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Minimum wage effects on employment, substitution, and the quality of the teenage labor supply: Evidence from personal data

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  • Laura Giuliano

    ()
    (Department of Economics, University of Miami)

Abstract

Using personnel data from a large U.S. retail firm with more than 700 stores nationwide, this study examines how the 1996 federal minimum wage increase affected both the level of employment at each store and also the fraction of teenagers employed. Because the minimum wage caused the relative wages of teenagers to increase at many stores, examining the relative employment of teenagers permits me to test the hypothesis of substitution toward more skilled (i.e., relatively high-wage) employees. The basic results indicate, first, that while the legislation had a much greater impact on average wages in some stores than in others, there is no significant difference in post-legislation employment growth at high-impact and low-impact stores. Second, I find that in stores where the legislation caused larger increases in the relative wage of teenagers, the employment of teenagers rose faster after the law was implemented. These results appear inconsistent with the traditional view that minimum wages lead employers to reduce employment, and to substitute relatively high-skilled, high-wage labor for the labor of the less-skilled workers whose relative wages go up. However, additional analysis suggests that the apparent contradiction can be explained in the context of a model (Drazen, 1986) that incorporates imperfect information about the quality of teenage applicants into the traditional, competitive framework. Specifically, the evidence suggests that high-quality teenagers often were not paid wages proportional to their output, and were drawn into the labor market when the minimum wage forced stores to pay teenagers more like adults. In these stores, the legislation appears to have increased the demand for teenage labor by raising the average quality of the teenage applicant pool. In contrast, where the legislation increased the wages of both teenagers and adults without compressing the wage distribution, the result was a decline in employment, as predicted by the conventional model.

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File URL: http://moya.bus.miami.edu/~lgiuliano/minwage_prepub.pdf
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Bibliographic Info

Paper provided by University of Miami, Department of Economics in its series Working Papers with number 0723.

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Length: 52 pages
Date of creation: Jul 2007
Date of revision:
Publication status: Forthcoming, Journal of Labor Economics
Handle: RePEc:mia:wpaper:0723

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Related research

Keywords: minimum wage; employment; teenagers; retail;

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References

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  1. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," Working Papers 060708, University of California-Irvine, Department of Economics, revised Jan 2007.
  2. David Neumark & William Wascher, 1993. "Employment Effects of Minimum and Subminimum Wages: Reply to Card, Katz and Krueger," NBER Working Papers 4570, National Bureau of Economic Research, Inc.
  3. Guasch, J Luis & Weiss, Andrew, 1980. "Wages as Sorting Mechanisms in Competitive Markets with Asymmetric Information: A Theory of Testing," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 653-64, July.
  4. Lawrence F. Katz & Alan B. Krueger, 1992. "The effect of the minimum wage on the fast-food industry," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 6-21, October.
  5. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December.
  6. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
  7. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027, December.
  8. Rebecca M. Blank, 2002. "Evaluating Welfare Reform in the United States," NBER Working Papers 8983, National Bureau of Economic Research, Inc.
  9. David Neumark & William Wascher, 1995. "The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys," NBER Working Papers 5092, National Bureau of Economic Research, Inc.
  10. Lang, Kevin & Kahn, Shulamit, 1998. "The effect of minimum-wage laws on the distribution of employment: theory and evidence," Journal of Public Economics, Elsevier, vol. 69(1), pages 67-82, July.
  11. Drazen, Allan, 1986. "Optimal Minimum Wage Legislation," Economic Journal, Royal Economic Society, vol. 96(383), pages 774-84, September.
  12. David Neumark & William Wascher, 1992. "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
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Cited by:
  1. Alan Manning, 2010. "Imperfect competition in the labour market," LSE Research Online Documents on Economics 28729, London School of Economics and Political Science, LSE Library.
  2. Allegretto, Sylvia & Dube, Arindrajit & Reich, Michael, 2010. "Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data," Institute for Research on Labor and Employment, Working Paper Series qt7jq2q3j8, Institute of Industrial Relations, UC Berkeley.

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