The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Does the Minimum Wage Help or Hurt Low-Wage Workers? . Skill Formation

12/01/1999

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 singlemothers 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:

  • Welfare recipients may be offered more attractive marriage proposals because their potential mates now have higher earnings. To date, no empirical research has shown this to be the case.
  • Earnings in the low-skilled labor market might increase, reducing the likelihood of re-entering welfare.

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