Product Market Evidence on the Employment Effects of the Minimum Wage

Abstract

We infer the employment response to a minimum wage change by calibrating a model of employment for the restaurant industry. Whereas perfect competition implies that employment falls and prices rise after a minimum wage increase, the monopsony model potentially implies the opposite. We show that estimated price responses are consistent with the competitive model. We place fairly tight bounds on the employment response, with the most plausible parameter values suggesting that a 10% increase in the minimum wage lowers low-skill employment by 2%–4% and total restaurant employment by 1%–3%.

Firm Dynamics and the Minimum Wage: A Putty-Clay Approach

“…By sharp contrast, there is no impact of a minimum wage increase on the exit of full service restaurants (column 4, row A), nor on other NAICS72 establishments other than restaurants and hotels and motels (column 6, row A), where minimum wage labor share is lower (Aaronson and French (2007)). We do find a large impact on hotels and motels (column 5, row A).…”

“…Moreover, the intensity of use of minimum wage workers in the restaurant industry is amongst the highest of the industrial sectors (Aaronson and French (2007)). Like many studies before this one (e.g.…”

“…Like many studies before this one (e.g. Katz and Krueger (1992), Card and Krueger (1995), Card and Krueger (2000), Neumark and Wascher (2000), Aaronson and French (2007) and Aaronson, French, and MacDonald (2008)), we concentrate specifically on limited service establishments, which are especially strong users of minimum wage labor. 8…”

“…As a result, consumers purchase fewer meals and restaurants require fewer inputs. This reduction in sales causes net exit of restaurants immediately following a minimum wage hike and consequently an immediate fall in the employment of minimum wage workers (Aaronson and French (2007)). This channel is sometimes known as the "scale effect.…”

“…While we draw upon Aaronson and French (2007), we augment their calibration targets to accommodate the more sophisticated dynamics in this model. The calibration targets are listed in Table 5, the parameters chosen to match those targets are in panel B of Table 4, and more detail is provided in Appendix A.…”