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The Effects of Statewide Minimum Wages

The Effects of Statewide Minimum Wages

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Published by Max Berre
This was my master thesis at Maastricht University. I proved that there was a positive relationship between minimum wages and employment figures at the national level in the US.
This was my master thesis at Maastricht University. I proved that there was a positive relationship between minimum wages and employment figures at the national level in the US.

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Published by: Max Berre on Jan 27, 2012
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1Max BerreErik de Regti461865August 18, 2008The Effects of Statewide Minimum Wages on the US Labor Market from 2002-2007What Factors Play a Role?Abstract:This paper investigates the effect of US statewide minimum wages on labor markets. Theeffect of sectoral composition of a state’s economy is empirically determined to have apivotal effect on wage-earning employment elasticity using 2002-2007 BLS data. Theexplanation behind this phenomenon is linked theoretically to tradability as well ascapital/labor substitution elasticity. The effect of statewide minimum wages on a state’slabor market is explained empirically by a state economy’s sectoral profile.
 
2
1: Introduction
The relationship between minimum wages and employment figures documented by Cardand Krueger’s works in both 1994 and 2000, as well as responses to Card and Krueger’s1994 work considered for reply in 2000, focused solely in the fast-food sector, and in justtwo states, Pennsylvania and New Jersey.Beyond Pennsylvania and New Jersey, the minimum wage at the statewide level is anissue that draws attention across the US. Until the second half of 2007, the US federalminimum wage remained unchanged at $5.15 an hour for over 10 years. Meanwhile, theminimum wage in several states across the US increased, while in other states, theminimum wage underwent no change whatsoever. This phenomenon leads one toreasonably question the effects of these statewide minimum wage increases.The QuestionsQuestions arise with respect to the relationship between employment levels and minimumwages proposed by Card and Krueger.
First,does a relationship between minimum wagesand employment exist beyond Pennsylvania and New Jersey or in industries and sectorsbeyond the fast food industry?
One possibility may be that perhaps the effect describedby Card and Krueger may be specific to New Jersey and Pennsylvania, or to the fast-foodindustry, while the relationship may be of wildly varying magnitude and direction on theaggregate level.
Second, what is the explanation for the relationship which was found?
To address thisquestion one must consider the effect of the minimum wage on both the labor demandfunction, on effective demand. Statewide variations in tradability and in capital/laborsubstitution elasticity expressed along sectoral lines must also be taken into account.The major purpose of this study is to empirically address these two questions. Inparticular, this study seeks to shed light onto factors determining the shape and nature of the relationship between minimum wages and employment. In the next section, part 2,previous research on the minimum wage topic is explored. Part 3 explores the theoretical
 
3underpinnings of the wage-employment relationship via an examination of theemployment function. Next, part 4 presents the estimation strategy implemented by thisstudy and part 5 explains the factors included in the estimation model. Subsequently, part6 presents the summary statistics, and provides a look into the data set. The empiricalresults of the econometric analysis are outlined in part 7, and are discussed in part 8.Finally, part 9 provides the conclusion of this study, as well as suggestions for furtherresearch into the minimum wage topic.
2: Literature Review
Hamermesh (1986) provides a summary of various theoretical labor-demand models, andtheir appropriate derivation. These are derived form various production models. Inparticular, the Hamermesh examines basic two-factor models, constant elasticity of substitution models, Cobb-Douglas models, and multi-factor models. This theoreticalanalysis can be used to examine the employment effects of the minimum wage.Perhaps the most controversial empirical authors examining the employment effects of the minimum wage are Card and Krueger. Card and Krueger (1994) found a positiverelationship between minimum wages and employment in the fast-food sector in NewJersey and Pennsylvania in the aftermath of minimum wage increases in New Jersey in1992. Card and Krueger attribute this outcome to monopsony power in the fast-foodindustry of these two states. This positive relationship was based on survey data of acase-study, an approach which then came under severe criticism from emanating fromboth academia in the form of revisionist research, and from conservative think-tanks,mostly in the form of opinion editorials. In response, Neumark and Wascher (2000)concluded a relative decline in employment based on a revision using payroll data, whileclaiming that Card and Krueger (1994) was invalid because of the relative informality of the data set used. In response to this, Card and Krueger (2000) re-examine the NewJersey and Pennsylvania phenomenon using data from the Bureau of Labor statistics, andconcluded that the 1992 change in the New Jersey minimum wage had most probably noeffect on total employment, and possibly a small positive effect, while reaching a similarconclusion using Neumark and Wascher’s data set, controlling for employer dummies.

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