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Dube, Lester and Reich 2010.pdf

Dube, Lester and Reich 2010.pdf

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IRLE
IRLE WORKING PAPER#157-07November 2010 Published VersionArindrajit Dube, T. William Lester, and Michael Reich
Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties
Cite as: Arindrajit Dube, T. William Lester, and Michael Reich. (201
0
 ). “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties.” IRLE Working Paper No. 157-07. http://irle.berkeley.edu/workingpapers/157-07.pdf 
irle.berkeley.edu/workingpapers
 
MINIMUMWAGEEFFECTSACROSSSTATEBORDERS:ESTIMATESUSINGCONTIGUOUSCOUNTIES
Arindrajit Dube, T. William Lester, and Michael Reich*
 Abstract— 
We use policy discontinuities at state borders to identify theeffects of minimum wages on earnings and employment in restaurantsand other low-wage sectors. Our approach generalizes the case studymethod by considering all local differences in minimum wage policiesbetween 1990 and 2006. We compare all contiguous county-pairs in theUnited States that straddle a state border and find no adverse employmenteffects. We show that traditional approaches that do not account for localeconomic conditions tend to produce spurious negative effects due to spa-tial heterogeneities in employment trends that are unrelated to minimumwage policies. Our findings are robust to allowing for long-term effects of minimum wage changes.
I. Introduction
T
HE minimum wage literature in the United States canbe characterized by two different methodologicalapproaches. Traditional national-level studies use all cross-state variation in minimum wages over time to estimateeffects (Neumark & Wascher, 1992, 2007). In contrast, casestudies typically compare adjoining local areas with differ-ent minimum wages around the time of a policy change.Examples of such case studies include comparisons of NewJersey and Pennsylvania (Card & Krueger, 1994, 2000) andSan Francisco and neighboring areas (Dube, Naidu, &Reich, 2007). On balance, case studies have tended to findsmall or no disemployment effects. Traditional national-level studies, however, have produced a more mixed ver-dict, with a greater propensity to find negative results.This paper assesses the differing identifying assumptionsof the two approaches within a common framework andshows that both approaches may generate misleadingresults: each approach fails to account for unobserved heter-ogeneity in employment growth, but for different reasons.Similar to individual case studies, we use policy discontinu-ities at state borders to identify the effect of minimumwages, using only variation in minimum wages within eachof these cross-state pairs. In particular, we compare all con-tiguous county-pairs in the United States that are located onopposite sides of a state border.
1
By considering all suchpairs, this paper generalizes the case study approach byusing all local differences in minimum wages in the UnitedStates over sixteen and a half years. Our primary focus ison restaurants, since they are the most intensive users of minimum wage workers, but we also examine other low-wage industries, and we use county-level data on earningsand employment from the Quarterly Census of Employmentand Wages (QCEW) between 1990 and 2006.We also estimate traditional specifications with onlypanel and time period fixed effects, which use all cross-statevariations in minimum wages over time. We find that tradi-tional fixed-effects specifications in most national studiesexhibit a strong downward bias resulting from the presenceof unobserved heterogeneity in employment growth for lessskilled workers. We show that this heterogeneity is spatialin nature. We also show that in the presence of such spatialheterogeneity, the precision of the individual case studyestimates is overstated. By essentially pooling all such localcomparisons and allowing for spatial autocorrelation, weaddress the dual problems of omitted variables bias and biasin the estimated standard errors.This research advances the current literature in fouways. First, we present improved estimates of minimumwage effects using local identification based on contiguouscountry pairs and compare these estimates to national-levelestimates using traditional fixed-effects specifications. Bothlocal and traditional estimates show strong and similar posi-tive effects of minimum wages on restaurant earnings, butthe local estimates of employment effects are indistinguish-able from 0 and rule out minimum wage elasticities morenegative than
 
0.147 at the 90% level or 
 
0.178 at the95% level. Unlike individual case studies to date, we showthat our results are robust to cross-border spillovers, whichcould occur if restaurant wages and employment in border counties respond to minimum wage hikes across the border.In contrast to the local estimates, traditional estimatesusing only panel and time period fixed effects produce neg-ative employment elasticities of 
 
0.176 or greater in mag-nitude. The difference between these two sets of findingshas important welfare implications. The traditional fixed-effects estimates imply a labor demand elasticity close to
1 (around
 
0.787), which suggests that minimum wageincreases do not raise the aggregate earnings of affectedworkers very much. In contrast, our local estimate usingcontiguous county rules out, at the 95% level, labor demandelasticities more negative than
 
0.482, suggesting that theminimum wage increases substantially raise total earningsat these jobs.Second, we provide a way to reconcile the conflictingresults. Our results indicate that the negative employmenteffects in national-level studies reflect spatial heterogeneity
Received for publication November 30, 2007. Revision accepted for publication October 29, 2008.* Dube: Department of Economics, University of Massachusetts-Amherst; Lester: Department of City and Regional Planning of UNC-Chapel Hill; Reich: Department of Economics and IRLE, University of California, Berkeley.We are grateful to Sylvia Allegretto, David Autor, David Card, Oein-drila Dube, Eric Freeman, Richard Freeman, Michael Greenstone, Peter Hall, Ethan Kaplan, Larry Katz, Alan Manning, Douglas Miller, SureshNaidu, David Neumark, Emmanuel Saez, Todd Sorensen, Paul Wolfson,Gina Vickery, and seminar participants at the Berkeley and MIT Labor Lunches, IRLE, the all-UC Labor Economics Workshop, University of Lausanne, IAB (Nuremberg), the Berlin School of Economics, the Uni-versity of Paris I, and the Paris School of Economics for helpful com-ments and suggestions.
1
State border discontinuities have also been used in other contexts, for example, by Holmes (1998) and Huang (2008).
The Review of Economics and Statistics
, November 2010, 92(4): 945–964
2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
 
and improper construction of control groups. We find thatin the traditional fixed-effects specification, employmentlevels and trends are negative prior to the minimum wageincrease. In contrast, the levels and trends are close to 0 for our local specification, which provides evidence that contig-uous counties are valid controls. Consistent with this find-ing, when we include state-level linear trends or use onlywithin–census division or within–metropolitan area varia-tion in the minimum wage, the national-level employmentelasticities come close to 0 or even positive.Third, we consider and reject several other explanationsfor the divergent findings. We rule out the possibility of anticipation or lagged effects of minimum wage in-creases—a concern raised by the typically short windowused in case studies. We use distributed lags covering a 6-year window around the minimum wage change and findthat for our local specification, employment is stable bothprior to and after the minimum wage increase. We obtainsimilar results when we extend our analysis to accommoda-tion and food services, and retail. Our local estimates for the broader low-wage industry categories of accommoda-tion and food services and retail also show no disemploy-ment effects. Hence, the lack of an employment effect isnot a phenomenon restricted to restaurants. Overall, theweight of the evidence clearly points to an omitted vari-ables bias in national-level estimates due to spatial hetero-geneity, which is effectively controlled for by our local esti-mates.Finally, in the presence of spatial autocorrelation, thereported standard errors from the individual case studiesusually overstate their precision. As we show in this paper,the odds of obtaining a large positive or negative elasticityfrom a single case study is nontrivial. This result establishesthe importance of pooling across individual case studies toobtain more reliable inference, a point made in earliepapers.The rest of the paper is organized as follows. Section IIbriefly reviews the literature, with a focus on identifyingassumptions. Section III describes our data and how weconstruct our samples, while section IV presents our empiri-cal strategy and main results. Section V examines therobustness of our findings and extends our results to other low-wage industries, Section VI provides our conclusions.
II. Related Literature
The vast U.S. minimum wage literature was thoroughlyreviewed by Brown (1999). On the most contentious issueof employment effects, studies since Brown’s review articlecontinue to obtain conflicting findings (for example, Neu-mark & Wascher, 2007; Dube et al., 2007). In discussingthis literature, we highlight what to us is the most criticalaspect of prior research: the key divide in the minimumwage literature is along methodological lines—betweenlocal case studies and traditional national-level approachesthat use all cross-state variations. Our reading of the litera-ture suggests that this difference in methods may accountfor much of the difference in results.Local case studies typically use fast food chain restaurantdata obtained from employers. The restaurant industry is of special interest because it is both the largest and the mostintensive user of minimum wage workers. Studies focusingon the restaurant industry are arguably comparable to stu-dies of teen employment, as the incidence of minimumwage workers is similar among both groups, and many of the teens earning the minimum wage are employed in thissector. Card and Krueger (1994, 2000) and Neumark andWascher (2000) use case studies of fast food restaurantchains in New Jersey and Pennsylvania to construct localcomparisons. Card and Krueger (1994) find a positive effectof the minimum wage on employment. However, usingadministrative payroll data from Unemployment Insurance(ES202) records, Card and Krueger (2000) do not detectany significant effects of the 1992 New Jersey statewideminimum wage increase on restaurant employment. More-over, they obtain similar findings when the 1996–1997 fed-eral increases eliminated the New Jersey–Pennsylvania dif-ferential. Neumark and Wascher (2000) find a negativeeffect using payroll data provided by restaurants in thosetwo states.A more recent study (Dube et al., 2007) compares restau-rants in San Francisco and the adjacent East Bay before andafter implementation of a citywide San Francisco minimumwage in 2004 that raised the minimum from $6.75 to $8.50,with further increases indexed annually to local inflation.Considering both full-service and fast food restaurants,Dube et al. do not find any significant effects of the mini-mum wage increase on employment or hours.
2
As with theother case studies, however, their data contain a limitedbefore-and-after window. Consequently they cannot addresswhether minimum wage effects occur with a longer lag.Equally important, individual case studies are susceptible tooverstating the precision of the estimates of the minimumwage effect, as they treat individual firm-level observationsas being independent (they do not account for spatial auto-correlation). The bias in the reported standard errors is exa-cerbated by the homogeneity of minimum wages within thetreatment and control areas (a point made in Donald &Lang, 2007, and more generally in Moulton, 1990).Most traditional national-level panel studies use datafrom the CPS and cross-state variation in minimum wagesto identify employment effects. These studies tend to focuson employment effects among teens. Neumark and Wascher (1992) obtain significant negative effects of minimumwages on employment of teenagers, with an estimated elas-ticity of 
 
0.14. Neumark and Wascher (2007) extend their previous analysis, focusing on the post-1996 period andincluding state-level linear trends as controls, which their 
2
They do find a shift from part-time to full-time jobs, and a largeincrease in worker tenure, and an increase in price among fast food res-taurants.
946 THE REVIEW OF ECONOMICS AND STATISTICS

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