The Low-Wage Labor Market:

Challenges and Opportunities for Economic Self-Sufficiency

Does the Minimum Wage Help or Hurt Low-Wage Workers?

By Mark D. Turner

Contents

Introduction

The Fair Labor Standards Act (FLSA) that mandated a federal minimum wage was adopted by the Congress in 1938.  Since then, the federal minimum wage has been increased 19 times, from 25 cents per hour in 1938 to $5.15 in 1997.  No employer may legally pay, in industries and occupations the FLSA currently covers, less than $5.15 per hour.  In 1996, 79.4 million wage and salary workers, 64.9 percent of all workers, were covered by the FLSA.(1)  In 1998 President Clinton proposed to increase the federal minimum wage from $5.15 to $6.15 in two 50-cent increments over two years.  The federal minimum wage is complemented by state minimum wage laws that often mandate higher wage floors than the federal government.(2)

Quote from the Fair Labor Standards Act of 1938 on the primary objective of the Act.In 1996, President Clinton signed legislation raising the minimum wage by 90 cents from $4.25 to $5.15 an hour.(3)  This legislation followed heated debate among economists and policymakers about the effects of minimum wages on employment, skill formation (i.e., educational attainment and on-the-job training), and the economy. In fact, the debate stems from many different scholarly studies with contradictory findings.

This paper summarizes research on the effects of minimum wages on employment, skill formation, and welfare participation. It also highlights areas of consensus as well as disagreement in the literature and identifies important gaps in the research. The second section describes minimum wage workers' demographic and socioeconomic characteristics. The third section simulates the impact President Clinton's proposed minimum wage increase would have on low-wage workers' hourly earnings. In this section, recent research examining the effect of minimum wages on employment, skill formation (i.e., educational attainment and on-the-job training), and welfare participation is highlighted. The last section describes areas of consensus as well as disagreement in the literature and identifies future research topics.

Key Findings

Who Are Minimum Wage Workers?

Table 1 presents the demographic and job characteristics of workers who would be affected by an increase in the federal minimum wage from $5.15 to $6.15 per hour. The minimum wage increase would directly affect 16 percent of all earners, or 11.2 million workers. President Clinton's proposal would particularly affect adult working women and teenagers. Teenagers represent 27.3 percent of affected workers, but comprise only 7.5 percent of all workers. Most of the direct beneficiaries of a new minimum wage would be women (62.3 percent). Only 17.4 percent of those benefiting from the proposed minimum wage are full-time workers while an additional 7.5 percent work 20 to 35 hours weekly. Most beneficiaries (75.1 percent) work less than 20 hours a week. The average minimum wage worker worked 9.2 hours per week in 1998.

Table 1.
Characteristics of Minimum Wage and Other Wage Earners, 1998
Characteristics Workers directly affected by proposed minimum wage
($5.15-$6.14)
Other low-wage workers
($6.15-$6.64)
Workers above minimum wage
($6.65+)
All workers
Average hourly wage $5.64 $6.41 $12.49 $11.04
Employment (in millions) 11,166 3,344 52,447 66,958
Share of total 17% 5% 78% 100%
Demographics
       Men 37.7% 40.2% 53.5% 50.2%
  Women 62.3% 59.8% 46.5% 49.8%
White 80.8% 82.2% 82.3% 82.0%
  Men 30.9% 32.6% 45.0% 42.0%
Women 50.0% 49.6% 37.3% 40.0%
Black 13.8% 14.2% 13.2% 13.4%
  Men 4.7% 5.2% 6.3% 6.0%
  Women 9.1% 9.1% 6.9% 7.4%
Teenagers (16-19) 27.3% 20.6% 2.5% 7.5%
Young adults (20-24) 19.5% 21.6% 11.5% 13.3%
Adults (25+) 53.2% 57.9% 86.0% 79.1%
  Parents 19.4% 24.6% 38.0% 34.3%
Work hours
Full-time (35+) 17.3% 22.2% 44.8% 39.1%
  Part-time        
  20-34 hours 7.5% 7.6% 3.5% 4.4%
1-19 hours 75.1% 70.2% 51.7% 56.5%
Average weekly hours 9.2 11.2 19.6 17.5
Poverty status
  Below poverty 16.4% 11.4% 4.8% 7.1%
  100-124% poverty 7.2% 4.8% 2.8% 3.6%
  125-149% poverty 5.1% 4.8% 3.0% 3.5%
  150% or more of poverty 71.3% 79.0% 89.4% 85.9%
Industry
  Manufacturing 9.3% 13.6% 22.8% 20.1%
  Retail trade 46.8% 35.3% 13.3% 20.0%
  Service 34.2% 37.8% 37.3% 36.8%
Occupation
  Managerial & professional 5.5% 6.9% 16.8% 14.4%
  Technical, sales 35.3% 33.9% 32.2% 32.8%
  Service 39.2% 33.0% 29.0% 30.9%
  Operators & laborers 20.0% 26.2% 22.0% 21.8%

Minimum wage workers are heavily concentrated in the retail trade sector. Although the retail trade workforce comprised only 20 percent of all earners in 1998, this group accounted for 47 percent of all minimum wage workers.

These same data suggest that most workers likely to be affected by the proposed minimum wage increase are not poor. Table 1 shows that only 16 percent of minimum wage workers live in families with incomes below the poverty level, and 12 percent are near-poverty (100 percent to 149 percent of poverty). The remaining 71 percent of minimum wage workers have family incomes of at least 150 percent of poverty. Bluestone and Ghilarducci (1996), for example, noted that only a small proportion of the poor would directly benefit from increasing the minimum wage, despite the fact that nearly 75 percent of poor households include someone who works.

Only a small proportion of the poor would directly benefit from increasing the wage floor, despite the fact that nearly 75 percent of poor households have someone who works. According to estimates by Richard Burkhauser and Kenneth Couch of Syracuse University and their colleague, Andrew Glenn of Vanderbilt University, only 16.9 percent of the workers in poor households in 1991 were in jobs paying below the proposed boost in the statutory minimum to $5.15 an hour. Except for the possible indirect benefits, the other 83 percent of working-poor households would not be helped since their working members already earn wages above this level.

Most workers affected by the proposed minimum wage are adults, of whom many are parents. Table 1 shows that 53.2 percent of affected workers or 6 million, are adults (25 years or older). Over one-third (2.2 million) of these adults directly affected by the minimum wage are also parents (adults 25 and older with resident biological children less than 18 years old). Additional findings not show indicate that these parents have 1.6 million children less than 6 years old and 5.4 million children less than 18 years old. Many of these parents (0.7 million) are single parents, and 1.4 million are poor or are near-poor.(4) These poor or near-poor parents have 1.0 million children less than 6 years old and 2.9 million children less than 18 years old.

A vast majority of teens and young adults who would be directly affected by the proposed minimum wage are also enrolled in school — 66.5 percent (or 3.6 million) of minimum wage workers (ages 16 to 24) are enrolled in high school or college. However, most of these teens and young adults enrolled in school do not live in poor families. Data from 1998 indicate that 82.6 percent (2.9 million) of enrolled teens and young adults live in families with incomes greater than 149 percent of poverty. Again, not all of these findings are show on the table.

A Living Wage or No Wage?

The effectiveness of minimum wages as a policy tool centers on its ability to boost hourly wage rates and to minimize its adverse side effects on employment and skill formation.

Will the Administration's Proposal Provide a Living Wage?

Two methods are employed to simulate the possible effect of the proposed minimum wage increase, from $5.15 to $6.15 per hour, on hourly wage rates. The first method assumes that the minimum wage increase has only a "direct" effect; that is, it raises the wages of those earning between the current level and the proposed new level up to the new level. Under this method, approximately 11 million workers who report hourly wages would receive a pay increase. However, a $1 (or 19.4 percent) increase in the federal minimum wage does not represent a $1 increase in the wage of all workers making less than the proposed minimum wage, $6.15 an hour. Table 2 shows that the 1.8 million hourly workers earning $5.15 an hour, the prevailing federal minimum wage, would receive the full $1 pay increase, assuming no disemployment effects and full compliance. The other 9.2 million workers making between $5.15 and $6.14 an hour would receive a smaller raise — on average, 51 cents or 9.5 percent.(5) Almost 4 in 10 workers directly affected by the minimum wage increase would receive less than a 20-cent pay increase.

The second method assumes that there is also an indirect effect on workers earning below the current minimum and a spillover effect that boosts the earnings of workers in some low-wage sectors who are currently earning more than the minimum. Using this methodology, a minimum wage increase would significantly narrow the pay gap between middle-wage earners (at the median, or 50th percentile) and low-wage earners (at the 10th percentile) among both men and women.(6) Moreover, higher minimum wage would also narrow the pay gap between college-educated women and those who do not complete high school.

Table 2.
Distribution of Pay Increases with a $6.15 Minimum Wage
Pay Increase Number of workers (millions) Percent of workers
$0.01 to 0.09 0.134 1%
$0.10 to 0.19 4.185 39%
$0.20 to 0.29 0.082 1%
$0.30 to 0.39 0.168 2%
$0.40 to 0.49 1.185 11%
$0.50 to 0.59 0.202 2%
$0.60 to 0.69 1.419 13%
$0.70 to 0.79 0.291 3%
$0.80 to 0.89 0.336 3%
$0.90 to 0.99 1.370 12%
$1.00 1.794 16%
Total 11.166 100%

Note:  The mean and median pay increase was 51 cents and 45 cents, respectively.

Note:  Assumes no disemployment. Analysis is limited to workers who reported hourly wage rates between $5.15 and $6.14 per hour in the 1998 March Current Population Survey, Outgoing Rotation (CPS-OR) group.

Source:  These estimates are based on an analysis of respondents in the March 1998 CPS-OR group. The sample contains noninstitutionalized civilians ages 16 and over, who were employed in the public or private sector, and who reported hourly wage rates. These wage rates exclude overtime pay, tips, or commission. CPS-OR weights are used to make the sample nationally representative. Due to misreporting of wage rates, these estimates may underestimate the number of hourly workers directly affected by proposed increases in the minimum wage.

Do Minimum Wages Reduce Employment Opportunities?

While economic theory predicts that higher minimum wages will lead to lower employment, findings from recent studies seem to be mixed.(7)  Overall, recent studies have found that minimum wages have negative effects on employment but the magnitudes have varied across studies. At the lower end, researchers have found that a 10 percent minimum wage hike would reduce employment by only 1 percent. At the high end, other researchers have found that the same hike would reduce employment by 10 percent.(8)  Moreover, other studies have concluded that minimum wages have no effect or a positive effect on employment.(9)

Quote from Samuelson and Nordhaus (1985): 'Minimum wages often hurt those they are designed to help...

Teen Employment and the Minimum Wage

Economic theory suggests that teens bear most of the disemployment effects resulting from a minimum wage hike, compared with any other demographic group (e.g., adult males), since minimum wages directly affect a high proportion of employed teens. Thus, a great deal of the research examines the economic impact an increase in the minimum wage would have on teenagers. Researchers have typically examined the influence of the minimum wage on teenagers 16 to 19 years old.(10)  Earlier time-series studies that analyzed the impact of minimum wages on teen employment over time found that, in addition to the disemployment effects, some teenagers withdraw from the labor force (stopped actively looking for employment) following a minimum wage increase.(11)

In a recent book, David Card and Allan Krueger reviewed their research that used a natural experiment framework to examine whether minimum wages affected employment in the fast-food industry in New Jersey and Pennsylvania.(12)  To examine how employment might be affected by the New Jersey minimum wage increase, Card and Krueger collected data on employment from a sample of about 400 fast-food restaurants in New Jersey and Pennsylvania before and after a minimum wage hike in New Jersey took effect.(13)

On April 1, 1992, the state minimum wage in New Jersey was increased from $4.25 to $5.05, while the minimum wage in Pennsylvania remained at $4.25 (the federal minimum wage). Other things being equal, economic theory predicts that employment would fall in New Jersey in response to the increase in the legal minimum wage and would remain unchanged in Pennsylvania. In contrast to economic theory and earlier time-series studies, Card and Krueger found that employment in the fast-food restaurants in New Jersey increased relative to employment in Pennsylvania's fast-food restaurants.

Adults and the Minimum Wage

Scant research has examined the effects of minimum wages on adult employment. In a review of studies that examined the effect of cross-state variations in minimum wages on state-level employment, Brown et al. (1982) found that minimum wages had a smaller effect on young adults (ages 20 to 24) than on teenagers. In general, a 10 percent increase in the minimum wage results in a 1 percent reduction in young adult employment. More recent research has found little evidence that minimum wages affect adults' employment status. For instance, one study found that state minimum wage increases during the 1970s and 1980s had no effect on adult employment.(14) Another study found weak empirical evidence to support the theoretical prediction that minimum wages differentially affect adult employment across gender and race groups.(15)  In short, these studies and others suggests that moderate minimum wage increases do not adversely affect aggregate adult employment or reduce employment opportunities for at-risk adults (e.g., women and minorities) while improving employment opportunities for other adults.

Quote from Neumark and Wascher (1996b) evaluating the Clinton minimum wage proposal that the

effect of the minimum wage is even stronger for minority youths.

Do Minimum Wages Redistribute Employment Opportunities?

Economic theory as well as empirical evidence has revealed that studies that have analyzed the minimum wage's net effect on employment may conceal a redistribution of employment within the analysis group — usually teenagers. Theory predicts that in comparing the effect of minimum wages on employment of different demographic groups, those groups with a larger share of minimum wage workers will face more severe disemployment. And because employed black and Hispanic teens earn lower wages on average and hence are more likely to be directly affected by minimum wage hikes than otherwise similar white teens, theory suggests that minimum wages have a larger negative effect on black and Hispanic teenagers than on white teenagers. For instance, some estimates predict that President Clinton's proposed minimum wage hike (a 19.4 percent increase) would disproportionately increase the number of minority youth who are neither employed nor enrolled in school, compared to otherwise similar white youth.(16) However, empirical research has not found conclusive or consistent evidence that minimum wages have differential effects on employment across racial groups.(17)

Skill Formation

Economic theory also predicts that minimum wages reduce on-the-job training and may lead to lower educational attainment, yet little empirical research has validated these predictions.(18) Skill formation is critical in order for low-wage workers to earn higher wages and move up the economic ladder. However, minimum wages may reduce low-skilled workers' desire to obtain additional formal education and might foreclose opportunities for employer-provided training.

Do Minimum Wages Reduce Educational Attainment?  Economic theory predicts that the effect of minimum wages on school enrollment is ambiguous.(19) That is, a higher minimum wage makes employment more attractive and school less attractive, causing some teens to seek employment and/or drop out of school. A number of empirical studies have advanced the literature by examining the effects of minimum wages on the school enrollment status of teenagers.(20) Minimum wage opponents contend that it decreases teen employment and prompts at-risk teens to drop out of school. For example, Neumark and Wascher's estimates suggest that President Clinton's proposed minimum wage hike would lower school enrollment by 2.8 percentage points. However, their study used an inaccurate measure of school enrollment, misclassifying some students as nonstudents. As a result, Neumark and Wascher overestimated the adverse effects minimum wages have on school enrollment.(21) Evans and Turner (1995), using an accurate measure of school enrollment but otherwise identical specifications, found that the minimum wage does not affect school enrollment.

Do Minimum Wages Curb On-the-Job Training Opportunities?  Economic theory suggests that the effect of the minimum wage on employer-provided training is unambiguously negative.(22) To the extent that training is firm-specific rather than general, employers bear more of the costs. A higher minimum wage makes it less likely that the employer will provide firm-specific on-the-job training. Using data from the January Current Population Surveys (CPS) in 1983 and in 1991, Neumark and Wascher (1998) examined the correlation between state minimum wages and training designed to improve skills on the current job and training to qualify for a job. They found that minimum wages reduced training aimed at improving skills. For example, they estimated that the proposed minimum wage increase would reduce the probability of training by as much as 5.8 percentage points.

Do Minimum Wages Help or Hurt Welfare Mothers?  At the same time the Clinton administration proposes to increase the federal minimum wage, the new welfare law — the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) — has reformed the welfare system, resulting in significant reductions in welfare caseloads by requiring more recipients to work. Yet, conservatives commonly argue that minimum wages hinder the employment prospects of low-skilled workers because employers must pay these workers more than they would have without a wage floor. Not surprisingly, most welfare recipients are low-skilled and would likely enter the low-wage labor market where many would be affected, directly or indirectly, by federal and state minimum wages. Thus, some economists have questioned the efficacy of raising the minimum wage when federal and local governments are trying to move welfare recipients — predominately women with children — into private-sector jobs. In particular, opponents of the minimum wage often contend that it makes moving from welfare to work more difficult and that it has a negative effect on employment — particularly among minority welfare recipients.

Quote form Edin and Lein (1997): One obvious way to mitigate TANF's adverse impact on single

mothers would be to raise the minimum wage to at least $6 or perhaps even $6.50 an hour...On the other hand, proponents of the proposed minimum wage increase contend that the minimum wage does not reduce employment opportunities for low-skilled workers. Moreover, they argue that higher minimum wages make work a more attractive choice for welfare mothers, increase the earnings of the working-poor, and reduce poverty.

Interestingly, little empirical evidence supports either the opponents' or the proponents' hypotheses. One might suspect that minimum wages have a perverse impact on welfare recipients because they might reduce exits from Temporary Assistance for Needy Families (TANF) and/or increase TANF entrance rates. On the other hand, proponents of the minimum wage argue that increasing the minimum wage would help TANF recipients "make ends meet" in the labor market and thus provide a greater incentive for TANF recipients to exit the welfare rolls and to work. For example, one study found that some women wanted to make the transition from welfare to work, but felt that the wages were not high enough to cover the cost of child care.(23) When child care, transportation costs, loss of benefits, and tax payments are taken into account, work did not pay for many welfare recipients. Proponents of the minimum wage argue that a higher minimum wage may increase the number of women working — and reduce welfare participation — because their wages would be high enough to cover the fixed costs of employment (e.g., child care and transportation).

Two recent studies have examined the impact of minimum wages on welfare participation, both using the same data set — the Survey of Income and Program Participation (SIPP). Research by Peter Brandon (1995) suggests that welfare recipients who lived in states that increased their minimum wages between 1985 and 1990 stayed on welfare 44 percent longer than welfare recipients who lived in states that did not increase their minimum wage. Because individual characteristics (e.g., work experience and educational attainment) and local labor market conditions may also affect welfare participation, Turner (1999) isolated the effect of minimum wages on welfare participation, net of these other confounding factors.(24) In contrast to Brandon, Turner (1998a) found that higher minimum wages reduce welfare participation. Specifically, he found that a 50 cent minimum wage (9.7 percent) increase would lower welfare participation by 1.3 percentage points. An event-history analysis revealed that higher minimum wages increase the likelihood of welfare exits and had no effect on the likelihood of welfare re-entries.

Increases in minimum wages might lead to lower welfare participation rates for several reasons:

Quote from Samuelson and Nordhaus (1985): The minimum wage probably raises the income of some low-wage workers at the expense of others who cannot find work... Do Minimum Wages Reduce Poverty Rates?  The primary goal of a national minimum wage floor is to raise the incomes of poor or near-poor families with members in the work force. Most research suggests that moderate minimum wages increases do not reduce poverty rates. In an in-depth study of the minimum wage effect on poverty, Neumark and Wascher (1996a) used matched CPS surveys to examine both the probability that poor families escape poverty and the probability that previously non-poor families fall into poverty. They found that minimum wage hikes increased poverty exits but also increased the probability that previously non-poor families entered poverty. The estimated increase in the number of non-poor families that fall into poverty is larger than the estimated increase in the number of poor families that escape poverty, although this difference is not statistically significant. Overall the tradeoffs created by minimum wage increases, more closely resemble income redistribution among low-income families than income redistribution from high-to-low-income families. Earnings in the low-skilled labor market increase, reducing the likelihood of re-entering welfare.

Others contend that recent minimum wage increases are an important component of a public policy strategy to reduce poverty. Combined with the Earned Income Tax Credit (EITC) and other supports (e.g., food stamps, Medicaid, child care), minimum wage increases can make work a more viable alternative for the poor.(25)

Consensus and Continuing Disagreement?

Economic theory unambiguously states that minimum wages should reduce employment opportunities for low-wage workers. However, recent empirical evidence has forced economists and policy analysts to question the validity of this theory. In particular, economists have attempted to quantify the impact recent minimum wage increases have had on employment. Opponents of the minimum wage argue that its negative effect on employment is large and is difficult to detect because some low-wage workers become employed while others become nonemployed following minimum wage hikes. On the other hand, proponents of the minimum wage contend that its impact on employment is small and thus acceptable from a cost-benefit perspective as well as to the American public. In short, most economists agree that the minimum wage reduces employment opportunities for low-wage workers, but they cannot agree on how much moderate minimum wage increases reduce employment opportunities.

A new area of contention centers on what effect minimum wages have had on educational attainment. Recent research by Turner and Neumark and Wascher have produced contradictory findings. Turner contends that minimum wages have no effect on educational attainment, while Neumark and Wascher argue that minimum wages significantly reduce educational attainment, particularly for minority youth. Because economic theory is ambiguous on how minimum wages affect educational attainment, additional empirical research is needed to answer these important questions.

Another new area of research is the effect minimum wages have on welfare participation. Too little research has been done on this subject for economists or policymakers to reach a consensus. In light of recent welfare reform legislation and proposals to increase the minimum wage, additional research is vital.

References

Acs, Gregory, Norma Coe, Keith Watson, and Robert Lerman. 1998. "Does Work Pay? An Analysis of the Work Incentives under TANF." Occasional Paper #9, The Urban Institute.

Bluestone, Barry, and Teresa Ghilarducci. 1996. "Rewarding Work:  Feasible Antipoverty Policy." The American Prospect (May).

Brandon, Peter. 1995. "Jobs Taken by Mothers Moving from Welfare to Work:  And the Effects of Minimum Wages on This Transition." Employment Policies Institute (February).

Brown, Charles, Curtis Gilroy, and Andrew Kohen. 1982. "The Effect of the Minimum Wage on Employment and Unemployment." Journal of Economic Literature 20.

Card, David, and Alan Krueger. 1995. Myth and Measurement:  The New Economics of the Minimum Wage. Princeton, N.J.:  Princeton University Press.

Cunningham, James. 1981. "The Impact of Minimum Wages on Youth Employment, Hours of Work, and School Attendance:  Cross-sectional Evidence from the 1960 and 1970 Census." In The Economics of Legal Minimum Wages, ed. Simon Rottenberg. Washington, D.C.:  American Enterprise Institute.

Deere, Donald, Kevin Murphy, and Finis Welch. 1996. "Examining the Evidence on Minimum Wages and Employment." In The Effects of the Minimum Wage on Employment, edited by Marvin Kosters. Washington, D.C.:  The AEI Press.

Edin, Kathryn, and Laura Lein. 1997. Making Ends Meet:  How Single Mothers Survive Welfare and Low-Wage Work. New York:  Russell Sage Foundation.

Ehrenberg, Ronald, and Alan Marcus. 1982. "Minimum Wage Legislation and the Educational Outcomes of Youth." In Research in Labor Economics, edited by Ronald Ehrenberg. Greenwich, Conn.:  JAP Press, Inc.

Evans, William, and Mark Turner. 1995. "Employment Effects of Minimum Wage and Subminimum Wage:  Comment." Working Paper, Department of Economics, University of Maryland.

Hashimoto, Masanori. 1982. "Minimum Wage Effects on Training on the Job." American Economic Review 72 (5).

Neumark, David, and William Wascher. 1992. "Employment Effects of Minimum and Subminimum Wages:  Panel Data on State Minimum Wage Laws." Industrial and Labor Relations Review 46 (1).

------.1996a. "Do Minimum Wages Fight Poverty." NBER Working Paper no. 6127.

------.1996b. "The Effects of Minimum Wages on Teenage Employment and Enrollment:  Evidence from Matched CPS Surveys." Research in Labor Economics 15.

------.1998. "Minimum Wages and Training Revisited." Mimeo. April.

Pavetti, La Donna. 1993. The Dynamics of Welfare and Work:  Exploring the Process by Which Women Work Their Way Off Welfare. Doctoral Dissertation, Harvard University.

Rosen, Sherwin. 1972. "Learning and Experience in the Labor Market." Journal of Human Resources, vol. 7, no. 3, Summer.

Samuelson, Paul, and William Nordhaus. 1985. Economics, 20th Ed. New York:  McGraw-Hill.

Spriggs, William, and Bruce Klein. 1994. Raising the Floor:  The Effects of the Minimum Wage on Low-Wage Workers. Washington, D.C.:  Economic Policy Institute.

Turner, Mark. 1999. "The Effects of Minimum Wages on Welfare Recipiency." Joint Center for Poverty Research Working Paper.

------.1998. "The Effects of Minimum Wages on Educational Attainment and Employment." Urban Institute Working Paper.

U.S. Department of Labor. 1998. Minimum Wage and Overtime Hours under the Fair Labor Standards Act. Wage and Hour Division, Employment Standards Administration, June.

Welch, Finis. 1978. "The Rising Impact of Minimum Wages." Regulation (November/December).

Footnotes

1.  The remaining 42.9 million workers were found to be not subject to or exempt from the minimum wage.  For example, workers not subject to the minimum wage provisions often are employed by businesses with less than $500,000 in annual gross receipts; workers who are exempt most often are in executive, administrative, and professional occupations (U.S. Department of Labor (1998)).

2.  Where state law requires a higher minimum wage, that higher standard applies.

3.  The 1996 FLSA amendments included provisions for a youth minimum wage.  The youth minimum wage provisions maintained the $4.25 minimum wage for employees under 20 years of age during their first 90 consecutive calendar days on the job.

4.  Family income is less than 150 percent the poverty level for the appropriate family size.

5.  See Deere, Murphy, and Welch (1996, p. 33-36) for a similar discussion that also incorporates disemployment effects.

6.  Spriggs and Klein (1994).

7.  See Brown, Gilroy, and Kohen (1982) for a description of a simple supply-demand model that shows higher minimum wages lead to lower employment.  This adverse effect may take the form of a lower rate of employment growth rather than an actual decline in the number employed.  Or, if employment actually declined, it may take the form of not replacing workers who quit rather than discharging workers.  The monopolistic model is a well-known exception where minimum wages increase employment.

8.  Unit elasticity between employment and the minimum wage would mean that a 10 percent hike in the minimum wage reduces employment by 10 percent.

9.  See Card and Krueger (1995).

10.  Most nationally representative surveys (i.e., Current Population Surveys) do not collect labor market information from respondents younger than 16 years old.

11.  Since 1970, researchers have conducted more than 30 time-series studies of the effect of the minimum wage in the United States. A typical study relates the employment-population rate of teenagers to a variable indicating the importance of the minimum wage (e.g., the Kaitz index is the coverage-weighted minimum wage relative to the average wage in the industry).

12.  Borrowing from the natural sciences, Card and Krueger compared the labor market outcomes of the "treatment" and "control" groups that arise naturally when the minimum wage increases for one group of workers, but not for another.

13.  Card and Krueger argue that this increase in the minimum wage in New Jersey was particularly appealing as a natural experiment, because whether it would be allowed to take effect as scheduled under legislation enacted earlier remained uncertain until its effective date.

14.  Evans and Turner (1995).

15.  Brown et al. (1982).

16.  Neumark and Wascher (1996b).

17.  In contrast to Neumark and Wascher's findings, Turner (1998) found that minimum wages had a statistically imprecise effect on the employment status of minority teens not enrolled in school.

18.  Hashimoto (1982).

19.  An increase in the minimum wage results in offsetting effects regarding school enrollment — the substitution and income effects.  The substitution effect would cause students to work part-time while enrolled in school or possibly leave school and work full-time because the relative return to work increased.  The income effect would cause teens to stay in school or enroll in school because wages and the returns to educational attainment are positively related.

20.  The following articles examine the effects of minimum wages on school enrollment status:  Turner (1998b); Neumark and Wascher (1992 and 1996b); Evans and Turner (1995); Ehrenberg and Marcus (1982); and Cunningham (1981).

21.  Neumark and Wascher (1992 and 1996b) counted teenagers as enrolled only if they reported their major activity during the survey week as "going to school."  If a student reported his major activity as "working," he was not asked about school enrollment and was therefore not classified as enrolled.  Research by Evans and Turner (1995), using the October CPS, showed that the Neumark and Wascher measure of school enrollment systematically understates the proportion of teens in school by 7.4 percentage points and understates full-time enrollment by 5.6 percentage points.  Notably, the definition of school enrollment affected estimates of whether a higher minimum wage significantly altered teens' school enrollment and employment status.

22.  Rosen (1972); Welch (1978); and Neumark and Wascher (1998).

23.  Pavetti (1993).

24.  The other confounding factors included state average wages, mothers' educational attainment, work history, age, race, number of children, age of youngest child, living arrangements, state Aid to Families with Dependent Children (AFDC) benefit levels, and state unemployment rates.

25.  Acs, et al. (1998).


Where to?

Main Page and Contents | Preface | Chapter Authors ]
Executive Summary
Introduction & Overview
Defining & Characterizing the Low-Wage Labor Market
Low-Wage Labor Markets:  The Business Cycle and Regional Differences
Can the Labor Market Absorb Three Million Welfare Recipients?
Does the Minimum Wage Help or Hurt Low-Wage Workers?
Job Creation for Low-Wage Workers
Matching & Mismatch in the Low-wage Labor Market:  Hiring Perspective
Matching & Mismatch in the Low-wage Labor Market:  Job Search Perspective
Work as a Stepping Stone for Low-Skilled Workers
Job Turnover in the Low-Wage Labor Market
Appendix:  Statistical Data and Background Information

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