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Looking for a Needle in a Haystack? A Structural Time Series Model of the Relationship Between Teenage Employment and Minimum Wages in the United States

  • Stephen Bazen

    (Universite Montesquieu Bordeaux X)

  • Velayoudom Marimoutou

    (Universite de la Mediterranee)

The work of Card and Krueger has cast doubt on the nature of the relationship between the minimum wage and teenage employment. The earlier "consensus" finding of a small but statistically significant negative effect was based on time series data whereas Card and Krueger's findings are based mainly on cross section data. In this article, we re-examine the time series relationship between minimum wage and teenage employment. We find that previous models break down due to their inability to capture changes in the trend, cyclical and seasonal components of teenage employment. We propose a structural time series model in which these components are treated as stochastic components and which contains the traditional approach as a special case. The model when estimated up to 1979 accurately predicts what happens to teenage employment subsequently, when the minimum wage was frozen after 1981 and then increased quite substantially in the early 1990s. Moreover, we find that there is a significant, negative effect of the minimum wage on teenage employment and its size and significance have hardly changed during the 1980s and early 1990s. Finally, the model remains robust in an out-of-sample test for 1993-99 containing two further minimum wage hikes.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0495.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0495
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  1. 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.
  2. Andrew C Harvey & Andrew Scott, 1994. "Seasonality in Dynamic Regression Models," CEP Discussion Papers dp0184, Centre for Economic Performance, LSE.
  3. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January.
  4. Stephen Bazen & Velayoudom Marimoutou, 2002. "Looking for a Needle in a Haystack? A Re-examination of the Time Series Relationship between Teenage Employment and Minimum Wages in the United States," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(s1), pages 699-725, 08.
  5. Deere, Donald & Murphy, Kevin M & Welch, Finis, 1995. "Employment and the 1990-1991 Minimum-Wage Hike," American Economic Review, American Economic Association, vol. 85(2), pages 232-37, May.
  6. S. Krane & W. Wascher, 1999. "The cyclical sensitivity of seasonality in US employment," BIS Working Papers 67, Bank for International Settlements.
  7. Harvey, A C, et al, 1986. "Stochastic Trends in Dynamic Regression Models: An Application to the Employment-Output Equations," Economic Journal, Royal Economic Society, vol. 96(384), pages 975-85, December.
  8. Charles Brown & Curtis Gilroy & Andrew Kohen, 1981. "Time-Series Evidence of the Effect of the Minimum Wage on Youth Employment and Unemployment," NBER Working Papers 0790, National Bureau of Economic Research, Inc.
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