employed following an increase in the minimum wage, essentially attempting to realign the marginal product of their workers with the wages they are paid. As a
result of these adjustments, the effects of minimum wages may extend beyond work- ers whose wages are directly impacted by the higher oor. Our evidence indicates
that minimum wage increases adversely affect workers initially earning near the minimum wage, but have little impact on higher-wage workers. In particular, al-
though wages of low-wage workers rise, their hours and employment fall. The com- bined effect of these changes is a decline in earned income.
Past minimum wage research focuses mainly on employment effects, and fails to distinguish minimum wage effects at different parts of the wage distribution. Conse-
quently, this past research provides insufcient information with which to evaluate the policy implications of raising the minimum wage, in particular whether such
increases help low-wage workers. In contrast, this paper generates a richer descrip- tion of the effects of the minimum wage on labor markets, providing evidence on
a wide set of the margins along which labor market adjustments to minimum wages may occur, and how the adjustments vary at different points of the wage distribution;
we provide a particularly sharp focus on minimum wage effects at the lower end of the wage distribution.
II. Existing Research
Our efforts to distinguish minimum wage effects in different parts of the wage distribution differentiates our approach from most of the existing work
on minimum wages, which— in order to focus on a set of relatively low-skilled workers—typically studies employment effects for teenagers or a closely related
group. However, the focus on employment effects for teenagers is arguably far re- moved from the most pertinent policy questions, for at least three reasons.
First, policymakers typically are most concerned with adults working near the minimum wage, because young workers are on the early part of their experience
prole and hence are likely to grow out of minimum wage jobs, while adults working at minimum wage jobs are more likely to be permanent low-wage workers. In addi-
tion, teenagers are more likely to be secondary earners. Second, because many teen- agers and young adults earn wages well above the minimum, estimates of disemploy-
ment effects for young workers as a whole may mask larger disemployment effects for the lowest-wage workers, and thus overstate the resulting income gains experi-
enced by low-wage workers. Third, the emphasis on employment effects provides too narrow a picture of the effects of minimum wages on the economic well-being
of low-wage workers. On the negative side, hours could fall in response to minimum wage increases, while on the positive side minimum wages may generate wage in-
creases above the minimum. We examine the consequences of minimum wages for employment, wages, and hours, as well as the overall impact on labor income.
1
In all cases, we isolate the effects of minimum wages in different parts of the distribution of
wages.
1. A more overriding policy concern is the effects of minimum wages on family incomes; see Neumark et al. 1998.
Two recent papers move beyond the estimation of employment effects for teenag- ers or young adults to focus more sharply on workers who are most likely to be
affected by the minimum wage. Abowd et al. 1999 examine individual-level panel data for France, where the real minimum wage rose throughout their sample period
1981– 89, and for the United States, where it fell 1981– 87. They study minimum wage effects in two opposite but closely related ways: In France, they condition on
initial employment and test for disemployment effects among workers who are “caught” by minimum wage increases, while in the United States they look at indi-
viduals who are “released” by the falling real minimum wage. For both countries, Abowd et al. report considerably larger disemployment effects of minimum wages
for workers constrained by the minimum than for workers with marginally higher wages. Currie and Fallick 1996 carry out a similar analysis using NLSY data for
the United States. They estimate the employment effects of the 1980 and 1981 federal minimum wage increases, dening as the treatment group workers whose wage prior
to the increase was between the old and the new minimum wage, and as the control group workers earning near but above the minimum wage. Currie and Fallick nd
that workers bound by the minimum were about 3 percent less likely than the control group to be employed after the minimum wage increase; the estimated employment
elasticity for workers bound by the minimum is about 20.4. The elasticities esti- mated by Abowd et al. are at least as large.
Some researchers have examined other margins of adjustment to minimum wage increases. The most extensive body of research exploring other margins of adjust-
ment studies the extent to which minimum wage increases lead to positive “ripple” effects on the wages of workers already earning more than the new minimum. Gram-
lich 1976 originally broached this question, suggesting that standard substitution effects or union-related relative wage considerations might lead to increases in the
wages of higher-skilled workers following an increase in the legislated minimum wage. Another possibility is that the labor supply of higher-skilled workers might
increase as lower-skilled workers in the same family become disemployed or face lower hours as a result of minimum wage increases, leading to a decline in wages
for higher-skilled workers. Gramlich presents evidence suggesting that minimum wage increases raise average wage rates by about twice what would be predicted
from the direct impact of minimum wage increases on workers for whom the mini- mum is binding ignoring possible employment effects. But because Gramlich relies
on aggregate data, he cannot examine where in the wage distribution the wage spill- overs occur. Grossman 1983 also presents evidence consistent with ripple effects
from minimum wages.
More recent analyses use empirical methods that more directly reveal the impacts of minimum wages on the wage distribution. For example, DiNardo et al. 1996
present a semi-parametric analysis of how changes in national minimum wages have affected wage inequality, while Lee 1999 examines the impact of minimum wages
on the wage distribution in more detail using state-level variation. Both papers nd evidence suggestive of positive spillovers from minimum wages to other wages, as
does more limited evidence in Spriggs 1993 and Card and Krueger 1995, Ch. 9, and evidence for Canada reported by Green and Paarsch 1998.
The DiNardo et al. 1996 and Lee 1999 papers differ from ours in a few impor- tant ways. First, while they are concerned with trying to estimate how the distribution
of wages changes as a result of minimum wage increases, we try to estimate the actual impact of minimum wages on workers at different points of the initial distribu-
tion of wages relative to the minimum. Second, we study additional outcomes hours, employment, and labor income to provide a more comprehensive analysis of the
consequences of minimum wage increases. Finally, DiNardo et al. 1996 and Lee 1999 focus more on how minimum wages sweep up workers in the bottom tail of
the wage distribution, as opposed to an analysis of the effects on the wage distribution above but near the new minimum.
Much less research looks at hours effects, and what there is focuses on the probabilities of part-time and full-time employment. Gramlich 1976 nds that minimum wages
reduce full-time employment and increase part-time employment of teenagers and adult males; although an overall disemployment effect is apparent for teenagers only, the
switch from full-time to part-time is consistent with hours reductions for both groups. Hungerford 2000 reports that minimum wages appear to increase the proportion of
involuntary part-time workers among less-educated teenagers, and among blacks across age and education categories. In contrast, Cunningham 1981 reports evidence from an
earlier period suggesting that minimum wages discourage part-time employment and boost full-time employment, as do Katz and Krueger 1992 using data from fast-food
restaurants in Texas.
2
Finally, Zavodny 2000 nds that teenagers who remain employed following a minimum wage increase tend to experience an increase in hours worked,
roughly offsetting the job losses incurred by other teens. One study that comes closer to our more comprehensive approach of estimating
the effects of minimum wages on wages, employment, hours, and income is Linne- man 1982. He uses PSID data from 1973 to predict wages in 1974 and 1975, and
on the basis of the predicted wages identies workers who would be bound by the increases in the minimum wage in 1974 and 1975. His ndings indicate hours and
to a lesser extent employment reductions among constrained workers. However, he also estimates hours and employment effects for workers in various wage intervals
above the minimum, nding that individuals just above the minimum relative to workers further above the minimum experience reduced employment rates but in-
creased hours.
We have two main criticisms of Linneman’s analysis. First, his estimates of the effects of the minimum wage on income are not based on actual income in 1974
and 1975, but are imputed from the estimated hours and employment effects. As a result, the estimates take no account of the effects of the minimum wage on the
wages of workers earnings more than the minimum, and the imputation method takes no account of the distribution of wage and hours effects across individuals.
3
Second, his approach does not provide a credible counterfactual for the experiences of the
group affected by the minimum wage increase Card and Krueger 1995, p. 224. We address the rst set of shortcomings by looking at wage and income effects
independently. We provide a credible counterfactual by using exible estimates of
2. Neumark and Wascher 2000 and Michl 2000 touch on the issue of effects of minimum wages on employment and hours in the context of the Card and Krueger 1994 New Jersey-Pennsylvania minimum
wage study. 3. In addition, Linneman does not compute standard errors for the income effects he estimates, so there
is no way to determine which estimated effects are signicant. Our approach readily yields standard errors of the estimated effects on income.
underlying wage, hours, employment, and income changes of the nonaffected popu- lation, and using state variation in minimum wages to obtain treatment and control
groups. More generally, we provide a fuller characterization of minimum wage ef- fects throughout the wage distribution, and update and strengthen the analysis by
taking advantage of the state-level variation in minimum wages that has been fruit- fully exploited in the new minimum wage research.
III. Data
