Arindrajit Dube, T. William Lester, and Michael Reich*
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.
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.
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 four ways. 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
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.
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