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Regional Studies, Vol. 33.8, pp.

713± 726

Do Minimum Wage Hikes Raise US Long Term


Unemployment? Evidence Using State Minimum
Wage Rates1
M AR K D. PA RT R ID G E * and JAM I E S. PA RT R ID G E ²
*Department of Economics, Stewart Hall, St Cloud State University, St Cloud, MN 56301-4498, U SA
² Department of Management, St John’s University/College of St Benedict, St Joseph, MN 56374, USA

(Received July 1998; in revised form March 1999)

P AR TR ID GE M. D. and P A RT RI D G E J. S. (1999) Do minimum wage hikes raise US long term unemployment? Evidence
using state minimum wage rates, Reg. Studies 33, 713± 726. Several recent studies have challenged the conventional notion that
raising the minimum wage reduces employment. This study considers a related but relatively unexplored issue by examining
the minimum wage’s in¯ uence on long durations of unemployment. By considering long term unemployment rates, this study
extends the previous minimum wage literature by examining the persistence of minimum wage eVects. The empirical analysis
considers state data from the latter 1980s, a unique period when many states raised their minimum wage above the federal level.
The results suggest that a greater minimum wage increases long term unemployment rates. Further evidence indicates that
increased minimum wage coverage also raises long term unemployment rates. Subsequent analysis yielded similar patterns for
other aggregate labour market measures. Thus, state and federal policy makers should weigh these potential costs in deciding
whether to increase minimum wage rates in the future.

Long term unemployment Minimum wage Minimum wage coverage Unemployment

P AR TR ID GE M. D. et P A RT RI D G E J. S. (1999) Les retom- P A RT RI D G E M. D. und P AR TR IDG E J. S. (1999) FuÈhren


beÂes des augmentations du salaire minimum sur le choÃmage Anhebungen von MindestloÈhnen in den Vereinigten Staaten
de longue dureÂe? Des preuves provenant des salaires mini- zu langfristigem Ansteigen der Arbeitslosigkeit? Beweise, die
mum aux Etats-Unis, Reg. Studies 33, 713± 726. Des eÂtudes sich auf staatliche Mindestlohnraten stuÈtzen, Reg. Studies 33,
reÂcentes ont mis en question l’ideÂe recËue qu’une augmenta- 713± 726. Verschiedene, kuÈrzlich veroÈ Ventlichte Unter-
tion du salaire minimum entraõÃ ne une reÂduction de l’emploi. suchungen stellten die herkoÈmmliche Meinung in Frage, daû
Cette eÂtude-ci cherche aÁ consideÂrer un sujet connexe mais ein Anheben der MindestloÈhne zur Herabsetzung der Zahl
relativement inexploreÂ; autrement dit, les retombeÂes du salaire der BeschaÈftigten fuÈ hrt. Dieser Aufsatz zieht eine damit
minimum sur le choÃmage de longue dureÂe. En examinant verbundene, doch relativ selten untersuchte Frage in
les taux de choÃmage de longue dureÂe, cette eÂtude eÂlargit la Betracht, indem er den Ein¯ uû des Mindestlohnes auf lang
documentation anteÂrieure qui porte sur le salaire minimum anhaltende Arbeitslosigkeit pruÈft. Mit Hilfe der langfristigen
en consideÂrant la persistance des retombeÂes du salaire mini- Arbeitslosigkeitsraten erweitert die Studie durch Unter-
mum. On analyse des donneÂes qui proviennent de la ® n des suchung der anhaltenden Auswirkungen von MindestloÈhnen
anneÂes 1980, une eÂpoque exceptionnelle ouÁ bon nombre des die Literatur uÈber MindestloÈhne. Die empirische Analyse
eÂtats ont augmente leur salaire minimum au-dessus du niveau zieht oYzielle Datan der spaÈten achtziger Jahre heran, einer
feÂdeÂral. Les reÂsultats laissent supposer qu’un rencheÂrissement einmaligen Periode, insoweit als viele Staaten ihre Min-
du salaire minimum entraõÃ ne une hausse des taux de choÃmage destloÈhne uÈber die auf Bundesebene gezahlten anhoben. Die
de longue dureÂe. Des preuves suppleÂmentaires laissent voir Ergebnisse legen nahe, daû ein hoÈherer Mindestlohn zum
qu’un accroissement de la proportion de smicards ameÁne Ansteigen der langfristige Arbeitslosenraten fuÈhrt. Weitere
aussi aÁ une hausse des taux de choÃmage de longue dureÂe. Beweise lassen erkennen, daû vermehrte Mindestlohn-
Une analyse ulteÂrieure a fourni des re sultats comparables deckung auch langfristige Arbeitslosigkeitsraten anhebt. Die
pour ce qui est des autres mesures globales du marche du anschlieû ende Analyse ergab aÈhnliche Muster fuÈr andere, den
travail. Ainsi, les de cideurs, et au niveau de l’eÂtat et sur le Gesamtarbeitsmarkt umfassende Maû nahmen. Auf staatlicher
plan feÂdeÂral, devraient eÂvaluer ces couÃts potentiels au moment wie auf bundesstaatlicher Ebene sollten politische Entschei-
ouÁ ils de cident si, oui ou non, il faudra augmenter les taux dungen deshalb diese potentiellen Kosten mit in Betracht
de salaire minimum. ziehen, wenn sie zukuÈnftige Anhebungen von Min-
destloÈhnen erwaÈgen.
ChoÃmage de longue dureÂe Salaire minimum
Proportion de smicards ChoÃmage Langfristige Arbeitslosigkeit Mindestlohn
Mindestlohndeckung Arbeitslosigkeit

0034-3404/99/080713-14 ©1999 Regional Studies Association


714 Mark D. Partridge and Jamie S. Partridge

I N T RO D UC T I O N exceeded 20%, where the 20% ® gure was topped in


only one other year since World War Two (1983)
Since its original enactment in the 1930s, federal mini- (P A R T R I D G E and R I CK M A N , 1998). Longer durations
mum wage increases have been viewed by many as an of unemployment likely reinforced the seemingly high
eVective avenue to redistribute income and reduce levels of job anxiety felt by workers during the 1990s
poverty (F R EE M A N , 1996) as well as to provide a (see A A R O NS O N and S U L L I V A N , 1998, for more
`living wage’ (K U T T NER , 1997). Given that in¯ ation details of this anxiety). By comparison, the share of
erodes the purchasing power of a ® xed minimum wage, long term unemployed in total unemployment was less
every few years there are calls for further increases. than 10% in the latter 1980s. This raises an interesting
With US income inequality rising since the 1970s, the question: did the 1990± 91 increase in the federal mini-
policy implications of minimum wage hikes are even mum wage contribute to longer durations of un-
more signi® cant. In fact, many economists have argued employment? In addition, the onset of federal welfare
that the declining purchasing power of the minimum reform means that states will carry a greater share of
wage since the 1970s can account for about 30% of the income redistribution burden. One implication is
the ensuing increase in earnings dispersion (F O R T I N that state policy makers may feel pressure to boost their
and L E M I EU X , 1997). minimum wage to lift poor families out of poverty.
Yet, economists have traditionally cautioned that Given that many chronic welfare recipients can also be
raising the wage ¯ oor has deleterious consequences viewed as outsiders, the relationship between long term
including additional unemployment, reduced general unemployment and state minimum wage rates may
training and oVsetting reductions in fringe bene® ts. shed light on this topic as well.
B R O WN et al.’s, 1982, survey of the literature indicated In what follows, the next section sketches some
that a 10% increase in the minimum wage would on simple minimum wage models. The third section dis-
average reduce teen employment by 1± 3%, raise teen cusses empirical implementation and the fourth section
unemployment rates by 0± 0´75%, with smaller eVects discusses the results. In addition, section ® ve will con-
for adults. Such negative eVects temper the desired sider the in¯ uence of state minimum wage rates on
redistribution. None the less, US economists rarely, if aggregate unemployment rates. This additional analysis
at all, discuss minimum wage eVects on unemployment will examine the robustness of the long term un-
duration. employment rate results and will be of interest in their
Regardless, as F R EE MA N , 1995, notes, it is possible own light. The ® nal section presents some concluding
that minimum wage legislation can create a class of thoughts.
permanent outsiders who cannot obtain employment,
even though they would be willing to work at a rate
below the minimum wage. In fact, S I E B ER T, 1997, T H E M I NI M UM WA G E A N D T H E
contends that high minimum wage rates are a key L A B O UR M A RK E T
factor behind high levels of structural and long term The need to better understand all minimum wage
unemployment in Europe. Yet, the possibility that eVects is highlighted by a possible breakdown in the
minimum wage hikes increase long term unemployment consensus among economists regarding the minimum
is a relatively unexplored topic for the US. However, wage during the 1990s. Foremost is a series of cross-
C L A R K and S U M M ER S , 1990a, ® nd that most jobless- sectional and case studies by C A R D and K R U E G ER
ness in the US is composed of a hard core group of (e.g. 1992, 1994, 1995) which found that the 1990± 91
unemployed who are jobless for more than six months, increase in the federal minimum wage had virtually no
even though the typical person exits unemployment impact on employment. Similarly, D I C K ENS et al.,
rather quickly (less than three months). It seems plaus- 1999, and M A CH I N and M A NN I NG , 1994, found no
ible that members of this hard core group would be negative minimum wage eVects for UK employment.
potentially susceptible to job loss due to minimum However, recent ® ndings that minimum wage hikes
wage hikes, while ® nding a new job would be more have very little eVect on employment have not gone
diYcult.2 Therefore, this study will investigate the unchallenged. For example, using a variety of data sets
impact of state minimum wage laws on the prevalence and techniques, N EU M A R K and W A S C H E R , 1992,
of long term unemployment (de® ned as greater than 1994; D E ER E et al., 1995; K I M and T A Y L O R , 1995;
26 weeks). C U R R I E and F A L L I C K , 1996; and P A R T R I D G E and
One reason for the lack of emphasis on US long P A R T R I DG E , 1999, have found that increases in the
term unemployment is that is has been viewed as a minimum wage reduce employment, while P A R T -
relatively small problem. However, this may be chang- R I D G E and P A R T R I DG E , 1998, found that they
ing. The growing importance of long term unemploy- increase teen unemployment rates.
ment in the US can be seen by noting that, between Given the con¯ icting minimum wage ® ndings in the
1992± 94, the (annual) share of unemployed workers literature, it is not surprising that there are numerous
who had sought employment for more than 26 weeks models of how minimum wage legislation aVects the
Do Minimum Wage Hikes Raise US Long Term Unemployment? 715
labour market (e.g. see M I NC ER , 1976; B R O WN et al., superior to examining changes in unemployment rates
1982; C A R D and K R U E G ER , 1995). It is not possible (or vice versa), suggesting a need to consider all labour
to do a complete survey, but it is useful to outline some market indicators.
of the major themes in these models. Standard labour market theory also suggests that a
The standard minimum wage model is the basic greater minimum wage can increase long term un-
supply and demand model. In its simplest form, impos- employment. That is, if less skilled workers with a low
ing a wage ¯ oor above the equilibrium wage reduces value of marginal product (with realistic reservation
the quantity of labour demanded while inducing new wages) cannot be oVered a wage below the minimum
entrants into the labour market. Two outcomes are an wage by employers, their probability of receiving a job
increase in the unemployment rate and a reduction in oVer will diminish and their duration of unemployment
employment. However, real world complexities will increase. Using 1988 as a representative year for a
complicate the analysis. First, minimum wage coverage stylistic example, the median duration of unemploy-
is incomplete. A greater minimum wage may induce ment was 5´9 weeks, roughly corresponding to a cons-
workers from the uncovered sector to queue for jobs in tant 0´11 weekly hazard rate for exiting unemployment.
the covered sector, while previously employed workers Suppose that a higher minimum wage slightly reduces
from the covered sector may be forced to ® nd work in this to 0´10. This modest change would increase the
the uncovered sector. Moreover, some workers may be probability by one-third that an individual’s unemploy-
so discouraged by diminished employment chances that ment spell would last at least 26 weeks, which is
they exit the labour force (and hence are not counted consistent with long term unemployment rates being
as oYcially unemployed). Further complicating the more cyclically responsive than short term unemploy-
analysis is that ® rms may reallocate their shares of full- ment rates (C L A R K and S U M M ER S , 1990a). Moreover,
and part-time labour (R E S S L ER et al., 1996) such that if there is negative duration dependence where the
employment changes do not accurately re¯ ect actual hazard rate declines over time, a minimum wage
changes in total labour inputs (W EL C H , 1995). Finally, increase would further raise the chance of a long
® rms may substitute more skilled labour for less skilled unemployment duration.3 Also, T H OM A S , 1996, ® nds
labour, which further confounds the eVects on total that the length of unemployment spells is negatively
employment. related to the previous job’s wages. This suggests that
The monopsony labour market model has recently low skilled, low wage workers are even more susceptible
received attention in the minimum wage debate to longer unemployment durations. Since these lower
(C A R D and K R U E G ER , 1995). In this case, if an skilled workers are the very people minimum wage
employer is (labour) supply constrained, minimum hikes are hoped to bene® t, greater unemployment
wage increases can yield employment gains. Card and duration seems especially counter to the policy goals.
Krueger contend that information imperfections and A key advantage of considering the long term un-
mobility costs make the monopsony model applicable employed is that it seems much less likely that a potential
in low wage labour markets. However, many econom- worker induced into the labour market, by say a 10%
ists question the general applicability of the monopsony minimum wage increase, would remain in the labour
model in the typical labour market. force for more than six months without a job (i.e.
Therefore, the employment outcome of increasing continuously searching for work for such a small gain).
the minimum wage is hard to predict. Standard models That is, any increased long term unemployment should
generally imply a reduction in the number of labour be almost entirely concentrated among those who
hours, but not necessarily total employment, while a would have been in the labour force without a mini-
monopsony model can imply the opposite. The relative mum wage hike.
size and substitution elasticities in the covered and Despite the above discussion, the minimum wage
uncovered sector further confound employment pre- may have very little in¯ uence on long term unemploy-
dictions. Changes in total employment are also compli- ment if industries that employ a disproportionate share
cated by changes in the prevalence of part-time of minimum wage workers have almost no unemploy-
employment and average hours of work as well as ment to begin with. However, using 1988 Bureau of
changes in skill intensities. Likewise, the quantity of Labor Statistics data, this does not appear to be the
labour supplied may increase if new workers are case. The overall 1988 unemployment rate was 5´5%.
induced by the greater wages, or decrease if workers Yet, in retail, where over one-half of minimum wage
become discouraged and exit the labour force. Thus, workers are concentrated (S M I T H and V A VR I C H E K ,
unemployment rates may not necessarily increase. 1992), the unemployment rate was 6´1%. It was an
However, if workers from the uncovered sector queue even higher 8´9% for eating and drinking establishment
for employment in the covered sector, these search workers, which is where retail sector minimum wage
costs add to the social waste of increasing the minimum workers are especially concentrated. Relatively high
wage (M I NC E R , 1976). One implication is that, in unemployment rates are found in other industries
determining the impact of minimum wage laws, it is where the minimum wage is relatively important:
not clear whether examining employment changes is apparel, 8´1%; food and kindred industries, 8´2%; and
716 Mark D. Partridge and Jamie S. Partridge
private household services, 6´8%. Hence, unemploy- (e.g. see C L A R K and S U M M ER S , 1990a, regarding the
ment rates are relatively high in industries where the relationship between non-employment and unemploy-
minimum wage plays a key role, suggesting that mini- ment spells). Another feature of our long term un-
mum wage increases can, in turn, extend unemploy- employment rate measure is that, to be considered long
ment durations. Conversely, older displaced workers term unemployed, a jobless worker must continuously
would appear unlikely to be in¯ uenced by minimum search for work for six months, which means that we
wage increases. Yet, even here, because displaced are focusing on individuals who are the most attached
workers earn about 25% less on average up to ® ve years to the labour force. Thus, a rise in our long term
after displacement ( J A CO B S O N et al., 1993), minimum measure suggests that at least a portion of the labour
wage rates may in¯ uence displaced workers who are in force (who are quite attached) has experienced rather
the tail of the wage loss distribution.4 signi® cant increases in search costs and other costs. In
Since we will examine variations in minimum wage later analysis, we will also consider more aggregate
laws caused by state legislation, not federal legislation, unemployment, employment/population, and labour
there are other conceptual considerations when making force participation rates to examine the robustness of
predictions. Foremost, there is little incentive for ® rms the long term unemployment results.
or households to relocate or migrate in response to Regardless of whether the competitive model or the
federal minimum wage changes because there are no monopsony model primarily applies, the unemploy-
cross-state variations. However, state minimum wage ment rate is determined by the interaction of labour
changes can create incentives for cross-state ® rm and supply and labour demand in each state. Our empirical
household relocation, as well as aVect the likelihood of speci® cation will re¯ ect a reduced form model of
® rm births and deaths. One implication is that mini- these relationships. Factors that increase labour demand
mum wage responses driven by state legislation may be should reduce unemployment rates, while factors
larger than if we were examining the responses due to associated with an increase in labour supply should
federal changes. Another implication is that potential increase the unemployment rate. Although there are
® rm and household movements (or ® rm births and modest diVerences, the empirical speci® cation is gener-
deaths) may occur after a lag, suggesting that state ally consistent with N EU M A R K and W A S C HE R ’s,
minimum wage responses will be more drawn out. 1992, 1994, and D EER E et al.’s, 1995, state-level exam-
ination of minimum wage hikes and it is consistent with
P A R T R I DG E and R IC K M A N ’s, 1995, 1997, analysis of
E M P I RI C A L M O D E L
state-level unemployment.
Our empirical methodology will be similar to The data set covers the 48 contiguous states over the
N E U MA R K and W A S C H ER ’s, 1992, use of cross-state 1984± 89 period. Data from the late 1980s has sub-
diVerences in minimum wage levels and coverage, while stantial advantages in sorting out the impact of mini-
correcting for many of the empirical criticisms levelled mum wage hikes. For example, W E L C H and
by C A R D et al., 1994; and C A R D and K R U EG E R , C U NN I N G H A M , 1978, p. 144, noted that high rates of
1995. Yet, the major diVerence between this study and federal minimum wage coverage along with the rela-
most other minimum wage studies (including Neumark tively high federal minimum wage rate empirically
and Wascher) is that this study does not consider swamped any variation in state minimum wage laws in
teen employment. That is, by considering long term 1970. This changed in the late 1980s when many states
unemployment rates, this study extends the minimum raised their minimum wage in response to the federal
wage literature. minimum wage remaining unchanged between 1981
For the purposes of this study, long term unemploy- and 1990. The result is that only one contiguous state
ment is de® ned as being unemployed for more than had a minimum wage above the federal level in 1984
26 weeks. Hence, the long term unemployment rate is (Connecticut), while this increased to 13 states by 1989
de® ned as the number of individuals unemployed for (along with Alaska, District of Columbia and Hawaii).
more than 26 weeks divided by the total labour force as This yields both time-series and cross-sectional vari-
de® ned by the Current Population Survey (CPS).5 One ation in minimum wage levels. However, in April 1990,
trait of CPS data is that unemployment rates are derived the federal minimum wage increased from $3.35 to
from ongoing spells of joblessness. For example, some $3.80, greatly reducing cross-sectional variation.6 Like-
of the short term unemployed may eventually become wise, the 1984± 89 period was a period of national
long term unemployed or already would be long term economic expansion, while 1990 represented the
unemployed if they had continuously remained in the beginning of a national recession, which can confound
labour force. Another implication is that the long term the estimates.
unemployed may disproportionately exit the labour The variables are described below while the data
force by discontinuing their job search. These examples sources are fully detailed in Table 1. Note that one
tend to mean that potential increases in long durations advantage of the data is that they are based on annual
of non-employment due to minimum wage laws would averages. Conversely, Neumark and Wascher’s data
be understated by our long term unemployment measure were based only on May CPS estimates, where small
Do Minimum Wage Hikes Raise US Long Term Unemployment? 717
sample sizes for less populated states can introduce et al. contended that instead of a Kaitz index, it is
variable measurement error, which may have signi® - better to use the minimum wage rate itself or the
cantly aVected their results (C A R D et al., 1994). fraction of workers aVected by a minimum wage
The basic speci® cation for state s in year t is: increase.7
Hence, the log of the maximum of the state or
LOUTCOMEst5 bLMINWAGEst federal minimum wage is used as the minimum wage
measure.8 Other advantages of directly using the mini-
1 aLCOVERAGEst 1 pLWAGEst mum wage include easier interpretation and less
1 d INDMIX EMP GROWTHst measurement error. Many researchers only include the
contemporaneous minimum wage rate because mini-
1 F AGEst 1 ss 1 s t 1 est (1) mum wage jobs are perceived to have high turnover
rates (especially for teens ± see B R OW N et al., 1982).
where: LOUTCOME is the log of the labour market However, we include the lag minimum wage rate for
outcome of interest; LMINWAGE is a vector of log several reasons. First, it may take time for employers to
minimum wage variables; LCOVERAGE is the log substitute more skilled for low skilled labour or substi-
share of the state’s non-supervisorial labour force tute capital for low skilled labour (N E U M A R K and
covered by federal minimum wage legislation; LWAGE W A S C H ER , 1992, 1994). For example, B R O WN ,
is the log average hourly manufacturing production 1995, and H A M E R M ES H , 1995, contend that C A R D
worker wage; IND MIX EMP GROWTH is the state’s and K R U EG E R , 1995, did not ® nd these negative input
employment growth rate if all its industries grew at the substitution eVects on employment because they likely
national growth rate; AGE is a vector of demographic take more than a year to develop, which is longer than
age groups; ss is the state ® xed eVect; s is the year Card and Krueger allowed.9 Second, as noted earlier,
® xed eVect; e is the residual term. b, a, p, d , and F it may take additional time to realize the adverse state-
are coeYcient vectors. The state ® xed eVects control level ® rm and household relocation eVects after a state
for unmeasured factors that in¯ uence each state’s labour minimum wage increase (including fewer ® rm births
market. One primary factor accounted for by the state and more ® rm deaths).
® xed eVects is the possibility that states which raised Third, because we are using incomplete unemploy-
their minimum wage were systematically diVerent than ment spells, the previous year’s minimum wage may
the other states. The year ® xed eVects account for play a role in extending the duration of unemployment
national economic and demographic factors that have and increasing the current year’s long term unemploy-
a common eVect across all states. Following D E ER E ment rate. That is, if a worker loses his/her job, it
et al., 1995, the base speci® cation will be in double- would take at least six months of unemployment to
log form for the variables of interest (see below). aVect the long term unemployment rate, greatly
The proper minimum wage measure is in some reducing the contemporaneous minimum wage eVect.
dispute. In this regard, N E U MA R K and W A S CH E R , Moreover, note that the minimum wage is measured
1992, used a state-level Kaitz index. The Kaitz index is as an annual average (see note 8). States often increased
the product of the share of the state’s non-supervisorial their minimum wage rate eVective after 30 June. This
workforce covered by the federal minimum wage with means that almost all the long term unemployment rate
the maximum of the federal or the state minimum eVects would be delayed into the next year.
wage rate divided by the average hourly wage. This Generally, the competitive model suggests positive
measure has the advantage of adjusting for variation in minimum wage coeYcients, while a (supply con-
state minimum wage coverage. However, one assump- strained) monopsony model would generally predict
tion behind the Kaitz index is that a 10% increase in negative (or zero) coeYcients. However, the eVects
minimum wage coverage has the identical eVect of a just described suggest that the lagged minimum wage
10% increase in the nominal minimum wage rate as coeYcient will more likely be positive than the con-
well as the exact opposite eVect of a 10% increase in temporaneous minimum wage eVect. Further, as dis-
the average wage. N E UM A R K and W A S C H ER , 1994, cussed in more detail below, N EU M A R K and
acknowledge that there is no basis for this restriction, W A S C H ER , 1992, 1994; and P A R T R I DG E and P A R T -
although intuitively the minimum wage should be less R I D G E , 1998, 1999, ® nd results that are consistent
binding in high wage states or in states with lower with state policy makers considering current economic
coverage. Yet, C A R D et al., 1994, found that Neumark conditions in their minimum wage rate decision. Spe-
and Wascher’s Kaitz index was negatively related to teen ci® cally, state policy makers may be more likely to
wage rates, suggesting that it is a poor wage measure. increase the minimum wage when they believe good
Card et al., argued that this problem was caused when economic conditions in the near term will oVset any
states that had more economic growth also had higher adverse minimum wage eVects.10 For example, in the
overall average wage rates and greater teen employ- latter 1980s, state minimum wage hikes were concen-
ment. This can create a spurious negative correlation trated in the Northeast and along the Paci® c Coast, or
between the Kaitz index and teen employment. Card states that greatly bene® ted from the Reagan defence
718 Mark D. Partridge and Jamie S. Partridge
build up. In fact, this cyclical eVect suggests that the state male employment rate (K U T T N ER , 1997). That
contemporaneous minimum wage coeYcient may be is, Deere et al. attributed the eVects of the 1990± 91
negative, further suggesting that our results understate federal minimum wage increase to year dummy
the minimum wage in¯ uence on long term unemploy- coeYcients for 1990, 1991 and 1992. Yet, if the (lower-
ment rates. skilled) demographic groups examined by Deere et al.
Minimum wage coverage is incomplete due to have greater cyclical variations in their employment
exemptions for industry and ® rm size (which leads to rates, the male employment ratio may inadequately
cross-state variation). B R O WN et al., 1982; and account for the eVects of the 1990± 91 recession
B R O WN , 1988, strongly argue for coverage’s inclusion (K U T T NE R , 1997). Hence, their 1990± 92 year indi-
because of its importance in the standard model, cators may be capturing cyclical eVects and overstating
although C A R D and K R U EG E R , 1995, downplay its the negative impacts of the minimum wage hike.
importance. Therefore, the log of federal coverage of Finding suitable cyclical controls is diYcult because
minimum wage laws at the state level is also included unemployment and cyclical conditions are jointly
in the speci® cation. It would be optimal to also include determined. Thus, as a labour demand shifter, we use
binding minimum wage coverage rates due to state the (two-digit level) private sector, non-farm industry
laws, but such data are unavailable for our sample mix employment growth rate from shift-share analysis
period. None the less, our state-level coverage data (P A R T R I D G E and R I C K MA N , 1995). The industry
signi® cantly improve on the coverage data used by mix employment growth rate re¯ ects how much the
N E U MA R K and W A S C HE R , 1992, 1994. Due to data state’s employment would grow if all its industries grew
availability at the time of Neumark and Wascher’s study, at their respective national growth rates, i.e. it measures
coverage data were unavailable for many years of their whether the state has a mix of fast or slow growing
sample, most notably 1987 to 1989. However, we have industries. Given that national industry growth rates
obtained coverage estimates for every year of our are determined primarily at the national level, industry
study.11 This is fortunate because the US Department of mix employment growth should not be endogenous.
Labor ceased publishing state-level estimates of federal In fact, B A R T I K , 1991, and B L A N CH A R D and K A T Z ,
minimum wage coverage after 1990. 1992, used it as an exogenous instrument in their
The natural log of the average production worker regional economic analysis. Indeed, P A R T R I D G E and
wage is included in the model. As indicated when R I C K M A N , 1995, 1997, found that industry mix
discussing the Kaitz index, a minimum wage should be employment growth is strongly related to state un-
less of a constraint in states with a relatively high employment rates, where its coeYcient re¯ ects any
wage structure (suggesting a negative average wage multiplier eVects from national demand shifts. More-
relationship with long term unemployment). More- over, among other things, the state ® xed eVects control
over, C A R D and K R U EG E R , 1995, noted that the for persistent growth diVerences across states, such as
price of a substitute should be included in the model, rapid growth in the sunbelt. Finally, the year ® xed
where they also used average production worker hourly eVects account for national cyclical (or demographic)
wage (p. 185, p. 199). None the less, the production trends common across all states.
worker wage is likely to be endogenously related to The potential labour supply of groups that dispropor-
the state’s cyclical conditions (F R EEM A N , 1982), sug- tionately compose minimum wage earners is included
gesting that a reduced form model that omits produc- in the model. Minimum wage earners are primarily
tion worker wages would provide more accurate teens, young adults and older workers (over 55)
estimates (where the state ® xed eVects would capture (M EL L O R , 1987; S M I T H and V A V R I C HE K , 1992).
persistent wage level eVects). Below, we will also use Thus the model includes the share of the state’s popula-
the average private sector hourly wage to consider the tion between 15 and 19 years old; 20 and 24 years old;
robustness of our wage measure choice, although this 55 and 64 years old; and 65 and older.
measure is probably even more endogenous than pro-
duction worker wages.
E M P I RI C A L RE S ULT S
Estimating minimum wage eVects can be confoun-
ded if the state’s cyclical conditions are not adequately Table 1 presents the (unweighted) descriptive statistics
controlled for (C A R D et al., 1994). D EE R E et al., 1995, used in the empirical model. For example, the average
criticized C A R D ’s, 1992, cross-state analysis for not state long term unemployment rate was 0´91%, the
accounting for low wage Sunbelt states (where the average total unemployment rate was 6´3%, while 85%
federal minimum wage was most binding) growing of non-supervisorial employees were covered by federal
faster than the national average in 1990 and 1991. This minimum wage legislation.
can make it appear as though the increased federal In 1989, 13 of the contiguous states had a minimum
minimum wage had no negative employment eVects wage above the federal rate of $3.35. In these 13 states
on these states.12 Similarly, the analysis by D E ER E et al., (not shown), on average only 0´33% (s.d.5 0´12) of the
1995, of 1985± 92 state-level employment was criticized labour force was unemployed for more than 26 weeks,
for only controlling for cyclical eVects with the overall while the total average unemployment rate was 4´4%
Do Minimum Wage Hikes Raise US Long Term Unemployment? 719
Table 1. Descriptive statistics for the 48 contiguous states, model shown in equation (1), while columns (2)± (6)
1984± 891 contain alternative speci® cations.
Mean (Std dev)
In column (1), the contemporaneous eVect from
raising the minimum wage is negative and statistically
Long term total unemployment rate 0´91 signi® cant, but this is more than oVset by the positive
(GPE U) (0´69) and statistically signi® cant lag eVect.13 As described
Total unemployment rate 6´3
(GPE U) (2´1) above, one possible reason for this dynamic pattern is
Male unemployment rate 6´2 that states which raised their minimum wage did so
(GPE U) (2´2) because they were more likely to experience higher
Female unemployment rate 6´5 economic growth. Such a tendency would result in a
(GPE U) (2´1) negative (contemporaneous) relationship between the
Total employment/population 62´0
(GPE U) (4´6) minimum wage and the long term unemployment rate,
Total labour-force/population 66´1 where standard eVects would occur after a lag. Also,
(GPE U) (3´8) since the long term unemployed must be out of work
Minimum wage2 3´39 for at least six months, negative minimum wage eVects
(MLR) (0´12) would be further delayed. This would mean that our
Minimum wage coverage ratio 0´85
(MWMH) (0´05) contemporaneous estimate understates any unemploy-
Production worker hourly wage 9´66 ment increases that result from raising the state mini-
(EE) (1´24) mum wage. Conversely, this pattern could be consistent
Average private sector hourly wage 9´21 with C A R D and K R U E G ER ’s, 1995, monopsony
(GPEU, WE) (1´28)
model with mobility costs and search frictions playing
Industry mix employment growth 0´030
(BEA) (0´012) a strong role in the short run (D I C K EN S et al., 1999)
Share 15± 19 0´077 but with the standard model dominating over time.
(U SDC) (0´005) Summing the minimum wage coeYcients results in
Share 20± 24 0´079 an elasticity point estimate of 1´81. Yet, the F-test
(U SDC) (0´007)
reported at the bottom of Table 2 shows that we can
Share 55± 64 0´089
(U SDC) (0´008) reject the null hypothesis that the sum of the two
Share 65 1 0´125 minimum wage coeYcients equals zero at only the
(U SDC) (0´018) 17% level ( p5 0´166), suggesting that caution should
N 288 be exercised in interpreting the results. Two possible
Notes: 1. The sources are listed in parentheses: B EA, Bureau of causes of this imprecision are that state-level long term
Economic Analysis; USDC, US Department of Commerce, unemployment duration is measured with error in the
Bureau of the Census, Current Population Survey Data; CPS and endogeneity of average wages.
MWMH, US Department of Labor, Minimum Wage and Using the estimated minimum wage elasticity of
Maximum Hours Under the Fair Labor Standards Act; EE, US
Department of Labor, Employment and Earnings, States and
1´81, a 27% increase in the minimum wage (which
Areas; GPEU, US Department of Labor, Geographical Pro® le equals the federal increase between 1990 and 1991)
of Employment and Unemployment; MLR, US Department would increase the average state long term unemploy-
of Labor, Monthly Labor Review, January issues; WE, US ment rate to about 1´35% when evaluated at the
Department of Labor, Wage and Earnings, Annual Averages. 1984± 89 sample mean long term unemployment rate
2. The minimum wage is the maximum of the state and
federal minimum wage rates.
of 0´91% (or by about one-half ). For comparison, the
1989 national long term unemployment rate was only
0´52% of the labour force, while the average 1992± 94
(s.d.5 0´8). For the other 35 states the respective un- long term unemployment rate averaged about 1´38%.
employment rates were 0´57% (s.d.5 0´32) and 5´4% These results suggest that the federal minimum wage
(s.d.5 1´36). This pattern is in accord with Card and increase of 1990± 91 contributed to the increase in long
Krueger’s claim that modestly raising the minimum term unemployment in the ® rst half of the 1990s, but
wage has little if any negative consequences on labour note that these estimates are measured with some
market opportunities. None the less, as noted above, imprecision. Yet, bear in mind that national level
there could be other factors behind this relationship, responses are likely smaller than responses at the state
for which we turn to the regression analysis to sort out level.
the causal eVects. Regarding minimum wage coverage, the results in
column (1) indicate that its coeYcient is positive and
statistically signi® cant at the 7% level. In fact, the
magnitude of the coverage estimate is rather large,
Long term unemployment
suggesting that C A R D and K R U EG E R , 1995, were too
Table 2 contains several alternative regression speci® ca- quick to ignore coverage’s eVect. A ® ve percentage
tions using the log of the long term unemployment point increase in minimum wage federal coverage
rate as the dependent variable. Column (1) re¯ ects the would raise the average long term unemployment rate
720 Mark D. Partridge and Jamie S. Partridge
Table 2. Log long term unemployment rate regression results (absolute value of t-statistics) 1
(1) (2) (3) (4) (5) (6)
Log(minimum wage) 2 2´93 2 2´99 2 0´57 2 3´04 2 2´89 2 2´90
(3´45) (3´65) (0´68) (3´19) (3´39) (3´35)
Log(minimum wage)t2 1 4´74 4´79 5´72 4´65 5´02
(2´69) (2´88) (3´09) (2´62) (2´79)
Log(minimum wage coverage) 3´42 5´55 3´08 2´22 3´16
(1´84) (2´79) (1´64) (1´20) (1´80)
Log(minimum wage coverage)t2 1 0´66
(0´57)
Log(production hourly wage) 2 1´52 2 2´35 1´70 2 1´44 2 1´60
(1´51) (1´95) (2´29) (1´41) (1´50)
Log (production hourly wage)t2 1 3´59 3´00 3´59 3´28
(3´59) (2´73) (3´59) (3´15)
Industry mix employment growth 2 15´07 2 15´81 2 15´21 2 16´33 2 14´91 2 15´54
(2´62) (2´22) (2´81) (2´85) (2´56) (2´71)
Share 15± 19 43´27 54´56 49´20 44´02 40´83
(2´63) (3´16) (3´06) (2´65) (2´41)
Share 20± 24 2 88´04 2 77´30 2 74´68 2 86´86 2 92´13
(5´58) (4´95) (5´02) (5´32) (5´95)
Share 55± 64 2 34´26 2 23´17 2 23´89 2 34´69 2 26´27
(1´72) (1´14) (1´21) (1´75) (1´32)
Share 65 1 2 38´11 2 42´57 2 41´91 2 38´28 2 36´56
(2´46) (2´67) (2´70) (2´47) (2´37)
Year ® xed eVects Y Y Y Y Y Y
State ® xed eVects Y Y Y Y Y Y
R2 0´89 0´87 0´88 0´89 0´89 0´89
F-stat: bMWt 1 bMW(t2 1) 5 02 1´93 1´83 4´66 1´81 2´67
( p5 0´166) ( p5 0´177) ( p5 0´032) ( p5 0´180) (p5 0´104)
F-stat: Kaitz restriction3 2´15 4´16
(p5 0´119) ( p5 0´017)
F-stat: Lag Kaitz restriction3 6´90
(0´001)
Autocorrelation q 4 0´114 0´181 0´122 0´140 0´113 0´114
N 288 288 288 288 288 288
Minimum wage coverage elasticity 3´42 5´55 3´08 2´22 3´82 n.a.
Minimum wage elasticity 1´81 1´80 2 0´57 2´68 1´76 2´12

Notes: 1. The t-statistics use the White correction for heteroscedasticity. Long term unemployment is de® ned as an unemployment duration
longer than 26 weeks.
2. The F-statistic for the null hypothesis that the sum of the minimum wage rate coeYcients equals zero.
3. The Kaitz restriction is that the coeYcient on the minimum wage variable equals both the coeYcient on the coverage variable and
the negative of the coeYcient on the average wage variable.
4 The ® rst-order autocorrelation of the within-state residuals.

to 1´07% when evaluated at the sample mean of 0´91% pattern suggests that the lagged minimum wage variable
(or by over one-sixth). This again supports the argu- plays an integral role in detecting the conventional
ment that minimum wage laws can increase long term unemployment outcome (as suggested by N E UM A R K
unemployment. and W A SC H E R , 1992, 1994).
By not including the age controls, the model in One of the reasons that the average production
column (2) examines the sensitivity of the ® ndings to worker wage is included in the base model is that it is
accounting for the supply side controls. The results a measure of the degree to which the minimum wage
indicate that the coverage variable’s magnitude and is a binding constraint in the state’s labour market. Yet,
statistical signi® cance improved in this case (1% level), this likely introduces bias when production worker
while the minimum wage results are substantially wages are endogenous. By omitting production worker
unchanged. wages, the model in column (4) re¯ ects a reduced form
The model in column (3) shows the results when speci® cation. These results suggest that the sum of the
the lagged minimum wage variable is omitted from the minimum wage coeYcients is signi® cant at about the
base model in column (1). In this case, the contempor- 3% level with the minimum wage elasticity rising to
aneous minimum wage coeYcient is negative and 2´68. However, the coverage variable is no longer
statistically insigni® cant, which is not surprising given signi® cant.
that it takes at least six months before long term In further sensitivity analysis (not shown), speci® ca-
unemployment rates would be aVected. Foremost, this tions similar to those in columns (3) and (4) were
Do Minimum Wage Hikes Raise US Long Term Unemployment? 721
estimated. In this case, the contemporaneous minimum ing the impacts of the minimum wage and, thus,
wage variable and the production worker wage variables they did not include it in their model. Despite the
were omitted from the model. Also, to focus just on signi® cance of the coverage variable, to examine this
the minimum wage rate, the coverage variable was also possibility, column (6) reports results from the model
omitted (which had little in¯ uence on the results). In which omits coverage from the speci® cation in column
this case, the lagged minimum wage elasticity was 2´01 (1). The minimum wage elasticity is slightly larger in
with a t-statistic of 1´44. Likewise, in another model, this case and the joint signi® cance of the sum of
1990 data were included. The lagged minimum wage the minimum wage coeYcients is slightly improved
elasticity equalled 2´08 and the t-statistic equalled 1´85. ( p5 0´104 vs. p5 0´166).
However, because the federal minimum wage increase Table 3 highlights additional sensitivity regressions
took eVect in April 1990 and a recession began in that were estimated to examine the robustness of the
1990, these results should be cautiously interpreted. model shown in column (1) of Table 2. Row (1) is a
Finally, a corresponding linear model (not log) was two-stage least squares model (2SLS) treating produc-
estimated (without 1990 data). The minimum wage tion worker wages as endogenous.14 Row (2) adds the
elasticity equalled 2´62 with a t-statistic of 2´36. Overall, lag of the industry mix employment coeYcient to
this sensitivity analysis suggests that the positive lagged account for dynamic economic eVects correlated with
minimum wage response is robust and not an artefact long term unemployment. Row (3) adds the overall
of including the contemporaneous minimum wage employment/population ratio as an additional cyclical
variable. control to examine whether adding a clearly endogen-
The speci® cation in column (5) adds the lag of ous cyclical variable to the model confounds the results.
minimum wage coverage to the model in column (1). Finally, row (4) adds the log average private sector
The lagged coverage variable’s t-statistic is only 0´57, hourly wage in place of the average production worker
supporting our contention that there is very little lagged hourly wage.
coverage eVect. Conversely, the contemporaneous cov- The consistent pattern in Table 3 tends to aYrm
erage coeYcient is little changed from before as well the ® ndings in Table 2. First, the contemporaneous
as the two minimum wage coeYcients. The bottom of minimum wage eVect remains negative and generally
Table 2 shows the results of an F-test for separately statistically signi® cant. The lag minimum wage co-
imposing the Kaitz restriction contemporaneously and eYcient is positive and generally statistically signi® cant,
with a lag (on the minimum wage, coverage and where the magnitude of the lag coeYcient more than
manufacturing wage coeYcients). The null hypothesis oVsets the contemporaneous eVect. The consistent
can be rejected at the 5% level in both cases ( p5 0´017; ® nding that the lag eVect is larger than the contempor-
p5 0´001) suggesting that the Kaitz restriction is inap- aneous eVect lends additional support to this pattern.
propriate. In both the contemporaneous and lagged Finally, the coverage elasticity ranges from 2´0 to 4´0.
cases (not shown), the Kaitz coverage adjusted mini- Speci® cally, the results in the ® rst two rows of Table 3
mum wage coeYcient would have been negative and are little changed from column (1) of Table 2. As
statistically insigni® cant (t-statistics of 2 0´54 and expected, adding the employment/population ratio
2 0´29, respectively). Thus, imposing the Kaitz restric- (row (3)) aVects the ® ndings, where the minimum
tion would have given the impression of a negative wage eVect is diminished, but this is oVset by the
(but insigni® cant) relationship between the minimum coverage eVect becoming more in¯ uential. Substituting
wage and long term unemployment. the average private sector hourly wage also lessens the
C A R D and K R U E G ER , 1995, argued that including minimum wage eVects in row (4). However, this could
federal minimum wage coverage adds little to estimat- be caused by the average private sector wage suVering

Table 3. Alternative log long term unemployment rate regression models (absolute value of t-statistics) 1
(4)
(1) (2) (3) F-test
Log(minimum Log(minimum Minimum wage H0 :BMW 1 (5)
Model wage) waget2 1 ) elasticity BMW(t2 1)5 0 Log coverage
(1) 2S LS, production worker wage endogenous 2 3´22 5´63 2´41 2´63 3´20
(1´57) (2´85) ( p5 0´106) (1´76)
(2) Add lag industry mix employment growth 2 2´95 4´80 1´85 1´98 3´45
(3´45) (2´70) ( p5 0´161) (1´83)
(3) Add log (total employment/population) 2 1´80 2´24 0´44 0´15 3´74
(2´31) (1´48) ( p5 0´700) (2´84)
(4) Use log average private sector hourly wage 2 2´80 3´83 1´03 0´63 2´41
(3´35) (2´10) ( p5 0´429) (1´38)

Note: 1. The models are the same as used in column (1) of Table 2 with the changes indicated in the row. Long term unemployment is
de® ned as an unemployment duration longer than 26 weeks.
722 Mark D. Partridge and Jamie S. Partridge
from endogeneity and measurement error, suggesting Aggregate unemployment rates
that those results are possibly spurious.15
Given the fairly large long term unemployment
The results in Tables 2 and 3 appear to consistently
response to changes in the minimum wage, minimum
suggest that greater minimum wage coverage increases
wage changes should have a perceptible impact on
long term unemployment rates. Likewise, they indicate
aggregate unemployment rates, especially if other forms
that the magnitude of the lagged minimum wage of unemployment also increase. For example, D EE R E
coeYcient more than oVsets the negative contemporan- et al., 1995, provide evidence of large disemployment
eous minimum wage coeYcient (where both are eVects for `at risk’ population subgroups, although it is
usually statistically signi® cant at the 5% level). Yet, the reasonable to expect a smaller response for aggregate
sum of the minimum wage coeYcients is in many cases unemployment than long term unemployment. Hence,
only statistically signi® cant at the 10 to 20% level. to examine this possibility, as well as to examine the
Regardless, the reduced form model without produc- robustness of the patterns found above, Table 4 reports
tion worker wages (column (4) of Table 2) suggests a regression equations using three diVerent aggregate
signi® cant minimum wage response at the 5% level, state unemployment rates as the dependent variable.
where there are reasons to more heavily weigh those The basic model is unchanged with the exception that
results. the average manufacturing wage is omitted from these
As indicated above, state-level long term unemploy- speci® cations since it is quite likely that it is endogenous
ment rates are very diYcult to estimate precisely by when considering the aggregate labour market (i.e. it
the Bureau of Labor Statistics, which increases the is a reduced form model).
noise to signal ratio in the regressions. Thus, before In Table 4, columns (1)± (3) respectively report
making any ® rm judgements, it would seem prudent regression results using the total, male and female
to examine the minimum wage’s eVect on more aggre- unemployment rates as the dependent variable. Gener-
gate unemployment, employment/population and ally, the aggregate results follow the same pattern as
labour-force participation rates, which are likely to be before ± the contemporaneous minimum wage is
measured more accurately. negative and the lagged coeYcient is positive (where

Table 4. Aggregate labour market regression results (absolute value of t-statistics) 1


(1) (2) (3) (4)
Log total Log male Log female Log employment/ (5)
unemployment rate unemployment rate unemployment rate population Log LF/population

Log(minimum wage) 2 1´49 2 1´52 2 1´45 0´13 0´054


(3´93) (3´30) (3´28) (1´86) (0´88)
Log(minimum wage)t2 1 2´88 3´19 2´42 2 0´34 2 0´166
(4´33) (4´12) (3´24) (3´06) (1´78)
Log(minimum wage coverage) 2´07 2´29 1´91 0´11 0´21
(2´97) (2´48) (2´99) (1´04) (2´55)
Industry mix employment growth 2 7´35 2 6´95 2 7´38 0´49 0´06
(3´16) (2´69) (2´70) (1´51) (0´19)
Share 15± 19 14´28 12´40 18´32 0´06 2 0´52
(2´06) (1´56) (2´31) (0´05) (0´47)
Share 20± 24 2 31´69 2 24´90 2 39´43 5´44 2´93
(5´50) (3´67) (6´27) (5´74) (3´78)
Share 55± 64 2 21´09 2 21´93 2 19´25 0´26 2 1´13
(2´91) (2´77) (2´25) (0´23) (1´29)
Share 65 1 2 28´87 2 22´62 2 36´98 2´79 2 0´05
(4´52) (2´85) (5´79) (3´25) (0´08)
Year ® xed eVects Y Y Y Y Y
State ® xed eVects Y Y Y Y Y
R2 0´92 0´91 0´91 0´97 0´97
F-stat: bMWt 1 bMW(t2 1) 5 02 8´54 8´77 3´55 9´03 3´76
( p5 0´004) (p5 0´003) ( p5 0´061) (p5 0´003) (p5 0´054)
Autocorrelation q 3 0´129 0´077 0´065 0´239 0´223
N 288 288 288 288 288
Minimum wage coverage elasticity 2´07 2´29 1´91 0´11 0´21
Minimum wage elasticity 1´39 1´67 0´97 2 0´21 2 0´11

Notes: 1. The t-statistics use the White correction for heteroscedasticity. Columns (1)± (5) respectively have regression results for the total
unemployment rate, male unemployment rate, female unemployment rate, total employment/population percentage, and total labour
force/population percentage. The dependent variables are measured in natural log.
2. The F-statistic for the null hypothesis that the sum of the minimum wage rate coeYcients equals zero.
3. The ® rst-order autocorrelation of the within-state residuals.
Do Minimum Wage Hikes Raise US Long Term Unemployment? 723
both are statistically signi® cant at the 1% level). The that, after a lag, people will exit the labour force as
F-statistics at the bottom of Table 4 indicate that the they become discouraged by the negative minimum
null hypothesis that the sum of the minimum wage wage eVects.
coeYcients equals zero can be rejected at the 1% level The minimum wage results in columns (4) and
for total unemployment and male unemployment and (5) are consistent with these expectations. The initial
at about the 6% level for female unemployment. There- response of the employment rate is positive, but this is
fore, the aggregate unemployment results are estimated more than oVset by a negative lagged minimum wage
more precisely than before. The minimum wage elasti- response. Likewise, the labour force initially expands,
city equals 1´39 for total unemployment, indicating but this is overwhelmed by people exiting the labour
that a 10% increase in the minimum wage would raise force with a lag. The overall employment/population
the average state’s unemployment rate about 0´9% minimum wage elasticity is 2 0´21 after two years
percentage points (to 7´2% on average). As expected, where the corresponding participation elasticity is
all three aggregate minimum wage elasticity estimates 2 0´11. The joint F-statistics show that the overall
are smaller than the corresponding estimate for long employment response is statistically signi® cant at the
term unemployment (in column (1), Table 2). 0´3% level and the overall participation response is
Minimum wage coverage is positively related to all signi® cant at the 6% level. Together, columns (4) and
three aggregate unemployment rates, where the eVect is (5) suggest that the aggregate unemployment rate rises
statistically signi® cant at about the 1% level. Again, the after a lag because employment falls faster than the
estimated coverage elasticity is smaller for the aggregate labour force in response to a minimum wage hike. In
measures than for the long term unemployment rate. fact, using a derivation in B R O W N et al., 1982, the
As noted earlier, the ® nding of a `favourable’, con- results in columns (4) and (5) suggest that a 10%
temporaneous, state-level, minimum wage response state minimum wage increase will lift the aggregate
that is more than oVset by an `unfavourable’ , lagged, unemployment rate by 0´9%, the same as in column
minimum wage response is not limited to this study. (1). Finally, the results in columns (4) and (5) suggest
For example, N E U M A R K and W A S CH E R , 1992, 1994, that minimum wage coverage lifts aggregate unemploy-
found this pattern for teen (and 16 to 24 year old) ment by lifting the labour supply.
employment/population ratios. P A R T R I D G E and Overall, the aggregate results follow the same
P A R T R I D G E , 1998, also found this same pattern for dynamic pattern as the long term unemployment
teen unemployment rates. This was the case when results, further suggesting that the long term unemploy-
they directly examined teen unemployment rates or ment response is not a statistical artefact. In addition,
indirectly when they considered teen employment/ the precision of the aggregate coeYcients increases our
population rates and labour force participation rates. con® dence in the long term unemployment patterns.
Finally, P A R T R I DG E and P A R T R I D G E , 1999, found Thus, it may be possible that the long term unemploy-
the same dynamic pattern for retail and non-farm state- ment estimates were aVected by measurement error.
level employment. As an additional characteristic of Nevertheless, beyond exploring the robustness of the
these studies, note that unemployment, employment/ previous results, the aggregate ® ndings also suggest a
population and labour-force participation rates are from strong response to state-level minimum wage increases.
the household CPS and retail and non-farm employ- Given that these results are based on variations in state
ment are from establishment surveys, suggesting that minimum wage rates, these ® ndings are not surprising.
the dynamic minimum wage response is not an artefact That is, diVerences in state minimum wage rates can
of a single survey. generate cross-sectional variations in ® rm births and
® rm deaths as well as shifts in state migration patterns.
Conversely, ® rms or individuals cannot relocate to
Aggregate employment/population and labour-force participa-
avoid federal minimum wage requirements, implying a
tion results
smaller federal minimum wage response.
To further investigate the robustness of the results,
columns (4) and (5) report regression results using the
C O N C L US I O N
log employment/population ratio and the log labour
force participation rate as the dependent variables. If This study examined the impact of state-level minimum
the above explanations are correct, the employment wage rates on unemployment rates, focusing on the
rate should be positively related to the contemporan- long term unemployed over the 1984± 89 period. The
eous minimum wage rate due to strong unmeasured emphasis on long term unemployment extends mini-
economic conditions at the time of passage. This posi- mum wage research by considering how unemploy-
tive eVect would then be overwhelmed by a negative ment durations for attached low skilled workers are
lagged minimum wage response. Likewise, the initial aVected. By examining the 1984± 89 period, we took
favourable economic conditions along with a higher advantage of the large cross-sectional variation that
minimum wage should induce more people into the occurred when many states raised their minimum wage
labour force. However, the above explanations imply above the federal minimum rate of $3.35.
724 Mark D. Partridge and Jamie S. Partridge
We consistently found that the minimum wage is Association International Meetings in BuValo, New
positively related to long term unemployment rates York, and at a Federal Reserve Bank of Chicago seminar.
after a lag. However, it was often the case that the 2. Given their low skill levels, minimum wage rates are
sum of the contemporaneous and lag minimum wage especially thought to price teen workers out of the job
coeYcients was of only modest statistical signi® cance market. Yet, teens are also associated with even briefer
spells of unemployment than adults. Regardless, C L AR K
(i.e. at the 10± 20% level). Yet, the reduced form results
and S U M ME RS , 1990a, 1990b, ® nd that there is also a
without the production worker wages suggested a hard core group of teens that suVer long durations of
statistically signi® cant minimum wage result at the 5% unemployment, which composes about one-half of teen
level. Regarding minimum wage coverage, we found unemployment.
that greater coverage increases long term unemploy- 3. A typical explanation for negative duration dependence
ment, where the statistical signi® cance was stronger is a stigma eVect where long durations of unemployment
than for the minimum wage rate results. One possible are a negative signal to potential employers of the worker’s
factor that in¯ uenced the minimum wage rate results productivity. For more details on duration dependence,
was measurement error in estimating the long term see V A N D EN B ER G and V A N O U RS , 1996.
unemployment rates. In fact, further analysis using 4. Among demographic groups, teens (especially minority
aggregate labour market measures yielded results teens) are thought to be most in¯ uenced by minimum
strongly consistent with long term unemployment pat- wage rates (S M I TH and V A V RI CH EK , 1992). Besides
terns. This increased our con® dence in the long term teens, other demographic groups could be prone to
unemployment results. (long) unemployment spells as a result of minimum wage
hikes. For example, the 1988 unemployment rate for
These results suggest that policy makers at the federal
those between 20 and 24 years old was 8´7%. N EU M AR K
and state level should weigh additional total unemploy- and W A SC H ER , 1992, ® nd that this age group is about
ment, as well as the possibility of longer durations as adversely aVected by minimum wage hikes as teens.
of unemployment, in contemplating future minimum Moreover, the 20± 24 age group’s share of the labour
wage increases. In particular, state policy makers should force in 1988 was about four-® fths larger than the share
consider the prospect of ® rm and household relocation for the 16± 19 age group. Likewise, high school drop-
in their decision making. Likewise, in an era of welfare outs over the age of 25 had an unemployment rate that
reform, these results suggest that some low-skilled was about four percentage points above the overall
welfare recipients may experience long job searches, unemployment rate in 1992 (the earliest year available).
suggesting that minimum wage hikes may run counter Drop-outs are another demographic group that are
to the work requirement goals of welfare reform. One strongly aVected by minimum wage laws.
possible policy alternative is expanding the earned 5. Although longer periods of duration are of interest in
income tax credit. To be sure, this does not mean that European nations, the CPS measure of 26 weeks was
policy makers should forego minimum wage increases, chosen due to data availability at the state level. Yet,
just that they should fully weigh the costs and bene® ts. given that a very small share are unemployed for more
than one year and that state unemployment insurance
The ® ndings tend to support the standard prediction
bene® ts typically expire after 26 weeks, this duration is
that there are negative consequences from raising the of great practical importance in the US.
minimum wage, at least at the state level. Foremost, 6. After the federal minimum wage increased to $4.25 an
this was the case even after adjusting for the empirical hour in April 1991, only three contiguous states had a
concerns raised by C A R D et al., 1994; and C A R D and minimum rate above the federal rate. In fact, the state
K R UE G ER , 1995. None the less, more research should minimum wage changes of the latter 1980s created what
be conducted to explore if these results apply to other C A RD, 1992, termed `remarkable’ variation in minimum
periods besides the 1980s. However, a challenge facing wage levels that forms an unique natural experiment
such research is that, unlike the late 1980s, there has into the eVects of minimum wage legislation which has
been considerably less cross-state variation in minimum not been replicated before or since. In contrast, national
wage rates in the 1990s. Another complication is that time-series studies are hampered by the constraint that
the Federal Government no long publishes state-level the federal minimum wage varies infrequently, creating
minimum wage coverage estimates. signi® cantly less time-series variation.
7. One reason for the double-log form in equation (1) is
that the Kaitz restriction is a special case. Speci® cally,
the Kaitz restriction requires that b5 a and b5 2 p,
Acknowledgem ents ± The authors thank Dan Aaronson, which will be statistically tested below. To see this, note
Gary Hunt, Dan Rickman and Dan Sullivan for their helpful that the Kaitz variable is COVERAGE*MINWAGE/
comments with this study. AVG WAGE. Taking the natural log results in
LCOVERAGE1 LMINWAGE2 LAVG WAGE, where
L re¯ ects the natural log.
8. If a state changed their minimum wage in mid-year, a
NO T E S
weighted annual average of their minimum wage was
1. An earlier version of this paper was presented at the used. State minimum wage rate information was found
November 1997 North American Regional Science in various January issues of the U S Department of Labor,
Do Minimum Wage Hikes Raise US Long Term Unemployment? 725
Monthly Labor Review, in which state labour law changes difference as their empirical speci® cation. This may be a
are summarized. misspeci® cation when there are state ® xed eVects in state
9. As shown in C A RD and K REU GER , 1995, p. 218, it is growth rates, such as persistent growth in the Sunbelt. A
unnecessary to de¯ ate wages by the price de¯ ator in the related concern is that there are only 51 observations
current speci® cation (e.g. by the CPI). That is, the sum using this approach.
of the real minimum wage for state s and year t and the 13. It is possible that the two-year lag of the minimum wage
year indicator variable is: blog(MINWAGEst/CPIt)1 s t* . rate may aVect long term unemployment. However,
This can be rewritten as blog(MINWAGEst)2 when we included the two-year lag in the model (not
blog(CPIt)1 s * t . Since CPIt does not vary across states, shown), it was not statistically signi® cant at even the
this can be rearranged as: blog(MINWAGEst)1 s t , where 20% level while the other two minimum wage rate
s t5 blog(CPIt)1 s t* . Similar reasoning applies to the coeYcients were each statistically signi® cant at the 1%
average wage term. level.
10. Despite our best eVorts, it will be very diYcult to fully 14. Two exogenous instruments were used in the ® rst-stage
control for state economic conditions related to passage model. The ® rst is the real wage mix of the state, which
of a minimum wage increase because law makers rely is the hypothetical wage rate in the state if all the state’s
on a host of unmeasurable factors including constituent industries paid their respective national average wage
economic con® dence. Conversely, N E U MA R K and (P AR TR ID GE and R I CKM A N , 1995, 1997). The real
W A SC H ER , 1992, tried to instrument for the timing of wage mix is a measure of whether the state has a mix of
minimum wage hikes, but their results were unaVected. high or low paying industries. The second instrument is
Regardless, it is very diYcult to ® nd an exogenous the percentage of the state’s non-farm employment in
instrument related to the passage of minimum wage high-tech manufacturing industries.
increases that is also unrelated to the economic condi- 15. The production worker hourly wage is a direct hourly
tions of the state and region. wage estimate. Conversely, we indirectly derived the
11. We expect that coverage will not have a lagged eVect, average private sector hourly wage by taking average
although this assumption will be tested. With the excep- private sector weekly earnings divided by average weekly
tion of the expansion of coverage to state and local hours. Both weekly earnings and (especially) hours are
government in 1985, there was no change in the indus- likely endogenously related to long term unemployment.
tries covered by federal minimum wage legislation in Also, this wage measure is quite similar to K IM and
the late 1980s, suggesting that there should be little T A Y L O R ’s, 1995, wage measure, which was criticized
adjustment lag for employers. for measurement error (C A RD and K RU E GE R , 1995;
12. C AR D and K RU E GE R , 1995, used the 1990± 92 ® rst- K EN N AN , 1995).

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