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The Effect of Minimum Wages on Employment: A Factor Model Approach

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  • Evan Totty

Abstract

The goal of this paper is to resolve issues in the minimum wage-employment debate by using new factor model econometric methods to control for unobserved heterogeneity. Recent work has shown that traditional methods producing negative and statistically significant minimum wage-employment elasticities are sensitive to adding controls for unobserved heterogeneity, but these controls rely on assumptions that may not be supported by the data. The factor model results suggest that any negative employment effects that do exist are small. Furthermore, simulation results show that unobserved common factors can explain the different estimates across methodologies in the literature. A counterfactual experiment shows that the states that would be affected by a modest federal minimum wage increase are those that are most able to absorb minimum wage increases without experiencing decreased employment.

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  • Evan Totty, 2014. "The Effect of Minimum Wages on Employment: A Factor Model Approach," Purdue University Economics Working Papers 1278, Purdue University, Department of Economics.
  • Handle: RePEc:pur:prukra:1278
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    1. repec:bla:germec:v:20:y:2019:i:3:p:293-329 is not listed on IDEAS
    2. Doruk Cengiz & Arindrajit Dube & Attila Lindner & Ben Zipperer, 2018. "The Effect of Minimum Wages on Low-Wage Jobs: Evidence from the United States Using a Bunching Estimator," CEP Discussion Papers dp1531, Centre for Economic Performance, LSE.
    3. Daniele Tavani & Luke Petach, 2018. "No one is alone: Strategic complementarities, capacity utilization, growth, and distribution," FMM Working Paper 19-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Jonathan A. Parker & Daniel H. Cooper & Maria Jose Luengo-Prado, 2017. "The local aggregate effects of minimum wage increases," Working Papers 17-8, Federal Reserve Bank of Boston, revised 01 Aug 2017.
    5. David Neumark, 2019. "The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns," German Economic Review, Verein für Socialpolitik, vol. 20(3), pages 293-329, August.
    6. Charles C. Brown & Daniel S. Hamermesh, 2019. "Wages and Hours Laws: What Do We Know? What Can Be Done?," NBER Working Papers 25942, National Bureau of Economic Research, Inc.
    7. Borgschulte, Mark & Cho, Heepyung, 2018. "Minimum Wages and Retirement," IZA Discussion Papers 11728, Institute of Labor Economics (IZA).
    8. David Neumark, 2016. "Policy levers to increase jobs and increase income from work after the Great Recession," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-38, December.
    9. David Neumark, 2015. "The effects of minimum wages on employment," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    10. Congressional Budget Office, 2019. "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," Reports 55410, Congressional Budget Office.
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    12. Dube, Arindrajit & Zipperer, Ben, 2015. "Pooling Multiple Case Studies Using Synthetic Controls: An Application to Minimum Wage Policies," IZA Discussion Papers 8944, Institute of Labor Economics (IZA).
    13. Kevin Rinz & John Voorheis, 2018. "The Distributional Effects of Minimum Wages: Evidence from Linked Survey and Administrative Data," CARRA Working Papers 2018-02, Center for Economic Studies, U.S. Census Bureau.
    14. repec:eee:streco:v:50:y:2019:i:c:p:203-215 is not listed on IDEAS
    15. Theano Kakoulidou & Panagiotis Konstantinou & Thomas Moutos, 2018. "The Subminimum Wage Reform in Greece and the Labour-Labour Substitution Hypothesis," CESifo Working Paper Series 7273, CESifo Group Munich.
    16. Ekaterina Jardim & Mark C. Long & Robert Plotnick & Emma van Inwegen & Jacob Vigdor & Hilary Wething, 2017. "Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle," NBER Working Papers 23532, National Bureau of Economic Research, Inc.
    17. Clemens, Michael A., 2017. "Violence, Development and Migration Waves: Evidence from Central American Child Migrant Apprehensions," IZA Discussion Papers 10928, Institute of Labor Economics (IZA).

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