Introduction, Thesis Statement, and Annotated Bibliography

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WHO BENEFITS FROM A MINIMUM WAGE INCREASE?
JOHN W. LOPRESTI AND KEVIN J. MUMFORD*
The authors address the question of how a minimum wage increase
affects the wages of low-wage workers relative to the wage the
worker would have if there had been no minimum wage increase.
The authors’ method allows for the effect to depend not only on
the initial wage of the worker but also nonlinearly on the size of the
minimum wage increase. Results indicate that low-wage workers
who experience a small increase in the minimum wage tend to have
lower wage growth than if there had been no minimum wage
increase. A large increase to the minimum wage not only increases
the wages of those workers who previously earned less than the new
minimum wage but also spills over to workers with moderately
higher wages. Finally, the authors find little evidence of heterogeneity in the effect by age, gender, income, and race.
T
he minimum wage literature has primarily focused on evaluating the
employment effects of a minimum wage increase.1 In this article, we
address the far less studied question of documenting the wage effects of a
minimum wage increase. We focus our attention on estimating how the
wage effects of a minimum wage increase differ across the wage distribution
and by the size of the increase. Most studies assume that a minimum wage
increase causes those workers with an initial wage between the old and the
new minimum wage to have their wage bumped up to the new minimum.
Some studies allow for minimum wage spillovers to a predefined group of
workers with slightly higher wages.2 When benefits are calculated, however,
1
See Card (1992a, 1992b); Katz and Krueger (1992); Neumark and Wascher (1992, 1995); Card and
Krueger (1994, 1995); Spriggs and Klein (1994); Deere, Murphy, and Welch (1995); Currie and Fallick
(1996); Lang and Kahn (1998); and Baker, Benjamin, and Stanger (1999). Neumark and Wascher
(2007) provide a comprehensive review.
2
The observation that a minimum wage increase affects the wages of workers earning more than the
new minimum wage originated with Gramlich (1976) and has been confirmed in many subsequent
studies.
*JOHN W. LOPRESTI is Assistant Professor of Economics at the College of William and Mary. KEVIN J.
MUMFORD is Associate Professor of Economics at Purdue University. We thank David Hummels, Steve
Martin, Justin Tobias, Stephen Woodbury, and Chong Xiang for helpful discussion and comments. We
acknowledge financial support from the Upjohn Institute for Employment Research. Additional results
and copies of computer programs used to generate the results presented in the article are available from
the authors at jwlopresti@wm.edu or mumford@purdue.edu.
KEYWORDs: wage effects, minimum wage
ILR Review, 69(5), October 2016, pp. 1171–1190
DOI: 10.1177/0019793916653595. Ó The Author(s) 2016
Journal website: ilr.sagepub.com
Reprints and permissions: sagepub.com/journalsPermissions.nav
1172
ILR REVIEW
the implicit assumption is that wages for low-wage workers would have
remained constant had it not been for the minimum wage increase.
In contrast, we start with the assumption that low-wage workers would
have experienced wage changes in the absence of a minimum wage
increase. In our approach, the benefit of a minimum wage increase to a particular low-wage worker is the difference between the hourly wage after the
minimum wage increase and the hourly wage the worker would have experienced had there been no increase. It is possible for this difference to be
negative for some workers if the wage increase they would have experienced
is larger than what they actually experienced with a small minimum wage
increase. This approach is most similar to that of Neumark, Schweitzer, and
Wascher (2004) in that we estimate the effect of a minimum wage increase
on the wages of current low-wage workers, allowing the effect to differ for
workers with different initial wage rates. Our analysis is different from that
of Neumark et al. (2004), however, in that we also allow for the effect to
depend on the size of the minimum wage increase without imposing linearity. Allowing for this additional flexibility in the estimation allows us to better understand how a minimum wage increase affects wages.
An alternative approach would be to analyze how a minimum wage
increase affects the wage distribution, as in DiNardo, Fortin, and Lemieux
(1996). This approach, however, is better suited to understanding how the
minimum wage affects income inequality and is not applicable to analyzing
how a minimum wage increase affects the wages of current low-wage workers. Because we estimate the effect for current workers, we can subsequently
analyze how the effect differs by the magnitude of the minimum wage
increase, by the initial wage, and for various demographic groups. For
example, it is well documented that workers earning the minimum wage
are predominantly women, adults (rather than teenagers), and members
of low-income households (bottom 40% of the household income
distribution). This does not necessarily imply, however, that these groups
experience larger wage gains from a minimum wage increase than other
groups do.
Our approach does not address employment effects, nor does it address
the wage effects for new entrants into low-wage positions who were not
working before the minimum wage increase, some of whom benefit from
the law change. These limitations are notable, but our question of how a
minimum wage increase affects the wages of current low-wage workers is
important to crafting minimum wage policy and has not been fully
answered. Our analysis provides a more complete picture of the wage effects
than has been previously available.
Our analysis shows that the wage impact of a minimum wage increase
depends on the size of the increase as well as the characteristics of the individual. Surprisingly, we find that a small increase may actually cause lowwage workers to experience less wage growth than they otherwise would
have without the increase. We do a great deal of sensitivity analysis and show
WHO BENEFITS FROM A MINIMUM WAGE INCREASE?
1173
that this finding is quite robust. We hypothesize that employers may use a
minimum wage increase as a focal point in setting wages, and thus a small
minimum wage increase may limit wage increases.
Data
We use the public-use Current Population Survey (CPS) outgoing rotation
group data between August 2005 and June 2008. CPS respondent households are interviewed for four consecutive months, followed by an eightmonth hiatus, followed by a final four consecutive months of interviews. A
household initially interviewed in January 2006 would thus be interviewed
through April of that year, as well as January through April of 2007. We
include only the fourth and eighth interview months—outgoing months
spaced one year apart—which contain more detailed employment and wage
data. Employing the methodology of Madrian and Lefgren (1999), we
match respondent interviews year to year on the basis of state, month interviewed, household identifiers, sex, race, and age.
Because of both the mobility of respondents between interview years and
reporting error, we are unable to match everyone interviewed in the fourth
interview month to a corresponding interview one year later. We match
72.8% of individuals in the CPS from August 2005 to June 2007 across sample years. This match rate is similar to that found in other time periods.
The less than perfect match rate raises the concern that our sample will not
be representative of the population if the observed attrition is not random.3
Specifically, if attrition is correlated with either wage growth or the size of
the minimum wage change, our results will be biased. We do not observe
wage growth for those individuals who are not matched, so we cannot
directly address this concern. However, we find no significant correlation
between state-level match rates and state average wage growth, state percapita GDP growth rate, or the magnitude of the state minimum wage
change in our time period.4 We view this as evidence against the concern
that the minimum wage increase itself may reduce the number of individuals we observe in the second period.
Our sample includes individuals age 16 and older who are employed at
the time of both interviews. To focus on workers in sectors covered by the
minimum wage, we impose a threshold $ 0.10 below the minimum wage
and exclude individuals reporting a wage below this threshold at the time
3
Our match rate is higher for older workers and those with higher wages. It is lowest for individuals
aged 20 to 24. These young workers are most likely to move from the household, and because the CPS
follows households rather than individuals, we are unable to match those who move between the fourth
and eighth interviews. It is thus not surprising that young, mobile workers are the least likely to be
matched.
4
State-level match rates for workers aged 16 to 65 range from 65.6% in Nevada to 80.4% in West
Virginia. There is a slightly negative, though not statistically significant, correlation between average wage
growth and the match rate. There is a slightly positive, though not statistically significant, correlation
between the magnitude of the minimum wage increase and the match rate.
1174
ILR REVIEW
of either interview.5 We also exclude individuals reporting wage growth
greater than 1,000%. Finally, self-employed workers and those in the agricultural sector have been removed. This leaves us with a final sample of
101,299 observations. We report variable means from the matched full sample in column (1) of Table 1.
The period 2005 to 2008 is notable for a large number of U.S. state-level
minimum wage changes in addition to the federal minimum wage increase
of 2007. From 2005 to 2008, 28 states and the District of Columbia increased
the minimum wage. An additional 20 states were affected by the federal
increase.6 At the level of the individual observation, we define the minimum
wage increase as the change in the applicable minimum wage that occurs in
the year between interviews. For example, the Arkansas minimum wage rose
from $5.15 to $6.25 on October 1, 2006, and there was no minimum wage
change in 2007. An individual living in Arkansas whose first outgoing interview occurred in September 2006 is thus defined as having experienced a
$1.10 minimum wage increase, while an individual first interviewed in
October 2006 is defined as experiencing no increase.
Slightly fewer than 64% of the respondents in our sample experienced a
minimum wage increase between interviews. This includes individuals in 48
states and the District of Columbia. The remaining 36% of individuals who
did not experience a minimum wage increase between interviews span 44
states and the District of Columbia. These minimum wage changes differed
not only in their timing and location but also in their magnitude. Changes
during this period were as small as $ 0.10 and as large as $2.10.7 This dispersion in magnitude across states and time is the primary identifying variation
in our analysis.
This leads to an important question: Why did some states raise their minimum wage by only a small magnitude while others enacted a large increase?
There is a great deal of randomness inherent in the political process, and
this may be the main source of variation in the timing of increases to the
minimum wage. For our estimates to be unbiased, however, the size of the
minimum wage increases must also be ‘‘as good as’’ randomly assigned, conditional on the controls. We argue that this is the case. Some initial
5
For individuals who do not report an hourly wage, we use the reported weekly earnings divided by
the usual hours of work per week. Though this imputation likely introduces some measurement error
and potentially causes us to drop some individuals from the sample who reported either too high or too
low usual hours of work per week, we do not believe the imputation causes bias in the results.
Importantly, there is no evidence that the need to impute wages is in any way correlated with the minimum wage change. In our full sample, the correlation between the minimum wage change in a state-year
and the fraction of workers whose hourly wage is imputed is statistically indistinguishable from zero
(p value = 0.853).
6
Alaska, which had a minimum wage of $7.15 throughout the entire sample, and Minnesota, which
had a minimum wage of $6.15 throughout the entire sample, were not affected by a minimum wage
change in any year.
7
Montana increased its minimum wage from $6.15 to $6.25 on January 1, 2008. Iowa increased its minimum wage from $5.15 to $6.20 on April 1, 2007, and again to $7.25 on January 1, 2008, so individuals
first interviewed between January and March of 2007 experienced an increase of $2.10.
WHO BENEFITS FROM A MINIMUM WAGE INCREASE?
1175
Table 1. Summary Statistics
Minimum wage change
Variables
Observations
Mean wage
Percentage employed
Sex
Male
Female
Race
White
Black
Hispanic
Education
Less than high school
High school only
Associate’s degree or more
Age
16–19
20–24
25–34
35–44
45–54
65 +
Family income
Low
Low–mid
Mid
Mid–high
High
(1)
Full sample
(2)
No change
(3)
5%
(4)
5%–10%
(5)
10%–20%
(6)
. 20%
101,299
19.33
100
36,837
18.94
100
16,406
19.49
100
8,244
22.17
100
29,453
19.41
100
10,359
18.14
100
51.83
48.17
51.67
48.33
51.18
48.82
51.84
48.16
52.21
47.79
52.13
47.87
83.58
10.2
11.85
83.27
10.95
10.55
86.89
8.18
11.1
77.32
8.84
18.58
81.67
11.76
13.58
90.08
6.87
7.13
8.76
47.62
43.61
9.15
47.54
43.31
7.23
48.18
44.59
8.89
41.58
49.53
9.55
47.44
43.01
7.17
51.94
40.88
2.68
6.73
20.05
26.16
27.43
16.95
2.87
6.73
20.14
26.13
27.54
16.6
2.23
6.23
19.13
26.36
28.07
17.06
2.46
6.97
19.91
27.46
26.7
16.6
2.59
6.76
20.47
26.2
27.13
16.85
3.16
7.15
19.95
24.94
27.62
17.18
6.88
18.92
20.78
30.85
22.57
7.49
18.86
21.23
30.71
21.71
6.71
19.07
21.46
31.82
20.95
5.08
15.66
18.63
28.94
31.7
6.87
19.19
20.15
30.38
23.42
6.45
20.35
21.75
32.68
18.77
Notes: The following individuals have been removed: those earning a wage more than $ 0.10 below the
minimum wage, those earning an hourly wage greater than $100, those experiencing a wage change
greater than 1,000%, those listed as self-employed and agricultural workers, and individuals younger
than 16. Low-income families are defined as those with an annual family income of less than $20,000.
Low–mid income includes families earning between $20,000 and $40,000 annually. Mid includes
families earning between $40,000 and $60,000 annually. Mid-high includes families earning between
$60,000 and $100,000 annually, and high includes families earning at least $100,000 annually.
Individuals are weighted by sample weights included in the CPS.
supportive evidence is that those states that enacted a small increase in the
minimum wage come from all regions of the country, with substantial variation in the timing.8 In addition, as reported in columns (1) through (6) of
Table 1, no clear pattern emerges in the characteristics of state-year observations across the different groups defined by size of the minimum wage
increase. Furthermore, we find no statistically significant correlation
between the size of the minimum wage increase and the prior year’s state
8
In our 2005 to 2008 time period, Arizona, Colorado, Connecticut, Florida, Maine, Michigan,
Missouri, Montana, Nevada, Oregon, Ohio, Rhode Island, Vermont, and Washington all enacted a minimum wage increase that set the new minimum wage no more than 5% higher than the old.
1176
ILR REVIEW
Table 2. Wage Mobility
Second interview wage
First interview wage
Minimum wage*1.1
MW *1.1–MW *1.25
MW *1.25–MW *1.5
MW *1.5–MW *2
MW *2
Minimum
wage*1.1
MW *1.1–
MW *1.25
MW *1.25–
MW *1.5
MW *1.5–
MW *2
MW *2
25.01
7.08
3.18
1.12
0.42
21.05
19.84
6.47
2.94
0.82
19.76
26.55
27.71
7.12
2.17
19.01
23.40
32.99
43.23
7.74
15.17
23.13
29.65
45.59
88.85
Notes: The above table includes 36,837 individuals from 44 states and the District of Columbia who did
not experience a minimum wage increase between interviews. Percentages represent the percentage of
a given wage bin at the time of the first interview that belong to a given bin at the time of the second
interview, so that percentages sum horizontally to 100. Individuals are weighted by sample weights
included in the CPS.
GDP growth rate, unemployment rate, union membership rate, price level,
or poverty rate. We have identified no factors that appear to drive the size
of minimum wage increases, and we view this as support for our assertion.
Before proceeding to the empirical analysis, we pause to note an important aspect of the data. We observe considerable upward wage mobility
among low-wage workers even in the absence of a minimum wage law
change. Table 2, which examines the wage mobility of workers who did not
experience a minimum wage change between interviews, illustrates this
point. Workers are divided into five categories based on their wage relative
to the applicable minimum wage at the time of the first interview. We
report the movement of workers among these groups between their first
and second interviews. Specifically, the table reports the percentage of
workers in a particular group at time t that belong to a given group at time
t + 1. As shown in the table, most low-wage workers experience considerable wage growth in our sample, even in the absence of a minimum wage
increase. Approximately one-quarter of the workers earning no more than
10% above the minimum wage at the time of their first interview still earn
within 10% of that minimum a year later. Furthermore, more than half of
these individuals earn more than 25% above the minimum wage at the time
of their second interview. For an individual in a state with a minimum wage
of $5.15, this implies that only 25% would still have a wage of no more than
$5.65, and more than half would have a wage greater than $6.40.9
We observe similar patterns higher in the wage distribution. Of those
individuals earning between 25 and 50% above the minimum wage at the
time of their first interview, over 60% earn more than 50% above the minimum wage the following year, with more than 29% earning more than double the minimum. These simple averages reveal that minimum wage
9
The federal minimum wage prior to the 2007 increase, $5.15, is the applicable minimum wage for
more than half the individuals who do not experience a minimum wage increase in our sample.
WHO BENEFITS FROM A MINIMUM WAGE INCREASE?
1177
changes are occurring not in a static environment but rather in one in
which there is already a large degree of upward mobility among low-wage
earners.
Estimation
The large number and staggered timing of state-level minimum wage
changes creates a rich environment in which to analyze the effects of minimum wage law changes. We abstract from any employment effects and
focus solely on the wage effects of a minimum wage change conditional on
continued employment. We hypothesize that such effects may differ along
two dimensions. First, following Neumark et al. (2004), we allow the effect
of a minimum wage increase to vary throughout the wage distribution, with
individuals at or near the initial minimum wage level experiencing wage
changes that are different from those experienced by individuals at the
upper end of the wage distribution. The wage effect at or near the initial
minimum wage is primarily mechanical, while those effects higher in the
wage distribution are often called minimum wage spillovers. Second, we
examine effects that vary according to the size of the change in the minimum wage itself.
Nearly 64% of the individuals in our sample experienced a minimum
wage increase, but there is substantial heterogeneity in the size of this
increase. More than 16% experienced a small minimum wage increase of
less than 5% of the ini …
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