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Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data

  • Allegretto, Sylvia
  • Dube, Arindrajit
  • Reich, Michael

Traditional estimates of minimum wage effects include controls for state unemployment rates and state and year fixed-effects. Using CPS data on teens for the period 1990 – 2009, we show that such estimates fail to account for heterogeneous employment patterns that are correlated with selectivity among states with minimum wages. As a result, the estimates are often biased and vary with the source of identifying variation. Including controls for long-term growth differences among states and for heterogeneous economic shocks renders the employment and hours elasticities indistinguishable from zero and rules out any but small disemployment effects. Dynamic evidence further shows the nature of bias in traditional estimates, and it also rules out more negative long run effects. We do not find evidence of heterogeneous employment effects in different parts of the business cycle. We also consider predictable versus unpredictable changes in the minimum wage by looking at indexation of the minimum wage in some states.

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Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt7jq2q3j8.

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Date of creation: 21 Jun 2010
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Handle: RePEc:cdl:indrel:qt7jq2q3j8
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  1. Arindrajit Dube & Suresh Naidu & Michael Reich, 2007. "The Economic Effects of a Citywide Minimum Wage," ILR Review, Cornell University, ILR School, vol. 60(4), pages 522-543, July.
  2. Joseph Sabia, 2009. "The Effects of Minimum Wage Increases on Retail Employment and Hours: New Evidence from Monthly CPS Data," Journal of Labor Research, Springer, vol. 30(1), pages 75-97, March.
  3. Pinoli, Sara, 2010. "Rational Expectations and the Puzzling No-Effect of the Minimum Wage," IZA Discussion Papers 4933, Institute for the Study of Labor (IZA).
  4. Pia M. Orrenius & Madeline Zavodny, 2008. "The Effect of Minimum Wages on Immigrants," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 61(4), pages 544-563, July.
  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. Arindrajit Dube & Suresh Naidu & Michael Reich, 2007. "The Economic Effects of a Citywide Minimum Wage," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 60(4), pages 522-543, July.
  7. Baker, Michael & Benjamin, Dwayne & Stanger, Shuchita, 1999. "The Highs and Lows of the Minimum Wage Effect: A Time-Series Cross-Section Study of the Canadian Law," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 318-50, April.
  8. Laura Giuliano, 2007. "Minimum wage effects on employment, substitution, and the quality of the teenage labor supply: Evidence from personal data," Working Papers 0723, University of Miami, Department of Economics.
  9. Christopher L. Foote, 2007. "Space and time in macroeconomic panel data: young workers and state-level unemployment revisited," Working Papers 07-10, Federal Reserve Bank of Boston.
  10. Daniel Aaronson & Kyung-Hong Park & Daniel G. Sullivan, 2006. "The decline in teen labor force participation," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 2-18.
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