literature have been written on the subject of minimum wageeffects. The survey by Brown et al. (1982) and the recent work by Card and Krueger(1995) are probably the most cited. Additionally, the summary evidence provided byBrown et al. (1982) has become the benchmark against which all subsequent esti-mates of minimum wage employment effects are measured. According to their sum-mary, teenage employment is reduced by 1 to 3 percent by a 10 percent increase in
JOURNAL OF LABOR RESEARCH
Volume XXII1, Number 1 Winter
2002
 
26 JOURNAL OF LABOR RESEARCHFigure 1
Wage
WMINw I
SLjE 2 E I E* Employment
the minimum wage. The same increase is associated with up to a 0.75 percentage pointrise in the unemployment rate for this group. Brown et al. 0982) also conclude thatadult employment responds insignificantly to minimum wage increases.Other recent work in the area of minimum wage effects includes Schaafsma andWalsh (1983), Wellington (1991 ), Neumark and Wascher (1992), and Williams (1993).Each of these studies estimates the employment elasticity of a particular demographicgroup with respect to the minimum wage. The majority of these studies use pooled-data techniques. Schaafsma and Walsh (1983), Neumark and Wascher (1992), Castillo-Freeman and Freeman (1992), and Williams (1993) all use pooled-data techniques intheir estimations. Since pooled data can capture the cross-sectional variation of obser-vations and control for any variation through time, this technique should come closerthan time-series or cross-sectional approaches to relating the true relationship betweenemployment and the minimum wage.All of these recent studies, except Schaafsma and Walsh (1983), use either the Kaitz(1970) index or some variant thereof. The Kaitz (1970) minimum wage index is a ratioof the nominal minimum wage to the average hourly earnings in each industry. In mostcases all the major industrial divisions are included as industries. Each of these ratiosis weighted by the proportion of persons covered in the industry. Finally, the index
 
MARVIN E. DODSON III 27weighs each industry ratio according to the employment share of that industry. Clearly,the Kaitz (1970) index, in this full form, summarizes a good deal of information intoone real variable. Castillo-Freeman and Freeman (1992) suggest that the index workswell because it measures the "bite" of the minimum wage. This abundance of infor-mation as well as the index's ability to measure the minimum wage relative to the mar-ket prevailing hourly earnings makes it a superior measure of minimum wage effects.Unlike the intense investigation of teenage employment effects, there has beenvery little recent work relating to low-wage areas. The U.S. Department of Labor pro-duced two investigations on this topic (DOL, 1959, 1965). General results from thesereports maintain that there are no negative employment effects attributable to the min-imum wage. According to Brown et al. (1982), however, these studies may have under-stated the impact of the minimum wage since there are no controls for previousemployment growth.Colberg (1960) examines county-level manufacturing employment in Florida fromJanuary to April 1956. His results suggest that a 1 percent increase in the associatedaverage wage translates into a 0.12 percent reduction in county employment. Further-more, the lower wage counties experienced a far greater reduction (0.92 percent) inemployment. Carter (1978) examines the impact of the minimum wage on the unem-ployment rate in a time series and finds that the southeastern states display a half a per-centage point increase in unemployment due to a 10 percent increase in the minimumwage. Heckman and Sedlacek (1981) also find a strong dis-employ ment effect in SouthCarolina manufacturing due to minimum wage increases. Castillo-Freeman and Free-man (1992) examine the low-wage-area theory of minimum wage effects by concen-trating on Puerto Rico. Their results stand out from the standard minimum wageliterature in terms of the size of the dis-employment effect associated with the mini-mum wage. These estimates range from a 1.5 to 5.4 percent reduction in employmentdue to a 10 percent increase in the minimum wage.Recently, a new branch within the minimum wage effects literature has challengedthe traditional estimation formats discussed above. This new branch has several names,the natural experiment approach, the treatment approach, or the pre/post approach toestimating minimum wage effects. Card (1992), Card (1992b), Katz and Krueger(1992), and Card and Krueger (1995) are examples. All of these studies examineemployment and wage changes that straddle an increase in the legislated minimumwage. For example, Card (1992) examines the employment effects in California dueto the 1988 state minimum wage change. Katz and Krueger (1992) examine employ-ment effects of the 1990 minimum wage increase in the fast-food industry in Texas.Card (1992b) pools states for quarters II, III, and IV in 1989 and 1990. He thenregresses the teen employment to population ratio on state factors and the average statewage or an instrument for the state average wage to obtain an estimate of the employ-ment elasticity with respect to the average wage. Put another way, Card (1992b) esti-mates the price elasticity of labor demand across a period when a minimum wagechange has occurred. The results suggest no reduction in teen employment due to the
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