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The Unexpected Long-Run Impact of the Minimum Wage: An Educational Cascade

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  • Richard Sutch
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    Abstract

    Neglected, but significant, the long-run consequence of the minimum wage – which was made national policy in the United States in 1938 – is its stimulation of capital deepening. This took two forms. First, the engineered shortage of low-skill, low-paying jobs induced teenagers to invest in additional human capital – primarily by extending their schooling – in an attempt to raise their productivity to the level required to gain employment. Second, employers faced with an inability to legally hire low-wage workers, rearranged their production processes to substitute capital for low-skill labor and to innovate new technologies. This paper explores the impact of the minimum wage on enrollments between 1950 and 2003. I describe an upward ratcheting mechanism which triggers an “educational cascade.” My estimate is that the average number of years of high school enrollment would have risen to only 3.5 years, rather than 3.7 years, for men born in 1951. Thereafter, enrollment rates would have trended down to about 3.2 years for the cohort born in 1986, rather than slowly rising to around 3.9 years. The cumulative effect of the minimum wage increases beginning in 1950 was to add 0.7 years to the average high school experience of men born in 1986.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16355.

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    Date of creation: Sep 2010
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    Handle: RePEc:nbr:nberwo:16355

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    1. Joshua L. Rosenbloom & William A. Sundstrom, 2009. "Labor-Market Regimes in U.S. Economic History," NBER Working Papers 15055, National Bureau of Economic Research, Inc.
    2. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
    3. James J. Heckman & John Eric Humphries & Paul A. LaFontaine & Pedro L. Rodriguez, 2008. "Taking the Easy Way Out: How the GED Testing Program Induces Students to Drop Out," NBER Working Papers 14044, National Bureau of Economic Research, Inc.
    4. Frank Levy & Peter Temin, 2007. "Inequality and Institutions in 20th Century America," NBER Working Papers 13106, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Zsófia L. Bárány, 2011. "The Minimum Wage and Inequality - The Effects of Education and Technology," CEP Discussion Papers dp1076, Centre for Economic Performance, LSE.

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