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Min Wage

Min Wage

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Published by: Michael Gareth Johnson on May 31, 2012
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CBER BusinEss BRiE
EBRuaRy 2010
Who Lost JobsWhen the Minimum Wage Rose?
© 2010 Center or Business andEconomic Research, Miller Collegeo Business, Ball State University
Ball State UniverSity • Center for BUSineSS and eConomiC reSearCh
mc J. hcks, Pd
n September 2008 I estimated the eecto recent Federal increases to the mini-mum wage across states. In Indiana, the2008 increase in the minimum wage costthe state roughly 8,000 jobs. Since thattime, the state has plunged ar deeper intorecession and has begun a slow recovery.The minimum wage has again increased to$7.25 per hour. It is once again useul toevaluate the impact o this policy, in particu-lar ocusing on those whom the legislationimpacts.
The economics of The minimum wage
Economic theory is clear in its understandingo the minimum wage – it unambiguously reducesthe demand or labor, but only i the minimum wage is above the market wage or unskilled entry level labor. In practice, the minimum wage hasbeen ar beneath the going wage or unskilled, en-try level workers. Increasing the minimum wageat these levels would have no eect on employ-ment or wages. As a consequence, research nd-ings have ranged rom zero to modest job losses asthe minimum wage increases.
Unortunately, the latest round o minimum wage increases, which occurred in late July 2007,2008 and 2009, occurred rom the peak throughthe trough o the recession. Tese increases were,at 14, 12 and 11 percent respectively, the largestsince 1978 and the largest three-year percent-age change since 1950. Tese changes were notortuitously timed to have a benign eect onemployment. As a consequence, it is worthwhile to onceagain examine the impact the minimum wage hikehas had on employment. Repeating the modelo employment and minimum wage presented inSeptember 2008 we nd another 12,000 ewer workers in Indiana as a consequence o the mini-mum wage increase. But who were they?Casey Mulligan, a proessor at the University o Chicago, implicated the minimum wage in thesharp decline o part-time workers in the latter hal o 2009.
His analysis o the actual versus orecast-ed gap between part-time workers increased sharply in July 2009 when the most recent minimum wageincrease was enacted. Tis was surprising becausepart-time employment oten rises as ull-time em-ployment declines. Mulligan reports that the losso ve ull-time jobs during a downturn typically increases part-time employment by one position.Tis relationship stopped in July 2009.
The employmenT impacTof The minimum wage in 2008 and 2009
o test this, I created a statistical model which,like that presented in my 2008 minimum wagestudy, accounts or trends in employment, the re-cession and changes to the minimum wage. In my most recent model, the minimum wage increaseaccounts or roughly 550,000 ewer part-time jobsnow than would otherwise be the case without themost recent three minimum wage increases. Tisis a signicant decline, but still begs the ques-tion: Who are these workers? Earlier research hasindicated that teenage workers, especially minority teenagers, bear the bulk o minimum wage job
1. See Adie [1973]; Brown, Gilroy and Kohen [1981]; Card [1992a, b];Fleisher [1981]; Hammermesh [1982]; Meyer and Wise [1981, 1983a]; Minimum Wage Study Commission 1981]; Neumark and Wascher [1992];Ragan [1981]; Vandenbrink [1987];Welch [1974, 1978]; [Welch and Cun-ningham 1978]. For efect on Arican- Americans see Al-Salam, Quester, and Welch [1981], Iden [1980], Betsey and Dunson [1981]Mincer [1976], Moore [1971], Ragan [1977], Williams [1977a,b]. 2. See Mulligan, Casey, Attack o the  Minimum Wage, Economix Blog, New York imes, January 20, 2010.
pc b
aBoUt the aUthor
Michael J. Hicks, PhD,
is the direc-tor o the Center or Business andEconomic Research and an associate proessor o economics in the Miller College o Business at Ball StateUniversity.Hicks earned doctoral and mas-ter’s degrees in economics romthe University o Tennessee and abachelor’s degree in economics romVirginia Military Institute. He has au-thored two books and more than 60 scholarly works ocusing on state andlocal public policy, including tax andexpenditure policy and the impact o Wal-Mart on local economies.Contact Dr. Michael J. Hicks at
CBER BusinEss BRiE
EBRuaRy 2010
losses. o test this, I examine data on part-time workers orm the Bureau o Labor Statistics,ocusing on all workers age 16-19 employed inminimum wage jobs rom 1999 through Decem-ber 2009. Using the same modeling approach orteenage part-time workers, I nd that there areroughly 310,000 ewer teenagers working part-time today as a consequence o the increase in theminimum wage. Tis translates to roughly 6,800ewer Hoosier teenage workers, a remarkably largeimpact that requires some context.
The size of changesand The business cycle
Previous minimum wage increases had a negli-gible impact on employment because there were soew workers employed at the minimum wage. Forexample, on the eve o the recession, the 14 per-cent increase in the minimum wage aected very ew workers. Tis is because in most o the coun-try, the market wage or unskilled entry-level labor was above the new minimum wage. However, in just 25 months the minimum wage grew by morethan one-third at a time when ination was essen-tially unchanged. No doubt a signicant numbero minimum wage workers were no longer viableto employ during this period. Te new minimum wage made them simply too costly or the value o their contribution to the business. Te result wasa decline in part-time employment.Te business cycle should have mitigated the job losses in part-time employment. As Mul-ligan pointed out, part-time employment is otenused to sustain production during lean periodsor companies. As a consequence, a recession andits immediate atermath should see an increase inpart-time employment. It appears this impact wasespecially hard on younger workers.Figure 1 illustrates the number o part-time workers, age 16-19. Here, the sharp declinesin July 2008 and July 2009 are clearly visible.Other data on this age group paints an even morealarming story. Te unemployment rate or whiteteenagers rose rom 17.3 to 18.9 percent romDecember 2008 to December 2009. While this ishigh, the growth rate in unemployment was rathermodest when compared to that o the labor orceas a whole. Alarmingly, the unemployment rateor Arican-American teenagers rose rom a season-ally adjusted level o 28.5 percent in December2008 to 43.6 percent in December 2009.Te most consistent nding o researchers intothe dis-employment eects o the minimum wageare that teenagers, especially low skilled, male andminority suer disproportionate job losses as aconsequence o an increase in the minimum wage.Tere are several plausible reasons or this. Workplace discrimination against minorities andthe youth cannot be ruled out. However, theeducational achievement gap between minority and white teenagers almost certainly plays thedominant role in these unemployment rate dier-ences. Exacerbating this problem are local labormarket conditions that would tend to concentrateteenagers in locations by skill level. A large localsupply o unskilled workers would tend to createhigher overall unemployment rates or low-skilled workers.
Figure 1: Employment o Part-ime Workers, Age 16-19
199920002001200220032004200520062007200820095,0004,5004,0003,5003,000Je 2009
CBER BusinEss BRiE
EBRuaRy 2010
 3. See Headerman, Rea and James Shirk “Who Earns the MinimumWage--Single Parents or Suburbaneenagers?” Te Heritage Foundation, August 3, 2006.4. Te data on occupations o mini-mum wage workers by educational level is limited. But, given the high share and relative complexity o many ood service industry jobs, it is likely that adult holders o pure minimum wage  jobs (those without tips) are heavily dominated by those without high school degrees.
policy consideraTions
Te minimum wage legislation has long beenpopular precisely because it holds the promiseo helping low wage workers without an associ-ated cost. Te legislation was a chimerical reelunch – no cost and no meal. Te truth has largely been that it has not helped workers, and has beencostless because until 2008, the United Stateshad gone or two generations with the minimum wage largely trailing the hourly compensation o unskilled-entry level workers. By the summer o 2009, the increases in the minimum wage pushedahead o that which many employers were willingto pay or unskilled workers. As a consequence,the number o part-time workers declined by morethan a hal million, with teenagers comprisingtwo-thirds o these workers. Abandoning the minimum wage would havelittle or no adverse economic eects. Indeed, it would most likely boost employment. But, thatdoes not mean there are not benets rom thelegislation, many o which could be preserved even with modications to the minimum wage legisla-tion that boosted employment.It is convenient to classiy minimum wage workers into our groups; ood service workers,the physically and mentally handicapped, adultand teenage workers. For most workers in thisrst group, tips dominate their wages. For mostin the second group, wages are highly subsidized,and employment oten designed with rehabilita-tion and training aspects. Tese groups representmore than hal those working or minimum wage.eenagers, most o whom rom middle to highincome households, with 67 percent o teenageand young adult minimum wage workers livingin households with incomes at least twice thepoverty level.
Adult workers toiling at minimum wage suer immense, opportunity limiting, skilldecits. wo-thirds o all adult minimum wage workers have a high school degree or less.
Despiteenormous investment in K-12 education, these workers ailed to heed the market signals that low education levels limits opportunity and income.Minimum wage legislation keeps some o these workers out the labor market, and exposes them toadditional education and training in the workorcedevelopment network. In essence, a healthy adult who cannot command the minimum wage needssignicant training and education.Te minimum wage may also serve to bench-mark entry level wages or workers and employers,albeit at a very high cost in dis-employment. Tereare already cumbersome training tax incentives which compensate employers or training workers.Tis is not a cost eective alternative or a rmhiring a minimum wage worker, and is aimed atmore skilled employees.wo signicant policy innovations couldpreserve the minimum wage, while mitigatingsome o its dis-employment eects. First, theadoption o a “student minimum wage” wouldpermit employers to hire seasonal workers with-out bearing the ull cost o adult employment.Second, introducing a tenure scaled minimum wage would remove the disincentive or employ-ers to hire unskilled workers. Under this scheme,unskilled workers could be hired at a lower level,but must be paid at a higher level (such as thecurrent minimum wage), but only ater 90-120days o employment (this is well over the averageduration o employment or current minimum wage employees). Such a policy would allow more seasonal employment by youths, and permitemployers to risk the training o workers who arecurrently viewed as lacking the labor market valueat the level our Congress deems its minimum.Both o these policies recommendations wouldcreate dierent tiers o workers: students and new hires. While this is not typically a desirable out-come o legislation, it is a vast improvement on thecurrent legislation which has its own tiers o work-ers: those with jobs at the minimum wage, andthose without jobs who would be willing to work at wages beneath the current Federal minimum.
 Adie, Douglas K. (1973). een-Age Unemploy-ment and Real Federal Minimum Wages.
 Journal o Political Economy,
vol. 81 (March/ April): 435-441. Al-Salam, Nabeel; Quester, Aline; and Welch,Finis. (1981). Some Determinants o the Leveland Racial Composition o eenage Employ-ment. In Rottenberg (1981): 124-154.Betsey, Charles L., and Dunson, Bruce H. (1981).Federal Minimum Wage Laws and theEmployment o Minority Youth.
 AmericanEconomic Review,
vol. 71 (May): 379-384.Brown, Charles; Gilroy, Curtis; and Kohen,
“Two signifcant policyinnovations could preserve the minimumwage, while mitigating some o its dis-employment eects.” 

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