Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws

Political Variables as Instruments for the Minimum Wage

“…Our results consistently suggest, across a number of instruments, that the weak relationship between employment and the minimum wage is not driven by endogeneity. This is in line with evidence in the literature that suggests little bias correction when instrumenting for the minimum wage variable (Card and Krueger, 1995;Kim and Taylor, 1995), although some found that instrumented estimates correct some upwards bias (Neumark and Wascher, 1992).…”

“…More recently, a number of studies have found no evidence of adverse employment e ects (Card, 1992;Card andKrueger, 1995 andMachin et al, 2003). Explanations for such non-negative estimates include new theoretical approaches as well as concerns about empirical identification and data issues (Brown, 1999;Wascher, 1992 andCard andKrueger, 1995 andDe Fraja, 1999). For example, within a monopsony framework minimum wage increases need not reduce employment (Card and Krueger, 1995;Dickens et al, 1999), although some are skeptical of monopsony power among firms that hire minimum wage workers (Brown, 1999).…”

“…Further endogeneity can be caused by the use of average wages or prices in the denominator of a normalized minimum wage or by the use of wages to calculate a wage gap measure (Katz, 1970;Kim and Taylor, 1995). The instruments that have been used in the literature to circumvent the problems arising from endogeneity are lags of the minimum wage or lags of average wages (Dickens et al, 1999;Dolado et al, 1996;Card and Krueger, 1995;Kim and Taylor, 1995;Machin and Manning, 1994;Neumark and Wascher, 1992). The underlying identifying restriction in these studies is that the errors are serially uncorrelated.…”

Are there long-run effects of the minimum wage?

“…Card & Krueger (1994) look at a 9 month window around a minimum wage increase, while in the panel data literature, e.g. Neumark & Wascher (1992) and Dube et al (2010) the focus is on the response within a quarter. These estimates are interpreted as testing “[t]he prediction from conventional economic theory” (Card & Krueger (1994, pg.…”

“…Neumark & Wascher (1992, Table 5), Baker et al (1999, Table 7) and Dube et al (2010, Equation 7)). That the coefficients on these lags are often quite small is interpreted as evidence that the long-run employment effects of a minimum wage increase are the same as the short-run employment effects (Dube, Lester & Reich (2010, pg.…”