The Impact of the Minimum Wage in West Virginia: A Test of the Low-Wage-Area Theory

M A R V I N E. D O D S O N III*

University of Central Arkansas, Conway, AR 72035 I. Introduction
Hypotheses suggesting that low-wage areas may be more affected by minimum wage increases than higher wage areas are not new. Like the teenage demographic theory of minimum wage effects, the proportion of workers who earn a wage equal or close to the legislated minimum drives the low-wage-area theory. This theory only changes the focus from the age group of workers to the geographical location of employment. Accordingly, the theory predicts any negative employment effects due to minimum wage increases will be more prevalent in a low-wage area. Figure 1 depicts the argument. Assume that the labor demand curve, L l relates the short-run profit maximizing quantities of labor demanded for the total U.S. labor market. Also assume that the labor supply curve, S, represents the quantities of labor supplied at each wage level for the average worker. Consequently, the market clearing wage and employment combination is given by w* and E*, respectively. In this case, a minimum wage, denoted by wM1 has no impact on the equilibrium. However, if N, the analysis focuses on teenagers or workers in a low-wage area rather than the total U.S. labor market, the result may be different. Like teenagers, workers in a low-wage area may have a lower marginal product thus resulting in a new demand schedule. In the case of West Virginia, smaller amounts of human capital or lack of representation by 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 wage becomes binding. In the absence of the minimum wage, the equilibrium level of employment 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 wage effects. 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 by Brown et al. (1982) has become the benchmark against which all subsequent estimates of minimum wage employment effects are measured. According to their summary, 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

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Figure 1

Wage

S

WMIN wI

Lj

E2

EI

E*

Employment

the minimum wage. The same increase is associated with up to a 0.75 percentage point rise in the unemployment rate for this group. Brown et al. 0982) also conclude that adult employment responds insignificantly to minimum wage increases. Other recent work in the area of minimum wage effects includes Schaafsma and Walsh (1983), Wellington (1991 ), Neumark and Wascher (1992), and Williams (1993). Each of these studies estimates the employment elasticity of a particular demographic group with respect to the minimum wage. The majority of these studies use pooleddata techniques. Schaafsma and Walsh (1983), Neumark and Wascher (1992), CastilloFreeman and Freeman (1992), and Williams (1993) all use pooled-data techniques in their estimations. Since pooled data can capture the cross-sectional variation of observations and control for any variation through time, this technique should come closer than time-series or cross-sectional approaches to relating the true relationship between employment 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 ratio of the nominal minimum wage to the average hourly earnings in each industry. In most cases all the major industrial divisions are included as industries. Each of these ratios is weighted by the proportion of persons covered in the industry. Finally, the index

MARVIN E. DODSON III

27

weighs 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 into one real variable. Castillo-Freeman and Freeman (1992) suggest that the index works well because it measures the "bite" of the minimum wage. This abundance of information as well as the index's ability to measure the minimum wage relative to the market prevailing hourly earnings makes it a superior measure of minimum wage effects. Unlike the intense investigation of teenage employment effects, there has been very little recent work relating to low-wage areas. The U.S. Department of Labor produced two investigations on this topic (DOL, 1959, 1965). General results from these reports maintain that there are no negative employment effects attributable to the minimum wage. According to Brown et al. (1982), however, these studies may have understated the impact of the minimum wage since there are no controls for previous employment growth. Colberg (1960) examines county-level manufacturing employment in Florida from January to April 1956. His results suggest that a 1 percent increase in the associated average wage translates into a 0.12 percent reduction in county employment. Furthermore, the lower wage counties experienced a far greater reduction (0.92 percent) in employment. Carter (1978) examines the impact of the minimum wage on the unemployment rate in a time series and finds that the southeastern states display a half a percentage point increase in unemployment due to a 10 percent increase in the minimum wage. Heckman and Sedlacek (1981) also find a strong dis-employ ment effect in South Carolina manufacturing due to minimum wage increases. Castillo-Freeman and Freeman (1992) examine the low-wage-area theory of minimum wage effects by concentrating on Puerto Rico. Their results stand out from the standard minimum wage literature in terms of the size of the dis-employment effect associated with the minimum wage. These estimates range from a 1.5 to 5.4 percent reduction in employment due to a 10 percent increase in the minimum wage. Recently, a new branch within the minimum wage effects literature has challenged the traditional estimation formats discussed above. This new branch has several names, the natural experiment approach, the treatment approach, or the pre/post approach to estimating minimum wage effects. Card (1992), Card (1992b), Katz and Krueger (1992), and Card and Krueger (1995) are examples. All of these studies examine employment and wage changes that straddle an increase in the legislated minimum wage. For example, Card (1992) examines the employment effects in California due to the 1988 state minimum wage change. Katz and Krueger (1992) examine employment 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 then regresses the teen employment to population ratio on state factors and the average state wage or an instrument for the state average wage to obtain an estimate of the employment elasticity with respect to the average wage. Put another way, Card (1992b) estimates the price elasticity of labor demand across a period when a minimum wage change has occurred. The results suggest no reduction in teen employment due to the

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increase in the minimum wage. In fact, he finds a positive correlation, although insignificant, between teen employment and the average wage. The natural experiment approach to estimating minimum wage effects has drawn many skeptics (Hamermesh, 1995; Brown, 1995; Freeman, 1995). Some would reject the approach based only on the implausibility of a positive correlation between minimum wage changes and employment. These critics also point out two methodological problems. First, any adjustments on the part of the firm due to the minimum wage may encompass a longer time period than that found in this literature. Since minimum wage changes are announced in advance, firms may reduce labor demand even before the minimum wage change takes effect. On the other hand, Brown (1995) maintains that the typical sample period in the natural experiment approach is not short enough to identify the treatment effect these studies are attempting to find. He argues that even in this short time period, the effect attributed to the minimum wage change may include various other factors. Traditional estimation procedures with the Kaitz (1970) index do not rely on a treatment or pre/post effect due to the minimum wage and usually encompass a larger data set. For these reasons, these authors advocate the traditional approach to estimating minimum wage effects over the natural experiment approach. While standard microeconomics principles, like that in Figure 1, seem clear on the employment impacts of wage floors, there appears to be no other subject that elicits more empirical controversy. Not only do the aforementioned approaches contradict each other, but even further debate has also ensued. For example, Krueger (1995) reexamines the work of Castillo-Freeman and Freeman (1992) and finds far different results. In addition Neumark and Wascher (1995) contradict the findings of Katz and Krueger (1992). In both cases the use of different data sources and methodology may explain the varying conclusions. Investigations of various sub-populations have also come to the front in this debate. Williams and Mills (1998) investigate the difference in dis-employment effects for males and females in a time-series framework. Partridge and Partridge (1999) investigate employment in the retail sector. Like these studies, I concentrate on a portion of the population that presumably faces a higher risk of disemployment due to the minimum wage: West Virginia workers. II.

West Virginia Wages

West Virginia is a low-wage state (Table 1). In 1995, West Virginia employees earned $104.62 less than the national average weekly wage. Only in the mining industry do West Virginia workers earn more than their cohorts elsewhere in the U.S. At the other extreme, the total trade sector is the most under paid industry in West Virginia relative to the U.S. While a gap in the average wage between West Virginia and the U.S. suggests that West Virginia workers are susceptible to job losses due to minimum wage increases, evidence concerning the size of the affected group is also needed. Like the proportion of teenagers at the national level who receive wages at or near the minimum, there is a larger proportion of all workers in West Virginia, relative to the national proportion,

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Table 1

Wage Gap: Average Weekly Wagesfor West Virginia and the U.S.
1990 WV 1990 US 1995 WV 1995 US Average WV as % of US

Total Private Industry Goods Producing Mining Construction Manufacturing Service Producing Transportation, Communication & Public Utilities Trade Fire Services

$463.25 580.44 759,10 444.75 537.46 375.35 532.79 254.03 380.29 334.30

$543.31 591.00 714.00 503.00 556.00 495.63 577.00 41 1.50 571.00 426.00

$546.42 655.50 862.69 476.56 627.26 437.34 618.09 290.09 449.28 391.88

$651.04 700.33 871.00 562.00 668.00 601.75 674.00 488.00 742.00 503.00

84.60% 95.91 102,68 86.61 95.28 74.21 92.02 60.59 63.58 78.47

Notes: Goods and Service producing are the average of the respective major industries. Total Private is an average of

all major industries included, agriculture and government are excluded. Last column is the average of the percentages for both years.
Sources: Employment and Wages, Annual Averages+ 1990 and 1995. Bureau of Labor Statistics.

who are affected by minimum wage changes. The statistics below make this point and suggest that significant negative employment effects will occur at the total employment level in West Virginia. In 1996, 26.7 percent of employed teenagers (ages 16 to 19) were paid at or below the minimum wage. Among persons aged 25 years and older, 4.4 percent nationwide were in this wage category. For all persons employed aged 16 years and older, 7.1 percent were paid an hourly rate equal to or less than the federal minimum wage. The proportion of teenagers receiving the minimum wage is the driving motivation in the minimum wage investigations that study teenage employment. Card (1992b) estimates that 25.7 percent of all teenagers receive the minimum. Wellington (1991) maintains that the percentage of teenagers in this group ranged from 28.7 to 45.3 percent between 1981 and 1987. Like teenagers at the national level, there is a large percentage of workers, regardless of age, receiving wages at or below the minimum wage in West Virginia. Although data comparable to the U.S. minimum wage data above are not available, several measures can provide close estimates. According to a recent Department of Labor study, the mean hourly earnings in West Virginia for all industries was $12.58 in May of 1997 (DOL, 1998). Within this group 10 percent received an hourly wage of $5.68 or less.

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The lowest paid occupations were in the service sector. The mean in these occupations was $7.93. The wage at the 10th percentile in the service sector was $5.00, and at the 25th it was $5.50. The West Virginia Bureau of Employment Programs (WVBEP) also provides some wage data. According to their estimates 16.7 percent of all occupations in West Virginia were paid an hourly wage less than $5.00 in 1995. This same percentage then would have been directly affected by the 1996 minimum wage increase. Therefore, a substantial portion of the West Virginia work force is affected by the minimum wage. Because West Virginia is both a low-wage state and a large proportion of the work force receives wages near the federal minimum, it is a good test case for minimum wage effects at the total employment level. III. Modeling West Virginia Employment In order to test the low-wage-area theory with West Virginia data, the following model will estimate the elasticity of employment with respect to the minimum wage in a manner similar to recent pooled studies. Like Williams (1993), the basic estimation is simply a derived, conditional-factor demand equation, which arises from the firm's cost minimization problem. In this case the firm minimizes the total cost of its inputs, which is the sum of the inputs (L) multiplied by their per unit prices (w). This minimization is conditional on the firm producing some specified level of output (y). The resulting function maintains that the optimal choice of labor, in this case, is a function of the wage and the output level.

c(w, y) =

min w IL l + w2L2, Lt, L 2

subject to f(L 1, L2) = y; L I = L l ( w l , w 2,y).
Equation (1) is the conditional-factor demand equation in estimation form.

LNEMPit = ~o + LNMWit~I + tNYit~2 + Xit~3 + YDt~4 + CDi~5 + Eit"

(1)

The observational units are West Virginia's fifty-five counties, pooled across eight years (1988-1995). The dependent variable is the ratio of total employment to the population aged 15 to 64 in each county (EMP). A county product measure (Y) proxies for output. Two fixed effects are included by adding year and county dummies, YD and CD, respectively. All estimates are carried out in natural log form, where LN designates natural logs. The matrix X includes county characteristics that may influence the dependent variable, including population controls and transfer payments. My empirical specification differs slightly from minimum wage literature that focuses on teenage employment effects. In the case of teenagers most studies concentrating on employment use the teenage employment to population ratio as the dependent variable and include the

MARVIN E. DODSON III

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teenage population share as an exogenous factor (Neumark and Wascher, 1992; Williams, 1993; Wellington, 1991). Although, there has been debate concerning this formulation, it appears to be dominant in the literature.1 In this study, where the dependent variable is the employment to population ratio for those between the ages of 15 and 64, including the comparable population share as an exogenous variable produces some endogeniety concerns. Therefore, population controls for all age groups outside of the working-age range are included as explanatory supply-side variables. 2 The minimum wage variable (MW) is a Kaitz (1970) index. The full Kaitz (1970) index includes measurements of coverage and the mandated wage for newly covered workers. Both of these factors are ignored in this specification. Coverage of the minimum wage has been estimated to be at least 89-90 percent of the work force. Wellington (1991) and Brown et al. (1983) find that including coverage makes no statistical difference in elasticity estimates. Newly covered workers are ignored because during the sample period no extension of coverage occurred. Equation (2) defines the minimum wage variable, where F M N W is the federal minimum wage; AHEj is the average hourly earnings in each major industry j; Ej is employment in each major industry j; and E T is total county employment.

Mw i = ~,, (Ej / ET)[FMNW / AHEj].

(2)

The index maintains that the minimum wage variable for each county is the ratio of the federal minimum wage to average hourly earnings in each major industry weighted by the individual major industry share of total employment. This specification will account for industry variation for each county and capture the "bite" of the minimum wage in each county. In addition to the basic model just discussed, I examine the effect of the minimum wage across counties. Specifically, the elasticity estimates are allowed to vary according to the rural or urban nature of the counties. Dummy variables indicating metro, urban, suburban, and rural counties are interacted with the minimum wage variable to see if these groups react differently to the minimum wage. IV. Data Table 2 provides a brief description and the source for each variable. The dependent variable in the model is a ratio of total employment in each county to the prime working age population (ages 15 to 64) in the county. These values are employment by place of work, not residence, making it a better estimate of the total employment opportunities or labor demand within a county. This measure differs slightly from that used in previous work. Wellington (1991), Neumark and Wascher (1992), and Williams (1993) all use labor force statistics derived from the Current Population Survey (CPS). With the CPS data, the respondent may be reporting employment status and location differently. My formulation reports the employment based on the county where the job is located. Therefore, this employment-to-population ratio is a measure of jobs per person in each county.

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Table 2

Minimum Wage Model Variables
Description Source

Dependent Variable
Ratio of total county employment to the county population aged 15 to 64 REIS and Bureau of the Census

Independent Variables
Per capita county level earnings by place of work, lagged one year (thousands of 1990 dollars) Kaitz minimum wage index Mining's share of total county employment, lagged one year Per capita disbursements of Old Age, Survivors, and Disability Insurance (OASDI) at the county level (thousands of 1990 dollars) Per capita disbursements of Supplemental Security Income (SSI) at the county level (thousands of 1990 dollars) Per capita disbursements of Aid to Families with Dependent Children (AFDC) at the county level (thousands of 1990 dollars) Number of persons within the county between the ages of 0 and 14 (thousands) Number of persons within the county aged 65 years and older (thousands) Percent of county population aged 15 to 64 that is female REIS Department of Labor (DOL) and West Virginia Bureau of Employment Programs (WVBEP) REIS REIS

REIS

REIS

Bureau of the Census Bureau of the Census Bureau of the Census

Note." Sample period is 1988-1995.

The data for the minimum wage variable discussed above are drawn from several sources. The federal minimum wage that applies to all the counties is available from the U.S. Department of Labor. 3 Average hourly earnings in each industry for all counties must be constructed. The WVBEP provides average weekly earnings for each industry at the county level on an annual basis as well as average weekly hours for each industry at the state level on an annual basis. Therefore, these series can together provide average hourly earnings for each industry at the county level. Mixing these average hours at the state level and average earnings at the county level introduces a necessary, but reasonable, assumption. Employees in any given industry are assumed to work the same amount of hours per week on average in every county, which some-

MARVIN E. DODSON IlI

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what reduces variation at the county level. However, since the minimum wage variable varies across counties due to the industry mix, that loss may not be very large. This county-level industrial mix enters through the industrial shares of total employment. Employment shares are simply the number of employees working in each major industry divided by the total employment within the county. The federal minimum wage takes on three values during the sample, $3.35 in 1988 and 1989, $3.80 in 1990, and $4.25 for the remainder of the sample. Total earnings by place of work proxies for county output. Theory demands some variable that represents the output level in this specification. Unfortunately, this presents an empirical problem. First, there is no direct measure of county output. Second, any reasonable proxy may be correlated with several of the other right-hand-side variables. For instance, county shares of gross state product and county total personal income produced highly suspect results. Although total earnings introduces similar empirical concerns, the results are less suspect. In addition, the output measure is lagged by one year to further reduce any endogeniety and multicollinearity concerns. The matrix (X) includes transfer payments, population controls by age and sex, and lagged county mining employment. Three measures of transfer payments are included in the model, because they may represent the next best alternative to working, and they may capture some business cycle and demographic group variations. The expected sign of all three is negative, since these factors are viewed as the alternative to work and since subsidies typically increase when employment decreases. The measurements of output and transfers are per capita in the model. The transfer income measures used are Old-Age, Survivors, and Disability Insurance (OASDI), Supplemental Security Insurance (SSI), and Aid to Families with Dependant Children (AFDC). OASDI should pick up employment changes due to involuntary dropouts (disability) in employment. Both AFDC and SSI are designed to provide for those with low incomes and therefore can control for any influence from the income distribution. These factors are also a consideration in the decision to work, since they represent a possible alternative. Of course, there is feedback in this relationship. As workers are displaced by the minimum wage, transfer payments are likely to rise. Therefore, in this specification the minimum wage effect may be biased downwards due to the effect of transfer payments, 4 The number of people in the county between the ages of zero and 14 should be a negative influence on labor force participation, if child rearing is a significant factor in the labor/leisure decision. The number of people in the county over the age of 65 could correlate positively or negatively with employment. If those at retirement age re-enter the work force, the correlation will be positive. If they truly retire, the impact will most likely be negative. Elasticities for these two variables must be interpreted as relative to the prime working age group, because it is the only one left out. The percent of the primeage working population that is female is also included as a demographic control. West Virginia has historically overwhelmingly depended on the mining industry. The importance of mining in West Virginia necessitates an employment control vari-

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able for this factor. Employment shares of the mining industry in each county serve as this control. Additionally, this employment variable will pick up a good deal of wage variation due to unionization, since the majority of unions are in mining. As Table 1 indicates, the mining industry in West Virginia maintains relatively higher wages. Therefore, this variable should control for those workers who are relatively less susceptible to minimum wage dis-employment. The variable is also lagged by one year to reduce endogeniety concerns. While my sample period is not completely appealing due to the recession in 19901991 and minimum wage changes after 1995, county-level disclosure problems make it the most useful. In addition, there is significant variation in the minimum wage variable at the county level for this sample period. Table 3 provides descriptive evidence about the wage measurements and the remaining variables for the first and last year of the sample. The data indicate that the federal minimum wage increased at a faster rate than county-level average hourly earnings, so the group of workers affected by the minimum wage clearly must have grown during this period. In 1988, the average worker across these counties earned $7.40. According to the Kaitz measurement, the federal minimum wage represented 29 percent of the average hourly earnings among these counties. By 1995, average hourly earnings rose to $8.75, a 15.9 percent increase in nominal terms. The federal minimum wage between these years rose from $3.35 to $4.25, a 26 percent increase. Consequently, the "bite" of the minimum wage increased among these counties (Table 3). In fact, in 1995 the minimum wage accounted for 33 percent of average hourly earnings in the counties of West Virginia. V. Estimation Results The reported coefficients in Table 4 are elasticities. Column 1 displays the results for the conditional labor demand equation with no further controls. Output is positively correlated with the demand for labor, but insignificantly so. The minimum wage variable in this specification is negatively correlated with employment and its coefficient estimate is significantly different from zero at 10 percent. Column 2 adds the demographic and transfer-payment controls. With these controls, output remains insignificant while the minimum wage variable and employment are correlated at the 5 percent level. In this case a 10 percent increase in the minimum wage is associated with a 1.1 percent decrease in employment in the average county. Neither of the coefficients for population groups outside of the prime working age is significantly correlated with the dependent variable. Per capita SSI and AFDC payments produce negative coefficients but only the AFDC coefficient is statistically significant. The results also suggest that the female percentage of the prime age working group is negatively correlated and significant with respect to county-level employment. There is no significant correlation between the dependent variable and the remaining population controls or the mining variable. The addition of county and year dummies improved the estimation considerably. A joint significance test for both fixed effects rejected the null hypothesis. Further-

MARVIN E. DODSON III

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more, the Hausman test rejected the use of the random effects model at the 1 percent level of significance in each specification. Heteroskedasticity is absent in each specification as well. The Bruesch-Pagan test statistic rejected the null of homoskedasticity in all specifications. The corrected standard errors, according to White's (1980)

Table 3

Descriptive Statistics for 1988 and 1995
Standard Deviation

Mean Variable Ratio of total county employment to the county population aged 15 to 64 Per capita county-level earnings by place of work, lagged one year (thousands of 1990 dollars) Kaitz minimum wage index Mining's share of total county employment, lagged one year Per capita disbursements of Old Age, Survivors, and Disability Insurance (OASDI) at the county level (thousands of 1990 dollars) Per capita disbursements of supplemental Security Income (SSI) at the county level (thousands of 1990 dollars) Per capita disbursements of Aid to Families with Dependant Children (AFDC) at the county level (thousands of 1990 dollars) Number of persons within the county between the ages of 0 and 14 (thousands) Number of persons within the county aged 65 years and older (thousands) Percent of county population aged 15 to 64 that is female 1988 0.587

Median

Range 1988 0.644 1995 0.768

1995 1988 1995 1988 1995 0.628 0.562 0.596 0.147 0.167

4,638

5.608 4.08

5.078 2.832

3.646

12.898

13.29

0.292

0.329 0.287 0.068

0.321 0.053

0.05 0.117

0.049 0.098

0.269 0.513

0.199 0.429

0. I 12 0.085

1.054 1.535 1.(145 1.531 0.176 0.257

0.742

1.054

0.075

0.159

0.069

0.147

0.031

0.07

0.134

0.281

0.062

0.065

0.058

0.063

0.029 0.026

0.131

0.108

7.632

6.902

5.71

5.244

6.946 6.229

40.414 35.757

5.307

5.613

3.479

3.705

5.371 5.582

30.835

31.953

0.507

0.504 0.507

0.506 0.008

0.009

0.035

0.038

Notes: County-leveldata on 45 West Virginia counties. Due to disclosure problems 10 of West Virginia's 55 counties were

excluded from the sample.
Sources: See Table 2.

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Table 4

E m p l o y m e n t Elasticity E s t i m a t e s
I 2 3

Intercept

-1.143"* (0.069) ~).100 ^ (0.054)

-2.701"* (0.621) ~0.105" (0.054)

-2.147"* (0.485)

Minimum Wage Minimum Wage (Metro) Minimum Wage (Urban) Minimum Wage (Suburban) Minimum Wage (Rural) Output

~0.086 (0.148) -0.333 (0.258)

~). 112
(0.094) 4). 143" (0.067) 0.012 (0.01 I ) 0.128 (0.012) 0.095 (0.067) -0.097** (0.031 ) -0.002 (0.034) -0.003 (0.269) 0.022 (0.306) -1.909* (0.889) 0.012 (0.008) 0.127** (0.009) 0.247** (0.064) ~0.262"* (0.031 ) 0.096** (0.028) -0.297** (0.047) 0.399** (0.049) -0.758 (0.674) -0.011 ^ (0.007)

OASDI AFDC

SSI

Population under 15 years old Population 65 and older

Female Share of Population aged 15 to 64 Mining Share of Total Employment Dummies Counties, Year
0,981

Counties, Year
0.981

Urban, Suburban, Rural, Year
0.78

Adj. R2

Notes: Parentheses are White's (1980) corrected standard errors. Coefficients are elasticities (estimated in natural logs).
A ** (*,^) indicates significance at 1% (5%, 10%), two-tailed test.

MARVIN E. DODSON III

37

procedure, are reported in parentheses. Additionally, a LM-test indicated that auto-correlation does not bias the results. Column 3 introduces the possibility of varying slope coefficients for the minimum wage variable for different groups of counties. Four new variables replace the Kaitz (1970) minimum wage variable. These new variables interact the minimum wage variable with a set of four county-descriptive dummies. The county dummies, formed by the "Beale Codes" produced by the Department of Agriculture, describe the counties according to their urban or rural nature (Butler and Beale, 1994). For this study, several of the county codes have been grouped together. All counties with a designation of 0, 1, 2, or 3 are "metro" counties, which includes central and fringe counties of metropolitan areas. West Virginia has twelve counties in this group [Berkeley, Brooke, Cabell, Hancock, Jefferson, Kanawha, Marshall, Mineral, Ohio, Putnam, Wayne, and Wood]. Those counties with a designation of 4 or 5 on the continuum are "urban" and have an urban population of 20,000 or more [Harrison, Marion, Monongalia, and Raleigh]. Counties with an urban population between 2,500 and 19,999 or a designation of 6 or 7 on the continuum are "suburban" [Barbour, Boone, Fayette, Greenbrier, Jackson, Lewis, Logan, McDowell, Mason, Mercer, Mingo, Nicholas, Preston, Randolph, Summers, Taylor, Upshur, and Wetzel counties]. The remaining 21 counties have a continuum designation of 8 or 9 and are "rural" with urban populations below 2,500 persons. The specification in column 3 includes the four interacted minimum wage variables, the control variables used in the previous estimation, and the year dummies. Three of the four county-descriptive dummies replace the county-specific dummy variables. Therefore, each group of counties has a slope coefficient with respect to the minimum wage and an intercept term. The null hypothesis of no differences between these slopes can be rejected at the 5 percent level (F3,337 3.278). However, the only coefficient that is statistically significant is the slope on the rural counties. Employment in rural counties is more severely affected by minimum wage increases, and its estimated elasticity is more statistically significant. According to the estimates, rural counties will experience an added 0.4 percent in employment reductions compared with the average of all counties due to the same 10 percent increase in the minimum wage. The minimum wage elasticity estimates for the metro, urban, and suburban counties are negative but not significantly different from zero. The results for the control variables are not substantially altered by this complication.
=

In each specification the sum of square errors and the adjusted R-square measure indicate that fixed effects for counties and years produce the best model. In fact, the adjusted R-square appears to indicate an extraordinarily good model. While this may be the first sign of multicollinearity due to the output variable, the county dummy variables suggest otherwise. These fixed effects explain the majority of the variation in the dependent variable. For example, if all the independent variables were dropped except the county dummies, the adjusted R-square is still 0.9. In other words, given

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that county-specific variation alone explains 90 percent of the variation in the e m p l o y ment to population ratio, there remains a negative and significant relationship between the dependent variable and the minimum wage. VI. Conclusions West Virginia counties do provide evidence o f significant d i s - e m p l o y m e n t due to the minimum wage, a finding that supports the theory that low-wage areas are more susceptible to e m p l o y m e n t losses when the legislated m i n i m u m wage is increased. M y results show that a 10 percent increase in the m i n i m u m wage will reduce total employment in the average West Virginia county by 1,1 percent. The most rural counties may also respond more severely, up to 1.4 percent for the same m i n i m u m wage change. These estimates indicate that m i n i m u m wage increases intensify competition in the work force while the quantity of labor demanded decreases. More important, these total e m p l o y m e n t estimates are within the range o f previous estimates for teenage employment. Wellington ( 1991 ), Neumark and Wascher (1992), Williams (1993), and Brown et al. (1982) all estimate that the teen e m p l o y m e n t elasticity with respect to the minimum wage ranges between 0.6 and 2.0 percent for the same 10 percent increase in the minimum wage. These studies also maintain that adult e m p l o y m e n t will be less responsive than teen employment. Since my results show elasticities for total employment within the range for teen employment, there is support for the position that the minimum wage produces negative effects on a larger scale in low-wage areas. The differences between national measurements of m i n i m u m wage effects and these local-area estimates highlight an important point. A n y aggregate measure of disemployment due to the minimum wage will incorporate geographic areas having varying degrees o f susceptibility to m i n i m u m wage effects. Surely, any level o f the minimum wage will not affect some areas because the prevailing market wage is on average much higher than the minimum. Unfortunately, l o w - w a g e and l o w - i n c o m e states are intended to be the beneficiaries o f m i n i m u m wage legislation. The negative impacts I find for West Virginia indicate how federal labor market regulation can indeed produce counterproductive consequences.

NOTES *I thank Clifford Hawley, Sudeshna Bandypadhyay,George Hammond, Stratford Douglass, Brian Cushing, Tom Garrett, Victor Claar, Gary Wagner, and an anonymous referee for helpful comments. 1Supply variables in this single equation model are necessary for two reasons. First, supply variables should fully identify the demand curve. Second, these variables can account for the employment of those who earn above the minimum wage. Much discussion on these points can be found in the literature (Brown et al., 1982; Neumark and Wascher, 1992; Williams, 1993; Wellington, 1991). Although the debate continues there appears to be a consensus that even in a demand constrained labor market - - binding minimum wage - supply variables are important for the reasons above. Identification of the demand curve is, of course, an important econometric issue. Controlling for the presence of those workers who are paid above the mini-

M A R V I N E. D O D S O N III

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mum wage is also important in that doing so should produce a minimum wage coefficient that is not biased by this sector of the labor market. 2In addition to the explanatory controls, the dependent variable also captures supply side variation. As Brown et al. ( 1982, p. 501, footnote 18) point out, the employment-to-population ratio implicitly controls for labor supply variation9 3West Virginia does not have a state minimum wage that exceeds the federal minimum wage. 4Other measures of transfer payments may mitigate this bias. Eligibility requirements or marginal tax rates are possibilities. However, as the observation level is counties within West Virginia, I am aware of no data that provide variation9

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Brown, Charles. "Comment." Industrial and Labor Relations Review 48 (July 1995): 828-30. Butler, Margaret and Clavin Beale. "Rural-Urban Continuum Codes for Metro and Nonmetro Counties, 1993" Staff Report No. 9425, U.S. Department of Agriculture, Economic Research Service (September 1994). Card, David. "Do Minimum Wages Reduce Employment? A Case Study of California, 1987-897' Industrial and Labor Relations Review 46 (October 1992): 38-54. 9 "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage." Industrial and Labor Relations Review 46 (October 1992b): 22-37. _ _ and Alan B. Krueger. Myth and Measurement: 1"heNew Economics of the Minimum Wage. Princeton: Princeton University Press, 1995.

Carter, Charlie. "The New Minimum Wage: A Threat to Southeastern Jobs?" Economic Review, Federal Reserve Bank of Atlanta 63 (March / April 1978): 30-34. Castillo-Freeman, Alida and Richard Freeman9 "When the Minimum Wage Really Bites: The Effect of the U.S.-Level Minimum Wage on Puerto Rico." In Immigration and the Work Force, edited by George Borjas and Richard Freeman. Chicago: University of Chicago Press, 1992, pp. 177-212. Colberg, Marshall. "Minimum Wage Effects on Florida's Economic Development." Journal of Law and Economics 3 (October 1960): 106-17. Freeman, Benjamin. "Comment." Industrial and Labor Relations Review 48 (July 1995): 830-34. Hamermesh, Daniel. "Comment." Industrial and Labor Relations Review 48 (July 1995): 828-30. Heckman, James and Guilherme Sedlacek. "The Impact of the Minimum Wage on the Employment and Earnings of Workers in South Carolina." In Report of the Minimum Wage Study Commission, vol. V. Washington, D.C.: U.S. GPO, 1981, pp. 225-72. Kaitz, Hyman. "Experience of the Past: The National Minimum." In Youth Unemployment and Minimum Wages, Bulletin 1657. U.S. Department of Labor, Bureau of Labor Statistics, Washington, D.C.: U.S. GPO, 1970, pp. 30-549 Katz, Lawrence and Alan B. Krueger. "The Effects of the Minimum Wage on the Fast Food Industry." Industrial and Labor Relations Review 46 (October 1992): 6-21.

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Krueger, Alan B. "The Effect of the Minimum Wage When It Really Bites: A Reexamination of the Evidence from Puerto Rico." In Research in Labor Economics, vol. 14, edited by Solomon W. Polachek. Greenwich, Conn. and London: JAI Press, 1995, pp. 1-22. Neumark, David and William Wascher. "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws." Industrial and Labor Relations Review 46 (October 1992): 55-819 _. "The Effect of New Jersey's Minimum Wage Increase on Fast-Food Employment: A Re-Evaluation Using Payroll Records." NBER Working Paper Series, Working Paper 5224 (August 1995). Cambridge, Mass.: National Bureau of Economic Research9 Partridge, Mark D. and Jamie S. Partridge. "Do Minimum Wage Hikes Reduce Employment? State-Level Evidence from the Low-Wage Retail Sector9 Journal of Labor Research 20 (Summer 1999): 393-4139 Schaafsma, Joseph and William D. Walsh. "Employment and Labour Supply Effects of the Minimum Wage: Some Pooled Time-Series Estimates from Canadian Provincial Data." Canadian Journal of Economics 16 (February 1983): 87-97. U.S. Department of Commerce, Economics and Statistics Administration, Bureau of Economic Analysis 9 Regional Economic Information System 1969-959 Washington, D.C.: U.S. GPO. 1997. _, Bureau of the Census 9 Statistical Abstract of the United States, 1997. Washington, D.C.: U.S. GPO, 1998. U.S. Department of Labor. Studies of the Economic" Effects of the $1 Minimum Wage. Washington, D.C.: U.S. GPO, 1959. . Report submitted to the Congress in accordance with the requirements of section 4(d) ~f the Fair Labor Standards Act. Washington, D.C.: U.S. GPO, 1965. 9National Compensation Survey, Wages and Salaries, West Virginia, May 1997, Bulletin 309021 .Washington, D,C.: U.S. GPO, 1998. Wellington, Alison J. "Effects of the Minimum Wage on the Employment Status of Youths: An Update." Journal of Human Resources 26 (Winter 1991 ): 27-45. White, Halbert. "A Heteroscedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticity." Econometrica 48 (May 1980): 817-38. Williams, Nicolas. "Regional Effects of the Minimum Wage on Teenage Employment." Applied Economics 25 (December 1993): 1517-28. _ _ and Jeffrey A Mills. "Minimum Wage Effect by Gender." Journal of Labor Research 19 (Spring 1998): 397-414.

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