Does the Minimum Wage Make Young Adult Labor More Attractive to Firms?: A Panel Data Analysis That Controls for Spatial Heterogeneity

Adverse effects of minimum wage policy on labor markets materialize only if the new rate is binding. Annual data from the Current Population Survey indicate that the minimum wage is effectively non-binding for young adults (19-29) who have at least one year of college and are not enrolled in school. Hence, a minimum wage hike would have no effect on young adult workers… or does it? The authors investigate this using dynamic panel data that accounts for spatial heterogeneity, which must be controlled for because minimum wage coefficients are biased otherwise (Allegretto, Dube, and Reich 2011). The authors find that accounting for spatial heterogeneity and the inertia that is present in labor market variables affects the results dramatically. Average unemployment in adjacent states has a large net positive cumulative impact on young adult male employment but a large negative cumulative effect on young adult female employment. Though both cohorts are sensitive to market wages and weekly earnings, males are more geographically mobile while female employment is negatively linked to having children, poverty, welfare participation, and urbanity but positively associated with welfare reform. While the minimum wage was insignificant in the young adult male employment model, its anticipatory effect is associated with higher young adult female employment. This is perhaps due to firms substituting teen (16-18) labor with young adult females who possess longer employment tenure, slightly better job skills, and greater personal responsibility.