What Does the Minimum Wage Do?

1 - Introduction

1 1 Introduction The birth of the new minimum wage research (NMWR) can be dated to a conference at Cornell University held in late 1991 and the subsequent symposium that appeared in Industrial and Labor Relations Review (see Ehrenberg [1992] for a description of the conference and its attendees). The first period of this research came to a close nine years later. Prior to the conference, empirical research on the minimum wage had been dominated by studies that considered only the effect of the federal minimum wage on teenage employment, using aggregate time-series data. These earlier studies generally concluded that a 10 percent increase in the minimum wage is associated with a 1–3 percent decrease in teenage employment (Brown 1999). Energized by increases in the federal minimum wage in 1990, 1991, 1996, and 1997, researchers approached minimum wage issues through a variety of statistical frameworks, techniques, and data sources; explanatory economic models proliferated, as did the number of articles. By the end of the first period in 2000, it was no longer possible to identify a dominant line of research. In this review, which primarily focuses on articles published from 2000 forward, we have considered more than 200 scholarly and policy papers relating to the minimum wage that have appeared in English since the conference. While a few are surveys, most are original analyses, and most of these are statistical in nature rather than presentations of theoretical models or survey results. This book is our attempt to make sense of the research.1 We look at which observable, measurable variables (e.g., wages, employment, school enrollment) the minimum wage influences; how long it takes for the variables to respond to the minimum wage and the size and desirability of the effect; why the minimum wage has the results it does (and not others); and the workers most likely to be affected by changes to the minimum wage. Our emphasis is on studies that analyze data from the United States, but we also touch on studies of data from other countries: Canada, Australia, New Zealand, and the United Kingdom and other countries in Western Europe. Belman and Wolfson.indb 1 Belman and Wolfson.indb 1 6/16/2014 12:04:22 PM 6/16/2014 12:04:22 PM 2 Belman and Wolfson One set of issues revolves around who is affected by changes in the minimum wage. It is almost a given that those living in poverty are less likely to be affected than low-wage employees, since those below the poverty line, to a great extent, are not involved in the labor market (Freeman 1996). There remains an issue of who, among those who are employed and those who want to be employed, is affected when the minimum wage is increased. Among the employed, does the minimum wage affect only those who would be earning less than the minimum without it, or does it also affect those higher up the wage scale? Older minimum wage studies have generally focused on teenage workers— with their low skills and limited attachment to the labor market, it was thought that teenagers were most sensitive to the minimum wage and therefore any effect would be clearest here. While much of the NMWR examines what happens to teenagers when the minimum wage rises, many studies focus on other demographic groups with limited skills and labor market attachment, as well as workers identified specifically by their low wages, by membership in a specific demographic group (such as single mothers, young women, or immigrants), or by the industry in which they work (primarily hospitality and home care/nursing home). Another issue relates to identifying the outcomes of minimum wage increases. As with earlier research, most NMWR focuses on the number of jobs or the probability of employment. However, there has been considerable expansion of issues, even within the realm of employment broadly defined. We review studies of the consequences for hours worked, turnover, unemployment, and labor force participation, along with studies of the effects on wages and their distribution, fringe benefits and training, prices and profitability, and the effect of the minimum wage on school enrollment. The timing of effects of the minimum wage has become a recognized and challenging issue. How long it takes for the response to the minimum wage to play itself out is central to the effectiveness of policy. Before the NMWR, response to the minimum wage was thought to be nearly immediate. Most recent research also assumes that the...