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 retombees des augmentations du salaire minimum sur le chomage  à de longue duree? Des preuves provenant des salaires mini mum aux Etats-Unis, Reg. Studies 33, 713± 726. Des etudes  recentes ont mis en question l’idee recue qu’une augmentaÂ Â Ë tion du salaire minimum entraõà ne une reduction de l’emploi.  Á Cette etude-ci cherche a considerer un sujet connexe mais   relativement inexplore; autrement dit, les retombees du salaire   minimum sur le chomage de longue duree. En examinant à  les taux de chomage de longue duree, cette etude elargit la à    documentation anterieure qui porte sur le salaire minimum  en considerant la persistance des retombees du salaire mini  mum. On analyse des donnees qui proviennent de la ® n des  annees 1980, une epoque exceptionnelle ou bon nombre des Á   etats ont augmente leur salaire minimum au-dessus du niveau   federal. Les resultats laissent supposer qu’un rencherissement     du salaire minimum entraõà ne une hausse des taux de chomage à de longue duree. Des preuves supplementaires laissent voir   qu’un accroissement de la proportion de smicards amene Á aussi a une hausse des taux de chomage de longue duree. Á à  Une analyse ulterieure a fourni des re sultats comparables   pour ce qui est des autres mesures globales du marche du  travail. Ainsi, les de cideurs, et au niveau de l’etat et sur le   plan federal, devraient evaluer ces couts potentiels au moment    à ou ils de cident si, oui ou non, il faudra augmenter les taux Á  de salaire minimum. Chomage de longue duree Salaire minimum à  Proportion de smicards Chomage Ã

P A RT RI D G E M. D. und P AR TR IDG E J. S. (1999) Fuhren È Anhebungen von Mindestlohnen in den Vereinigten Staaten È zu langfristigem Ansteigen der Arbeitslosigkeit? Beweise, die sich auf staatliche Mindestlohnraten stutzen, Reg. Studies 33, È 713± 726. Verschiedene, kurzlich vero Ventlichte UnterÈ È suchungen stellten die herkommliche Meinung in Frage, daû È ein Anheben der Mindestlohne zur Herabsetzung der Zahl È der Beschaftigten fu hrt. Dieser Aufsatz zieht eine damit È È verbundene, doch relativ selten untersuchte Frage in Betracht, indem er den Ein¯ uû des Mindestlohnes auf lang anhaltende Arbeitslosigkeit pruft. Mit Hilfe der langfristigen È Arbeitslosigkeitsraten erweitert die Studie durch Untersuchung der anhaltenden Auswirkungen von Mindestlohnen È die Literatur uber Mindestlohne. Die empirische Analyse È È zieht oYzielle Datan der spaten achtziger Jahre heran, einer È einmaligen Periode, insoweit als viele Staaten ihre Mindestlohne uber die auf Bundesebene gezahlten anhoben. Die È È Ergebnisse legen nahe, daû ein hoherer Mindestlohn zum È Ansteigen der langfristige Arbeitslosenraten fuhrt. Weitere È Beweise lassen erkennen, daû vermehrte Mindestlohndeckung auch langfristige Arbeitslosigkeitsraten anhebt. Die anschlieû ende Analyse ergab ahnliche Muster fur andere, den È È Gesamtarbeitsmarkt umfassende Maû nahmen. Auf staatlicher wie auf bundesstaatlicher Ebene sollten politische Entscheidungen deshalb diese potentiellen Kosten mit in Betracht ziehen, wenn sie zukunftige Anhebungen von MinÈ destlohnen erwagen. È È Langfristige Arbeitslosigkeit Mindestlohn Mindestlohndeckung Arbeitslosigkeit

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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) (P A R T R I D G E and R I CK M A N , 1998). Longer durations of unemployment likely reinforced the seemingly high levels of job anxiety felt by workers during the 1990s (see A A R O NS O N and S U L L I V A N , 1998, for more details of this anxiety). By comparison, the share of long term unemployed in total unemployment was less than 10% in the latter 1980s. This raises an interesting question: did the 1990± 91 increase in the federal minimum wage contribute to longer durations of unemployment? In addition, the onset of federal welfare reform means that states will carry a greater share of the income redistribution burden. One implication is that state policy makers may feel pressure to boost their minimum wage to lift poor families out of poverty. Given that many chronic welfare recipients can also be viewed as outsiders, the relationship between long term unemployment and state minimum wage rates may shed light on this topic as well. In what follows, the next section sketches some simple minimum wage models. The third section discusses empirical implementation and the fourth section discusses the results. In addition, section ® ve will consider the in¯ uence of state minimum wage rates on aggregate unemployment rates. This additional analysis will examine the robustness of the long term unemployment rate results and will be of interest in their own light. The ® nal section presents some concluding thoughts. T H E M I NI M UM WA G E A N D T H E L A B O UR M A RK E T The need to better understand all minimum wage eVects is highlighted by a possible breakdown in the consensus among economists regarding the minimum wage during the 1990s. Foremost is a series of crosssectional and case studies by C A R D and K R U E G ER (e.g. 1992, 1994, 1995) which found that the 1990± 91 increase in the federal minimum wage had virtually no impact on employment. Similarly, D I C K ENS et al., 1999, and M A CH I N and M A NN I NG , 1994, found no negative minimum wage eVects for UK employment. However, recent ® ndings that minimum wage hikes have very little eVect on employment have not gone unchallenged. For example, using a variety of data sets and techniques, N EU M A R K and W A S C H E R , 1992, 1994; D E ER E et al., 1995; K I M and T A Y L O R , 1995; 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 P A R T R I DG E , 1999, have found that increases in the minimum wage reduce employment, while P A R T R I D G E and P A R T R I DG E , 1998, found that they increase teen unemployment rates. Given the con¯ icting minimum wage ® ndings in the literature, it is not surprising that there are numerous models of how minimum wage legislation aVects the

Since its original enactment in the 1930s, federal minimum wage increases have been viewed by many as an eVective avenue to redistribute income and reduce poverty (F R EE M A N , 1996) as well as to provide a `living wage’ (K U T T NER , 1997). Given that in¯ ation erodes the purchasing power of a ® xed minimum wage, every few years there are calls for further increases. With US income inequality rising since the 1970s, the policy implications of minimum wage hikes are even more signi® cant. In fact, many economists have argued that the declining purchasing power of the minimum wage since the 1970s can account for about 30% of the ensuing increase in earnings dispersion (F O R T I N and L E M I EU X , 1997). Yet, economists have traditionally cautioned that raising the wage ¯ oor has deleterious consequences including additional unemployment, reduced general training and oVsetting reductions in fringe bene® ts. B R O WN et al.’s, 1982, survey of the literature indicated that a 10% increase in the minimum wage would on average reduce teen employment by 1± 3%, raise teen unemployment rates by 0± 0´75%, with smaller eVects for adults. Such negative eVects temper the desired redistribution. None the less, US economists rarely, if at all, discuss minimum wage eVects on unemployment duration. Regardless, as F R EE MA N , 1995, notes, it is possible that minimum wage legislation can create a class of 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, contends that high minimum wage rates are a key factor behind high levels of structural and long term unemployment in Europe. Yet, the possibility that minimum wage hikes increase long term unemployment is a relatively unexplored topic for the US. However, C L A R K and S U M M ER S , 1990a, ® nd that most joblessness in the US is composed of a hard core group of unemployed who are jobless for more than six months, even though the typical person exits unemployment rather quickly (less than three months). It seems plausible that members of this hard core group would be potentially susceptible to job loss due to minimum wage hikes, while ® nding a new job would be more diYcult.2 Therefore, this study will investigate the impact of state minimum wage laws on the prevalence of long term unemployment (de® ned as greater than 26 weeks). One reason for the lack of emphasis on US long term unemployment is that is has been viewed as a relatively small problem. However, this may be changing. The growing importance of long term unemployment in the US can be seen by noting that, between 1992± 94, the (annual) share of unemployed workers who had sought employment for more than 26 weeks

Do Minimum Wage Hikes Raise US Long Term Unemployment?
labour market (e.g. see M I NC ER , 1976; B R O WN et al., 1982; C A R D and K R U E G ER , 1995). It is not possible to do a complete survey, but it is useful to outline some of the major themes in these models. The standard minimum wage model is the basic supply and demand model. In its simplest form, imposing a wage ¯ oor above the equilibrium wage reduces the quantity of labour demanded while inducing new entrants into the labour market. Two outcomes are an increase in the unemployment rate and a reduction in employment. However, real world complexities complicate the analysis. First, minimum wage coverage is incomplete. A greater minimum wage may induce workers from the uncovered sector to queue for jobs in the covered sector, while previously employed workers from the covered sector may be forced to ® nd work in the uncovered sector. Moreover, some workers may be so discouraged by diminished employment chances that they exit the labour force (and hence are not counted as oYcially unemployed). Further complicating the analysis is that ® rms may reallocate their shares of fulland part-time labour (R E S S L ER et al., 1996) such that employment changes do not accurately re¯ ect actual changes in total labour inputs (W EL C H , 1995). Finally, ® rms may substitute more skilled labour for less skilled labour, which further confounds the eVects on total employment. The monopsony labour market model has recently received attention in the minimum wage debate (C A R D and K R U E G ER , 1995). In this case, if an employer is (labour) supply constrained, minimum wage increases can yield employment gains. Card and Krueger contend that information imperfections and mobility costs make the monopsony model applicable in low wage labour markets. However, many economists question the general applicability of the monopsony model in the typical labour market. Therefore, the employment outcome of increasing the minimum wage is hard to predict. Standard models generally imply a reduction in the number of labour hours, but not necessarily total employment, while a monopsony model can imply the opposite. The relative size and substitution elasticities in the covered and uncovered sector further confound employment predictions. Changes in total employment are also complicated by changes in the prevalence of part-time employment and average hours of work as well as changes in skill intensities. Likewise, the quantity of labour supplied may increase if new workers are induced by the greater wages, or decrease if workers become discouraged and exit the labour force. Thus, unemployment rates may not necessarily increase. However, if workers from the uncovered sector queue for employment in the covered sector, these search costs add to the social waste of increasing the minimum wage (M I NC E R , 1976). One implication is that, in determining the impact of minimum wage laws, it is not clear whether examining employment changes is

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superior to examining changes in unemployment rates (or vice versa), suggesting a need to consider all labour market indicators. Standard labour market theory also suggests that a greater minimum wage can increase long term unemployment. That is, if less skilled workers with a low value of marginal product (with realistic reservation wages) cannot be oVered a wage below the minimum wage by employers, their probability of receiving a job oVer will diminish and their duration of unemployment will increase. Using 1988 as a representative year for a stylistic example, the median duration of unemployment was 5´9 weeks, roughly corresponding to a constant 0´11 weekly hazard rate for exiting unemployment. Suppose that a higher minimum wage slightly reduces this to 0´10. This modest change would increase the probability by one-third that an individual’s unemployment spell would last at least 26 weeks, which is consistent with long term unemployment rates being more cyclically responsive than short term unemployment rates (C L A R K and S U M M ER S , 1990a). Moreover, if there is negative duration dependence where the hazard rate declines over time, a minimum wage increase would further raise the chance of a long unemployment duration.3 Also, T H OM A S , 1996, ® nds that the length of unemployment spells is negatively related to the previous job’s wages. This suggests that low skilled, low wage workers are even more susceptible to longer unemployment durations. Since these lower skilled workers are the very people minimum wage hikes are hoped to bene® t, greater unemployment duration seems especially counter to the policy goals. A key advantage of considering the long term unemployed is that it seems much less likely that a potential worker induced into the labour market, by say a 10% minimum wage increase, would remain in the labour force for more than six months without a job (i.e. continuously searching for work for such a small gain). That is, any increased long term unemployment should be almost entirely concentrated among those who would have been in the labour force without a minimum wage hike. Despite the above discussion, the minimum wage may have very little in¯ uence on long term unemployment if industries that employ a disproportionate share of minimum wage workers have almost no unemployment to begin with. However, using 1988 Bureau of Labor Statistics data, this does not appear to be the case. The overall 1988 unemployment rate was 5´5%. Yet, in retail, where over one-half of minimum wage workers are concentrated (S M I T H and V A VR I C H E K , 1992), the unemployment rate was 6´1%. It was an even higher 8´9% for eating and drinking establishment workers, which is where retail sector minimum wage workers are especially concentrated. Relatively high unemployment rates are found in other industries where the minimum wage is relatively important: apparel, 8´1%; food and kindred industries, 8´2%; and

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(e.g. see C L A R K and S U M M ER S , 1990a, regarding the relationship between non-employment and unemployment spells). Another feature of our long term unemployment rate measure is that, to be considered long term unemployed, a jobless worker must continuously search for work for six months, which means that we are focusing on individuals who are the most attached to the labour force. Thus, a rise in our long term measure suggests that at least a portion of the labour force (who are quite attached) has experienced rather signi® cant increases in search costs and other costs. In later analysis, we will also consider more aggregate unemployment, employment/population, and labour force participation rates to examine the robustness of the long term unemployment results. Regardless of whether the competitive model or the monopsony model primarily applies, the unemployment rate is determined by the interaction of labour supply and labour demand in each state. Our empirical speci® cation will re¯ ect a reduced form model of these relationships. Factors that increase labour demand should reduce unemployment rates, while factors associated with an increase in labour supply should increase the unemployment rate. Although there are modest diVerences, the empirical speci® cation is generally consistent with N EU M A R K and W A S C HE R ’s, 1992, 1994, and D EER E et al.’s, 1995, state-level examination 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 state-level unemployment. The data set covers the 48 contiguous states over the 1984± 89 period. Data from the late 1980s has substantial advantages in sorting out the impact of minimum wage hikes. For example, W E L C H and C U NN I N G H A M , 1978, p. 144, noted that high rates of federal minimum wage coverage along with the relatively high federal minimum wage rate empirically swamped any variation in state minimum wage laws in 1970. This changed in the late 1980s when many states raised their minimum wage in response to the federal minimum wage remaining unchanged between 1981 and 1990. The result is that only one contiguous state had a minimum wage above the federal level in 1984 (Connecticut), while this increased to 13 states by 1989 (along with Alaska, District of Columbia and Hawaii). This yields both time-series and cross-sectional variation in minimum wage levels. However, in April 1990, the federal minimum wage increased from $3.35 to $3.80, greatly reducing cross-sectional variation.6 Likewise, the 1984± 89 period was a period of national economic expansion, while 1990 represented the beginning of a national recession, which can confound the estimates. The variables are described below while the data sources are fully detailed in Table 1. Note that one advantage of the data is that they are based on annual averages. Conversely, Neumark and Wascher’s data were based only on May CPS estimates, where small

private household services, 6´8%. Hence, unemployment rates are relatively high in industries where the minimum wage plays a key role, suggesting that minimum wage increases can, in turn, extend unemployment durations. Conversely, older displaced workers would appear unlikely to be in¯ uenced by minimum wage increases. Yet, even here, because displaced workers earn about 25% less on average up to ® ve years after displacement ( J A CO B S O N et al., 1993), minimum wage rates may in¯ uence displaced workers who are in the tail of the wage loss distribution.4 Since we will examine variations in minimum wage laws caused by state legislation, not federal legislation, there are other conceptual considerations when making predictions. Foremost, there is little incentive for ® rms or households to relocate or migrate in response to federal minimum wage changes because there are no cross-state variations. However, state minimum wage changes can create incentives for cross-state ® rm and household relocation, as well as aVect the likelihood of ® rm births and deaths. One implication is that minimum wage responses driven by state legislation may be larger than if we were examining the responses due to federal changes. Another implication is that potential ® rm and household movements (or ® rm births and deaths) may occur after a lag, suggesting that state minimum wage responses will be more drawn out. E M P I RI C A L M O D E L Our empirical methodology will be similar to N E U MA R K and W A S C H ER ’s, 1992, use of cross-state diVerences in minimum wage levels and coverage, while correcting for many of the empirical criticisms levelled by C A R D et al., 1994; and C A R D and K R U EG E R , 1995. Yet, the major diVerence between this study and most other minimum wage studies (including Neumark and Wascher) is that this study does not consider teen employment. That is, by considering long term unemployment rates, this study extends the minimum wage literature. For the purposes of this study, long term unemployment is de® ned as being unemployed for more than 26 weeks. Hence, the long term unemployment rate is de® ned as the number of individuals unemployed for more than 26 weeks divided by the total labour force as de® ned by the Current Population Survey (CPS).5 One trait of CPS data is that unemployment rates are derived from ongoing spells of joblessness. For example, some of the short term unemployed may eventually become long term unemployed or already would be long term unemployed if they had continuously remained in the labour force. Another implication is that the long term unemployed may disproportionately exit the labour force by discontinuing their job search. These examples tend to mean that potential increases in long durations of non-employment due to minimum wage laws would be understated by our long term unemployment measure

Do Minimum Wage Hikes Raise US Long Term Unemployment?
sample sizes for less populated states can introduce variable measurement error, which may have signi® cantly aVected their results (C A R D et al., 1994). The basic speci® cation for state s in year t is: LOUTCOMEst5 bLMINWAGEst 1 aLCOVERAGEst 1 pLWAGEst 1 d INDMIX EMP GROWTHst 1 F AGEst 1 ss 1 s t 1 est (1)

717

where: LOUTCOME is the log of the labour market outcome of interest; LMINWAGE is a vector of log minimum wage variables; LCOVERAGE is the log share of the state’s non-supervisorial labour force covered by federal minimum wage legislation; LWAGE is the log average hourly manufacturing production worker wage; IND MIX EMP GROWTH is the state’s employment growth rate if all its industries grew at the national growth rate; AGE is a vector of demographic age groups; ss is the state ® xed eVect; s is the year ® xed eVect; e is the residual term. b, a, p, d , and F are coeYcient vectors. The state ® xed eVects control for unmeasured factors that in¯ uence each state’s labour market. One primary factor accounted for by the state ® xed eVects is the possibility that states which raised their minimum wage were systematically diVerent than the other states. The year ® xed eVects account for national economic and demographic factors that have a common eVect across all states. Following D E ER E et al., 1995, the base speci® cation will be in doublelog form for the variables of interest (see below). The proper minimum wage measure is in some dispute. In this regard, N E U MA R K and W A S CH E R , 1992, used a state-level Kaitz index. The Kaitz index is the product of the share of the state’s non-supervisorial workforce covered by the federal minimum wage with the maximum of the federal or the state minimum wage rate divided by the average hourly wage. This measure has the advantage of adjusting for variation in state minimum wage coverage. However, one assumption behind the Kaitz index is that a 10% increase in minimum wage coverage has the identical eVect of a 10% increase in the nominal minimum wage rate as well as the exact opposite eVect of a 10% increase in the average wage. N E UM A R K and W A S C H ER , 1994, acknowledge that there is no basis for this restriction, although intuitively the minimum wage should be less binding in high wage states or in states with lower coverage. Yet, C A R D et al., 1994, found that Neumark and Wascher’s Kaitz index was negatively related to teen wage rates, suggesting that it is a poor wage measure. Card et al., argued that this problem was caused when states that had more economic growth also had higher overall average wage rates and greater teen employment. This can create a spurious negative correlation between the Kaitz index and teen employment. Card

et al. contended that instead of a Kaitz index, it is better to use the minimum wage rate itself or the fraction of workers aVected by a minimum wage increase.7 Hence, the log of the maximum of the state or federal minimum wage is used as the minimum wage measure.8 Other advantages of directly using the minimum wage include easier interpretation and less measurement error. Many researchers only include the contemporaneous minimum wage rate because minimum wage jobs are perceived to have high turnover rates (especially for teens ± see B R OW N et al., 1982). However, we include the lag minimum wage rate for several reasons. First, it may take time for employers to substitute more skilled for low skilled labour or substitute capital for low skilled labour (N E U M A R K and W A S C H ER , 1992, 1994). For example, B R O WN , 1995, and H A M E R M ES H , 1995, contend that C A R D and K R U EG E R , 1995, did not ® nd these negative input substitution eVects on employment because they likely take more than a year to develop, which is longer than Card and Krueger allowed.9 Second, as noted earlier, it may take additional time to realize the adverse statelevel ® rm and household relocation eVects after a state minimum wage increase (including fewer ® rm births and more ® rm deaths). Third, because we are using incomplete unemployment spells, the previous year’s minimum wage may play a role in extending the duration of unemployment and increasing the current year’s long term unemployment rate. That is, if a worker loses his/her job, it would take at least six months of unemployment to aVect the long term unemployment rate, greatly reducing the contemporaneous minimum wage eVect. Moreover, note that the minimum wage is measured as an annual average (see note 8). States often increased their minimum wage rate eVective after 30 June. This means that almost all the long term unemployment rate eVects would be delayed into the next year. Generally, the competitive model suggests positive minimum wage coeYcients, while a (supply constrained) monopsony model would generally predict negative (or zero) coeYcients. However, the eVects just described suggest that the lagged minimum wage coeYcient will more likely be positive than the contemporaneous minimum wage eVect. Further, as discussed in more detail below, N EU M A R K and W A S C H ER , 1992, 1994; and P A R T R I DG E and P A R T R I D G E , 1998, 1999, ® nd results that are consistent with state policy makers considering current economic conditions in their minimum wage rate decision. Speci® cally, state policy makers may be more likely to increase the minimum wage when they believe good economic conditions in the near term will oVset any adverse minimum wage eVects.10 For example, in the latter 1980s, state minimum wage hikes were concentrated in the Northeast and along the Paci® c Coast, or states that greatly bene® ted from the Reagan defence

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Mark D. Partridge and Jamie S. Partridge
state male employment rate (K U T T N ER , 1997). That is, Deere et al. attributed the eVects of the 1990± 91 federal minimum wage increase to year dummy coeYcients for 1990, 1991 and 1992. Yet, if the (lowerskilled) demographic groups examined by Deere et al. have greater cyclical variations in their employment rates, the male employment ratio may inadequately account for the eVects of the 1990± 91 recession (K U T T NE R , 1997). Hence, their 1990± 92 year indicators may be capturing cyclical eVects and overstating the negative impacts of the minimum wage hike. Finding suitable cyclical controls is diYcult because unemployment and cyclical conditions are jointly determined. Thus, as a labour demand shifter, we use the (two-digit level) private sector, non-farm industry mix employment growth rate from shift-share analysis (P A R T R I D G E and R I C K MA N , 1995). The industry mix employment growth rate re¯ ects how much the state’s employment would grow if all its industries grew at their respective national growth rates, i.e. it measures whether the state has a mix of fast or slow growing industries. Given that national industry growth rates are determined primarily at the national level, industry mix employment growth should not be endogenous. In fact, B A R T I K , 1991, and B L A N CH A R D and K A T Z , 1992, used it as an exogenous instrument in their regional economic analysis. Indeed, P A R T R I D G E and R I C K M A N , 1995, 1997, found that industry mix employment growth is strongly related to state unemployment rates, where its coeYcient re¯ ects any multiplier eVects from national demand shifts. Moreover, among other things, the state ® xed eVects control for persistent growth diVerences across states, such as rapid growth in the sunbelt. Finally, the year ® xed eVects account for national cyclical (or demographic) trends common across all states. The potential labour supply of groups that disproportionately compose minimum wage earners is included in the model. Minimum wage earners are primarily teens, young adults and older workers (over 55) (M EL L O R , 1987; S M I T H and V A V R I C HE K , 1992). Thus the model includes the share of the state’s population between 15 and 19 years old; 20 and 24 years old; 55 and 64 years old; and 65 and older. E M P I RI C A L RE S ULT S Table 1 presents the (unweighted) descriptive statistics used in the empirical model. For example, the average state long term unemployment rate was 0´91%, the average total unemployment rate was 6´3%, while 85% of non-supervisorial employees were covered by federal minimum wage legislation. In 1989, 13 of the contiguous states had a minimum wage above the federal rate of $3.35. In these 13 states (not shown), on average only 0´33% (s.d.5 0´12) of the labour force was unemployed for more than 26 weeks, while the total average unemployment rate was 4´4%

build up. In fact, this cyclical eVect suggests that the contemporaneous minimum wage coeYcient may be negative, further suggesting that our results understate the minimum wage in¯ uence on long term unemployment rates. Minimum wage coverage is incomplete due to exemptions for industry and ® rm size (which leads to cross-state variation). B R O WN et al., 1982; and B R O WN , 1988, strongly argue for coverage’s inclusion because of its importance in the standard model, although C A R D and K R U EG E R , 1995, downplay its importance. Therefore, the log of federal coverage of minimum wage laws at the state level is also included in the speci® cation. It would be optimal to also include binding minimum wage coverage rates due to state laws, but such data are unavailable for our sample period. None the less, our state-level coverage data signi® cantly improve on the coverage data used by N E U MA R K and W A S C HE R , 1992, 1994. Due to data availability at the time of Neumark and Wascher’s study, coverage data were unavailable for many years of their sample, most notably 1987 to 1989. However, we have obtained coverage estimates for every year of our study.11 This is fortunate because the US Department of Labor ceased publishing state-level estimates of federal minimum wage coverage after 1990. The natural log of the average production worker wage is included in the model. As indicated when discussing the Kaitz index, a minimum wage should be less of a constraint in states with a relatively high wage structure (suggesting a negative average wage relationship with long term unemployment). Moreover, C A R D and K R U EG E R , 1995, noted that the price of a substitute should be included in the model, where they also used average production worker hourly wage (p. 185, p. 199). None the less, the production worker wage is likely to be endogenously related to the state’s cyclical conditions (F R EEM A N , 1982), suggesting that a reduced form model that omits production worker wages would provide more accurate estimates (where the state ® xed eVects would capture persistent wage level eVects). Below, we will also use the average private sector hourly wage to consider the robustness of our wage measure choice, although this measure is probably even more endogenous than production worker wages. Estimating minimum wage eVects can be confounded if the state’s cyclical conditions are not adequately controlled for (C A R D et al., 1994). D EE R E et al., 1995, criticized C A R D ’s, 1992, cross-state analysis for not accounting for low wage Sunbelt states (where the federal minimum wage was most binding) growing faster than the national average in 1990 and 1991. This can make it appear as though the increased federal minimum wage had no negative employment eVects on these states.12 Similarly, the analysis by D E ER E et al., 1995, of 1985± 92 state-level employment was criticized for only controlling for cyclical eVects with the overall

Do Minimum Wage Hikes Raise US Long Term Unemployment?
Table 1. Descriptive statistics for the 48 contiguous states, 1984± 891
Mean (Std dev) Long term total unemployment rate (GPE U) Total unemployment rate (GPE U) Male unemployment rate (GPE U) Female unemployment rate (GPE U) Total employment/population (GPE U) Total labour-force/population (GPE U) Minimum wage2 (MLR) Minimum wage coverage ratio (MWMH) Production worker hourly wage (EE) Average private sector hourly wage (GPEU, WE) Industry mix employment growth (BEA) Share 15± 19 (U SDC) Share 20± 24 (U SDC) Share 55± 64 (U SDC) Share 65 1 (U SDC) N 0´91 (0´69) 6´3 (2´1) 6´2 (2´2) 6´5 (2´1) 62´0 (4´6) 66´1 (3´8) 3´39 (0´12) 0´85 (0´05) 9´66 (1´24) 9´21 (1´28) 0´030 (0´012) 0´077 (0´005) 0´079 (0´007) 0´089 (0´008) 0´125 (0´018) 288

719

Notes: 1. The sources are listed in parentheses: B EA, Bureau of Economic Analysis; USDC, US Department of Commerce, Bureau of the Census, Current Population Survey Data; MWMH, US Department of Labor, Minimum Wage and Maximum Hours Under the Fair Labor Standards Act; EE, US Department of Labor, Employment and Earnings, States and Areas; GPEU, US Department of Labor, Geographical Pro® le of Employment and Unemployment; MLR, US Department of Labor, Monthly Labor Review, January issues; WE, US Department of Labor, Wage and Earnings, Annual Averages. 2. The minimum wage is the maximum of the state and federal minimum wage rates.

(s.d.5 0´8). For the other 35 states the respective unemployment rates were 0´57% (s.d.5 0´32) and 5´4% (s.d.5 1´36). This pattern is in accord with Card and Krueger’s claim that modestly raising the minimum wage has little if any negative consequences on labour market opportunities. None the less, as noted above, there could be other factors behind this relationship, for which we turn to the regression analysis to sort out the causal eVects.

Long term unemployment Table 2 contains several alternative regression speci® cations using the log of the long term unemployment rate as the dependent variable. Column (1) re¯ ects the

model shown in equation (1), while columns (2)± (6) contain alternative speci® cations. In column (1), the contemporaneous eVect from raising the minimum wage is negative and statistically signi® cant, but this is more than oVset by the positive and statistically signi® cant lag eVect.13 As described above, one possible reason for this dynamic pattern is that states which raised their minimum wage did so because they were more likely to experience higher economic growth. Such a tendency would result in a negative (contemporaneous) relationship between the minimum wage and the long term unemployment rate, where standard eVects would occur after a lag. Also, since the long term unemployed must be out of work for at least six months, negative minimum wage eVects would be further delayed. This would mean that our contemporaneous estimate understates any unemployment increases that result from raising the state minimum wage. Conversely, this pattern could be consistent with C A R D and K R U E G ER ’s, 1995, monopsony model with mobility costs and search frictions playing a strong role in the short run (D I C K EN S et al., 1999) but with the standard model dominating over time. Summing the minimum wage coeYcients results in an elasticity point estimate of 1´81. Yet, the F-test reported at the bottom of Table 2 shows that we can reject the null hypothesis that the sum of the two minimum wage coeYcients equals zero at only the 17% level ( p5 0´166), suggesting that caution should be exercised in interpreting the results. Two possible causes of this imprecision are that state-level long term unemployment duration is measured with error in the CPS and endogeneity of average wages. Using the estimated minimum wage elasticity of 1´81, a 27% increase in the minimum wage (which equals the federal increase between 1990 and 1991) would increase the average state long term unemployment rate to about 1´35% when evaluated at the 1984± 89 sample mean long term unemployment rate 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 long term unemployment rate averaged about 1´38%. These results suggest that the federal minimum wage increase of 1990± 91 contributed to the increase in long term unemployment in the ® rst half of the 1990s, but note that these estimates are measured with some imprecision. Yet, bear in mind that national level responses are likely smaller than responses at the state level. 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, suggesting that C A R D and K R U EG E R , 1995, were too quick to ignore coverage’s eVect. A ® ve percentage point increase in minimum wage federal coverage 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) 2 2´99 (3´65) 4´79 (2´88) 5´55 (2´79) 2 (3) 0´57 (0´68) 2 (4) 3´04 (3´19) 5´72 (3´09) 2´22 (1´20) 2 (5) 2´89 (3´39) 4´65 (2´62) 3´16 (1´80) 0´66 (0´57) 2 1´44 (1´41) 3´59 (3´59) 2 14´91 (2´56) 44´02 (2´65) 2 86´86 (5´32) 2 34´69 (1´75) 2 38´28 (2´47) Y Y 0´89 1´81 ( p5 0´180) 4´16 ( p5 0´017) 6´90 (0´001) 0´113 288 3´82 1´76 2 (6) 2´90 (3´35) 5´02 (2´79)

Log(minimum wage) Log(minimum wage)t2
1

Log(minimum wage coverage) Log(minimum wage coverage)t2 Log(production hourly wage) Log (production hourly wage)t2
1 1

2 2´93 (3´45) 4´74 (2´69) 3´42 (1´84)

3´08 (1´64)

Industry mix employment growth Share 15± 19 Share 20± 24 Share 55± 64 Share 65 1 Year ® xed eVects State ® xed eVects R2 F-stat: bMWt 1 bMW(t2

1)

5 02

2 1´52 (1´51) 3´59 (3´59) 2 15´07 (2´62) 43´27 (2´63) 2 88´04 (5´58) 2 34´26 (1´72) 2 38´11 (2´46) Y Y 0´89 1´93 ( p5 0´166)

2

2

2´35 (1´95) 3´00 (2´73) 15´81 (2´22) 2

1´70 (2´29)

2 2 2 Y Y 0´87 1´83 0´177) (p5

15´21 (2´81) 54´56 (3´16) 77´30 (4´95) 23´17 (1´14) 42´57 (2´67) Y Y 0´88

( p5

16´33 (2´85) 49´20 (3´06) 2 74´68 (5´02) 2 23´89 (1´21) 2 41´91 (2´70) Y Y 0´89 4´66 ( p5 0´032)

2

1´60 (1´50) 3´28 (3´15) 2 15´54 (2´71) 40´83 (2´41) 2 92´13 (5´95) 2 26´27 (1´32) 2 36´56 (2´37) Y Y 0´89 2´67 (p5 0´104)

2

F-stat: Kaitz restriction3 F-stat: Lag Kaitz restriction3 Autocorrelation q 4 N Minimum wage coverage elasticity Minimum wage elasticity 0´114 288 3´42 1´81 0´181 288 5´55 1´80

2´15 0´119)

0´122 288 3´08 2 0´57

0´140 288 2´22 2´68

0´114 288 n.a. 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% (or by over one-sixth). This again supports the argument that minimum wage laws can increase long term unemployment. By not including the age controls, the model in column (2) examines the sensitivity of the ® ndings to accounting for the supply side controls. The results indicate that the coverage variable’s magnitude and statistical signi® cance improved in this case (1% level), while the minimum wage results are substantially unchanged. The model in column (3) shows the results when the lagged minimum wage variable is omitted from the base model in column (1). In this case, the contemporaneous minimum wage coeYcient is negative and statistically insigni® cant, which is not surprising given that it takes at least six months before long term unemployment rates would be aVected. Foremost, this

pattern suggests that the lagged minimum wage variable plays an integral role in detecting the conventional unemployment outcome (as suggested by N E UM A R K and W A SC H E R , 1992, 1994). One of the reasons that the average production worker wage is included in the base model is that it is a measure of the degree to which the minimum wage is a binding constraint in the state’s labour market. Yet, this likely introduces bias when production worker wages are endogenous. By omitting production worker wages, the model in column (4) re¯ ects a reduced form speci® cation. These results suggest that the sum of the minimum wage coeYcients is signi® cant at about the 3% level with the minimum wage elasticity rising to 2´68. However, the coverage variable is no longer signi® cant. In further sensitivity analysis (not shown), speci® cations similar to those in columns (3) and (4) were

Do Minimum Wage Hikes Raise US Long Term Unemployment?
estimated. In this case, the contemporaneous minimum wage variable and the production worker wage variables were omitted from the model. Also, to focus just on the minimum wage rate, the coverage variable was also omitted (which had little in¯ uence on the results). In this case, the lagged minimum wage elasticity was 2´01 with a t-statistic of 1´44. Likewise, in another model, 1990 data were included. The lagged minimum wage elasticity equalled 2´08 and the t-statistic equalled 1´85. However, because the federal minimum wage increase took eVect in April 1990 and a recession began in 1990, these results should be cautiously interpreted. Finally, a corresponding linear model (not log) was estimated (without 1990 data). The minimum wage elasticity equalled 2´62 with a t-statistic of 2´36. Overall, this sensitivity analysis suggests that the positive lagged minimum wage response is robust and not an artefact of including the contemporaneous minimum wage variable. The speci® cation in column (5) adds the lag of minimum wage coverage to the model in column (1). The lagged coverage variable’s t-statistic is only 0´57, supporting our contention that there is very little lagged coverage eVect. Conversely, the contemporaneous coverage coeYcient is little changed from before as well as the two minimum wage coeYcients. The bottom of Table 2 shows the results of an F-test for separately imposing the Kaitz restriction contemporaneously and with a lag (on the minimum wage, coverage and manufacturing wage coeYcients). The null hypothesis can be rejected at the 5% level in both cases ( p5 0´017; p5 0´001) suggesting that the Kaitz restriction is inappropriate. In both the contemporaneous and lagged cases (not shown), the Kaitz coverage adjusted minimum wage coeYcient would have been negative and statistically insigni® cant (t-statistics of 2 0´54 and 2 0´29, respectively). Thus, imposing the Kaitz restriction would have given the impression of a negative (but insigni® cant) relationship between the minimum wage and long term unemployment. C A R D and K R U E G ER , 1995, argued that including federal minimum wage coverage adds little to estimat-

721

ing the impacts of the minimum wage and, thus, they did not include it in their model. Despite the signi® cance of the coverage variable, to examine this possibility, column (6) reports results from the model which omits coverage from the speci® cation in column (1). The minimum wage elasticity is slightly larger in this case and the joint signi® cance of the sum of the minimum wage coeYcients is slightly improved ( p5 0´104 vs. p5 0´166). Table 3 highlights additional sensitivity regressions that were estimated to examine the robustness of the model shown in column (1) of Table 2. Row (1) is a two-stage least squares model (2SLS) treating production worker wages as endogenous.14 Row (2) adds the lag of the industry mix employment coeYcient to account for dynamic economic eVects correlated with long term unemployment. Row (3) adds the overall employment/population ratio as an additional cyclical control to examine whether adding a clearly endogenous cyclical variable to the model confounds the results. Finally, row (4) adds the log average private sector hourly wage in place of the average production worker hourly wage. The consistent pattern in Table 3 tends to aYrm the ® ndings in Table 2. First, the contemporaneous minimum wage eVect remains negative and generally statistically signi® cant. The lag minimum wage coeYcient is positive and generally statistically signi® cant, where the magnitude of the lag coeYcient more than oVsets the contemporaneous eVect. The consistent ® nding that the lag eVect is larger than the contemporaneous eVect lends additional support to this pattern. Finally, the coverage elasticity ranges from 2´0 to 4´0. Speci® cally, the results in the ® rst two rows of Table 3 are little changed from column (1) of Table 2. As expected, adding the employment/population ratio (row (3)) aVects the ® ndings, where the minimum wage eVect is diminished, but this is oVset by the coverage eVect becoming more in¯ uential. Substituting the average private sector hourly wage also lessens the minimum wage eVects in row (4). However, this could 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
(1) Log(minimum wage) 2 3´22 (1´57) 2 2´95 (3´45) 2 1´80 (2´31) 2 2´80 (3´35) (2) Log(minimum waget2 1 ) 5´63 (2´85) 4´80 (2´70) 2´24 (1´48) 3´83 (2´10) (3) Minimum wage elasticity 2´41 ( p5 1´85 ( p5 0´44 ( p5 1´03 ( p5 (4) F-test H0 :BMW 1 BMW(t2 1)5 0 2´63 0´106) 1´98 0´161) 0´15 0´700) 0´63 0´429)

Model (1) 2S LS, production worker wage endogenous (2) Add lag industry mix employment growth (3) Add log (total employment/population) (4) Use log average private sector hourly wage

(5) Log coverage 3´20 (1´76) 3´45 (1´83) 3´74 (2´84) 2´41 (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
Aggregate unemployment rates Given the fairly large long term unemployment response to changes in the minimum wage, minimum wage changes should have a perceptible impact on aggregate unemployment rates, especially if other forms of unemployment also increase. For example, D EE R E et al., 1995, provide evidence of large disemployment eVects for `at risk’ population subgroups, although it is reasonable to expect a smaller response for aggregate unemployment than long term unemployment. Hence, to examine this possibility, as well as to examine the robustness of the patterns found above, Table 4 reports regression equations using three diVerent aggregate state unemployment rates as the dependent variable. The basic model is unchanged with the exception that the average manufacturing wage is omitted from these speci® cations since it is quite likely that it is endogenous when considering the aggregate labour market (i.e. it is a reduced form model). In Table 4, columns (1)± (3) respectively report regression results using the total, male and female unemployment rates as the dependent variable. Generally, the aggregate results follow the same pattern as before ± the contemporaneous minimum wage is negative and the lagged coeYcient is positive (where

from endogeneity and measurement error, suggesting that those results are possibly spurious.15 The results in Tables 2 and 3 appear to consistently suggest that greater minimum wage coverage increases long term unemployment rates. Likewise, they indicate that the magnitude of the lagged minimum wage coeYcient more than oVsets the negative contemporaneous minimum wage coeYcient (where both are usually statistically signi® cant at the 5% level). Yet, the sum of the minimum wage coeYcients is in many cases only statistically signi® cant at the 10 to 20% level. Regardless, the reduced form model without production worker wages (column (4) of Table 2) suggests a signi® cant minimum wage response at the 5% level, where there are reasons to more heavily weigh those results. As indicated above, state-level long term unemployment rates are very diYcult to estimate precisely by the Bureau of Labor Statistics, which increases the noise to signal ratio in the regressions. Thus, before making any ® rm judgements, it would seem prudent to examine the minimum wage’s eVect on more aggregate unemployment, employment/population and labour-force participation rates, which are likely to be measured more accurately.

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/ unemployment rate unemployment rate unemployment rate population Log(minimum wage) Log(minimum wage)t2
1

(5) Log LF/population 0´054 (0´88) 2 0´166 (1´78) 0´21 (2´55) 0´06 (0´19) 2 0´52 (0´47) 2´93 (3´78) 2 1´13 (1´29) 2 0´05 (0´08) Y Y 0´97 3´76 (p5 0´054) 0´223 288 0´21 2 0´11

Log(minimum wage coverage) Industry mix employment growth Share 15± 19 Share 20± 24 Share 55± 64 Share 65 1 Year ® xed eVects State ® xed eVects R2 F-stat: bMWt 1 bMW(t2

1)

5 02

Autocorrelation q 3 N Minimum wage coverage elasticity Minimum wage elasticity

1´49 (3´93) 2´88 (4´33) 2´07 (2´97) 2 7´35 (3´16) 14´28 (2´06) 2 31´69 (5´50) 2 21´09 (2´91) 2 28´87 (4´52) Y Y 0´92 8´54 ( p5 0´004) 0´129 288 2´07 1´39

2

1´52 (3´30) 3´19 (4´12) 2´29 (2´48) 2 6´95 (2´69) 12´40 (1´56) 2 24´90 (3´67) 2 21´93 (2´77) 2 22´62 (2´85) Y Y 0´91 8´77 (p5 0´003) 0´077 288 2´29 1´67

2

1´45 (3´28) 2´42 (3´24) 1´91 (2´99) 2 7´38 (2´70) 18´32 (2´31) 2 39´43 (6´27) 2 19´25 (2´25) 2 36´98 (5´79) Y Y 0´91 3´55 ( p5 0´061) 0´065 288 1´91 0´97

2

0´13 (1´86) 2 0´34 (3´06) 0´11 (1´04) 0´49 (1´51) 0´06 (0´05) 5´44 (5´74) 0´26 (0´23) 2´79 (3´25) Y Y 0´97 9´03 (p5 0´003) 0´239 288 0´11 2 0´21

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?
both are statistically signi® cant at the 1% level). The F-statistics at the bottom of Table 4 indicate that the null hypothesis that the sum of the minimum wage coeYcients equals zero can be rejected at the 1% level for total unemployment and male unemployment and at about the 6% level for female unemployment. Therefore, the aggregate unemployment results are estimated more precisely than before. The minimum wage elasticity equals 1´39 for total unemployment, indicating that a 10% increase in the minimum wage would raise the average state’s unemployment rate about 0´9% percentage points (to 7´2% on average). As expected, all three aggregate minimum wage elasticity estimates are smaller than the corresponding estimate for long term unemployment (in column (1), Table 2). Minimum wage coverage is positively related to all three aggregate unemployment rates, where the eVect is statistically signi® cant at about the 1% level. Again, the estimated coverage elasticity is smaller for the aggregate measures than for the long term unemployment rate. As noted earlier, the ® nding of a `favourable’, contemporaneous, state-level, minimum wage response that is more than oVset by an `unfavourable’ , lagged, minimum wage response is not limited to this study. For example, N E U M A R K and W A S CH E R , 1992, 1994, found this pattern for teen (and 16 to 24 year old) employment/population ratios. P A R T R I D G E and P A R T R I D G E , 1998, also found this same pattern for teen unemployment rates. This was the case when they directly examined teen unemployment rates or indirectly when they considered teen employment/ population rates and labour force participation rates. Finally, P A R T R I DG E and P A R T R I D G E , 1999, found the same dynamic pattern for retail and non-farm statelevel employment. As an additional characteristic of these studies, note that unemployment, employment/ population and labour-force participation rates are from the household CPS and retail and non-farm employment are from establishment surveys, suggesting that the dynamic minimum wage response is not an artefact of a single survey. Aggregate employment/population and labour-force participation results To further investigate the robustness of the results, columns (4) and (5) report regression results using the log employment/population ratio and the log labour force participation rate as the dependent variables. If the above explanations are correct, the employment rate should be positively related to the contemporaneous minimum wage rate due to strong unmeasured economic conditions at the time of passage. This positive eVect would then be overwhelmed by a negative lagged minimum wage response. Likewise, the initial favourable economic conditions along with a higher minimum wage should induce more people into the labour force. However, the above explanations imply

723

that, after a lag, people will exit the labour force as they become discouraged by the negative minimum wage eVects. The minimum wage results in columns (4) and (5) are consistent with these expectations. The initial response of the employment rate is positive, but this is more than oVset by a negative lagged minimum wage response. Likewise, the labour force initially expands, but this is overwhelmed by people exiting the labour force with a lag. The overall employment/population minimum wage elasticity is 2 0´21 after two years where the corresponding participation elasticity is 2 0´11. The joint F-statistics show that the overall employment response is statistically signi® cant at the 0´3% level and the overall participation response is signi® cant at the 6% level. Together, columns (4) and (5) suggest that the aggregate unemployment rate rises after a lag because employment falls faster than the labour force in response to a minimum wage hike. In fact, using a derivation in B R O W N et al., 1982, the results in columns (4) and (5) suggest that a 10% state minimum wage increase will lift the aggregate unemployment rate by 0´9%, the same as in column (1). Finally, the results in columns (4) and (5) suggest that minimum wage coverage lifts aggregate unemployment by lifting the labour supply. Overall, the aggregate results follow the same dynamic pattern as the long term unemployment results, further suggesting that the long term unemployment response is not a statistical artefact. In addition, the precision of the aggregate coeYcients increases our con® dence in the long term unemployment patterns. Thus, it may be possible that the long term unemployment estimates were aVected by measurement error. Nevertheless, beyond exploring the robustness of the previous results, the aggregate ® ndings also suggest a strong response to state-level minimum wage increases. Given that these results are based on variations in state minimum wage rates, these ® ndings are not surprising. That is, diVerences in state minimum wage rates can 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 avoid federal minimum wage requirements, implying a smaller federal minimum wage response. C O N C L US I O N This study examined the impact of state-level minimum wage rates on unemployment rates, focusing on the long term unemployed over the 1984± 89 period. The emphasis on long term unemployment extends minimum wage research by considering how unemployment durations for attached low skilled workers are aVected. By examining the 1984± 89 period, we took advantage of the large cross-sectional variation that occurred when many states raised their minimum wage above the federal minimum rate of $3.35.

724

Mark D. Partridge and Jamie S. Partridge
Association International Meetings in BuValo, New York, and at a Federal Reserve Bank of Chicago seminar. Given their low skill levels, minimum wage rates are especially thought to price teen workers out of the job market. Yet, teens are also associated with even briefer spells of unemployment than adults. Regardless, C L AR K and S U M ME RS , 1990a, 1990b, ® nd that there is also a hard core group of teens that suVer long durations of unemployment, which composes about one-half of teen unemployment. A typical explanation for negative duration dependence is a stigma eVect where long durations of unemployment are a negative signal to potential employers of the worker’s productivity. For more details on duration dependence, see V A N D EN B ER G and V A N O U RS , 1996. Among demographic groups, teens (especially minority teens) are thought to be most in¯ uenced by minimum wage rates (S M I TH and V A V RI CH EK , 1992). Besides teens, other demographic groups could be prone to (long) unemployment spells as a result of minimum wage hikes. For example, the 1988 unemployment rate for those between 20 and 24 years old was 8´7%. N EU M AR K and W A SC H ER , 1992, ® nd that this age group is about as adversely aVected by minimum wage hikes as teens. Moreover, the 20± 24 age group’s share of the labour force in 1988 was about four-® fths larger than the share for the 16± 19 age group. Likewise, high school dropouts over the age of 25 had an unemployment rate that was about four percentage points above the overall unemployment rate in 1992 (the earliest year available). Drop-outs are another demographic group that are strongly aVected by minimum wage laws. Although longer periods of duration are of interest in European nations, the CPS measure of 26 weeks was chosen due to data availability at the state level. Yet, given that a very small share are unemployed for more than one year and that state unemployment insurance bene® ts typically expire after 26 weeks, this duration is of great practical importance in the US. After the federal minimum wage increased to $4.25 an hour in April 1991, only three contiguous states had a minimum rate above the federal rate. In fact, the state minimum wage changes of the latter 1980s created what C A RD, 1992, termed `remarkable’ variation in minimum wage levels that forms an unique natural experiment into the eVects of minimum wage legislation which has not been replicated before or since. In contrast, national time-series studies are hampered by the constraint that the federal minimum wage varies infrequently, creating signi® cantly less time-series variation. 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, which will be statistically tested below. To see this, note that the Kaitz variable is COVERAGE*MINWAGE/ AVG WAGE. Taking the natural log results in LCOVERAGE1 LMINWAGE2 LAVG WAGE, where L re¯ ects the natural log. If a state changed their minimum wage in mid-year, a weighted annual average of their minimum wage was used. State minimum wage rate information was found in various January issues of the U S Department of Labor,

We consistently found that the minimum wage is positively related to long term unemployment rates after a lag. However, it was often the case that the sum of the contemporaneous and lag minimum wage coeYcients was of only modest statistical signi® cance (i.e. at the 10± 20% level). Yet, the reduced form results without the production worker wages suggested a statistically signi® cant minimum wage result at the 5% level. Regarding minimum wage coverage, we found that greater coverage increases long term unemployment, where the statistical signi® cance was stronger than for the minimum wage rate results. One possible factor that in¯ uenced the minimum wage rate results was measurement error in estimating the long term unemployment rates. In fact, further analysis using aggregate labour market measures yielded results strongly consistent with long term unemployment patterns. This increased our con® dence in the long term unemployment results. These results suggest that policy makers at the federal and state level should weigh additional total unemployment, as well as the possibility of longer durations of unemployment, in contemplating future minimum wage increases. In particular, state policy makers should consider the prospect of ® rm and household relocation in their decision making. Likewise, in an era of welfare reform, these results suggest that some low-skilled welfare recipients may experience long job searches, suggesting that minimum wage hikes may run counter to the work requirement goals of welfare reform. One possible policy alternative is expanding the earned income tax credit. To be sure, this does not mean that policy makers should forego minimum wage increases, just that they should fully weigh the costs and bene® ts. The ® ndings tend to support the standard prediction that there are negative consequences from raising the minimum wage, at least at the state level. Foremost, this was the case even after adjusting for the empirical concerns raised by C A R D et al., 1994; and C A R D and K R UE G ER , 1995. None the less, more research should be conducted to explore if these results apply to other periods besides the 1980s. However, a challenge facing such research is that, unlike the late 1980s, there has been considerably less cross-state variation in minimum wage rates in the 1990s. Another complication is that the Federal Government no long publishes state-level minimum wage coverage estimates.

2.

3.

4.

5.

6.

7.

Acknowledgem ents ± The authors thank Dan Aaronson, Gary Hunt, Dan Rickman and Dan Sullivan for their helpful comments with this study.

NO T E S
1. An earlier version of this paper was presented at the November 1997 North American Regional Science

8.

Do Minimum Wage Hikes Raise US Long Term Unemployment?
Monthly Labor Review, in which state labour law changes are summarized. As shown in C A RD and K REU GER , 1995, p. 218, it is unnecessary to de¯ ate wages by the price de¯ ator in the current speci® cation (e.g. by the CPI). That is, the sum of the real minimum wage for state s and year t and the year indicator variable is: blog(MINWAGEst/CPIt)1 s t* . This can be rewritten as blog(MINWAGEst)2 blog(CPIt)1 s * . Since CPIt does not vary across states, t this can be rearranged as: blog(MINWAGEst)1 s t , where s t5 blog(CPIt)1 s t* . Similar reasoning applies to the average wage term. Despite our best eVorts, it will be very diYcult to fully control for state economic conditions related to passage of a minimum wage increase because law makers rely on a host of unmeasurable factors including constituent economic con® dence. Conversely, N E U MA R K and W A SC H ER , 1992, tried to instrument for the timing of minimum wage hikes, but their results were unaVected. Regardless, it is very diYcult to ® nd an exogenous instrument related to the passage of minimum wage increases that is also unrelated to the economic conditions of the state and region. We expect that coverage will not have a lagged eVect, although this assumption will be tested. With the exception of the expansion of coverage to state and local government in 1985, there was no change in the industries covered by federal minimum wage legislation in the late 1980s, suggesting that there should be little adjustment lag for employers. C AR D and K RU E GE R , 1995, used the 1990± 92 ® rst-

725

9.

10.

11.

12.

difference as their empirical speci® cation. This may be a misspeci® cation when there are state ® xed eVects in state growth rates, such as persistent growth in the Sunbelt. A related concern is that there are only 51 observations using this approach. 13. It is possible that the two-year lag of the minimum wage rate may aVect long term unemployment. However, when we included the two-year lag in the model (not shown), it was not statistically signi® cant at even the 20% level while the other two minimum wage rate coeYcients were each statistically signi® cant at the 1% level. 14. Two exogenous instruments were used in the ® rst-stage model. The ® rst is the real wage mix of the state, which is the hypothetical wage rate in the state if all the state’s industries paid their respective national average wage (P AR TR ID GE and R I CKM A N , 1995, 1997). The real wage mix is a measure of whether the state has a mix of high or low paying industries. The second instrument is the percentage of the state’s non-farm employment in high-tech manufacturing industries. 15. The production worker hourly wage is a direct hourly wage estimate. Conversely, we indirectly derived the average private sector hourly wage by taking average private sector weekly earnings divided by average weekly hours. Both weekly earnings and (especially) hours are likely endogenously related to long term unemployment. Also, this wage measure is quite similar to K IM and T A Y L O R ’s, 1995, wage measure, which was criticized for measurement error (C A RD and K RU E GE R , 1995; K EN N AN , 1995).

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