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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.

Suggested Citation

  • 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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    3. Shaun Gilyard & Marta Podemska-Mikluch, 2020. "Effects of Local, State, and Federal Minimum Wage on Employment Growth among Teenagers in the Restaurant Industry," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 26(1), pages 89-101, February.
    4. David Neumark, 2015. "The effects of minimum wages on employment," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    5. Allegretto, Sylvia & Nadler, Carl, 2020. "Minimum Wages and Health: A Reassessment," Institute for Research on Labor and Employment, Working Paper Series qt98f1p6h7, Institute of Industrial Relations, UC Berkeley.
    6. 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.
    7. Patel, Pankaj C., 2019. "Minimum wage and transition of non-employer firms intending to hire employees into employer firms: State-level evidence from the US," Journal of Business Venturing Insights, Elsevier, vol. 12(C).
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    9. 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.
    10. 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.
    11. Zachary S. Fone & Joseph J. Sabia & Resul Cesur, 2019. "Do Minimum Wage Increases Reduce Crime?," NBER Working Papers 25647, National Bureau of Economic Research, Inc.
    12. 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).
    13. 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.
    14. Daniel Cooper & María José Luengo‐Prado & Jonathan A. Parker, 2020. "The Local Aggregate Effects of Minimum Wage Increases," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(1), pages 5-35, February.
    15. Allison Dwyer Emory & Daniel P. Miller & Lenna Nepomnyaschy & Maureen R. Waller & Alexandra Haralampoudis, 2020. "The Minimum Wage and Fathers’ Residence with Children," Journal of Family and Economic Issues, Springer, vol. 41(3), pages 472-491, September.
    16. Borgschulte, Mark & Cho, Heepyung, 2018. "Minimum Wages and Retirement," IZA Discussion Papers 11728, Institute of Labor Economics (IZA).
    17. Ngoc Thien Anh Pham & Nicholas Sim, 2020. "Shipping cost and development of the landlocked developing countries: Panel evidence from the common correlated effects approach," The World Economy, Wiley Blackwell, vol. 43(4), pages 892-920, April.
    18. 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.
    19. Peng-Ju Su, Alice, 2020. "Information advantage and minimum wage," Information Economics and Policy, Elsevier, vol. 50(C).
    20. Liang, Weidong & Sim, Nicholas, 2019. "Did rainfall shocks cause civil conflict in Sub-Saharan Africa? The implications of data revisions," European Journal of Political Economy, Elsevier, vol. 60(C).
    21. Congressional Budget Office, 2019. "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," Reports 55410, Congressional Budget Office.
    22. David Neumark, 2017. "The Employment Effects of Minimum Wages: Some Questions We Need to Answer," NBER Working Papers 23584, National Bureau of Economic Research, Inc.
    23. 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).
    24. Feng, Qu, 2020. "Common factors and common breaks in panels: An empirical investigation," Economics Letters, Elsevier, vol. 187(C).
    25. Mark Borgschulte & Heepyung Cho, 2020. "Minimum Wages and Retirement," ILR Review, Cornell University, ILR School, vol. 73(1), pages 153-177, January.

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