Abstract
This study examines whether the low-skilled employment effects of minimum wage increases differ over the state business cycle. Controlling for spatial heterogeneity via state-specific productivity shocks to the low-skilled sector and state-specific non-linear time trends, the results suggest that minimum wage increases between 1989 and 2012 reduce low-skilled employment more during recessions than expansions. Estimated employment elasticities with respect to the minimum wage range from 0 to −0.2 during state economic expansions, but reach as high as −0.3 during troughs in the business cycle.
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Notes
For instance, the authors note that it is unclear how to conceptually interpret differences in estimates of low-skilled employment levels for the same county depending on the county-pair to which it is matched.
Along similar lines, Addison et al. (2013) find little evidence of heterogeneous effects of the minimum wage across the business cycle for restaurant or bar employment.
They find that this result holds even after controlling for state-specific linear time trends, but do not present estimates exploring the sensitivity to census division-specific year effects.
When the minimum wage changes mid-year, I construct the weighted average for the minimum wage that existed in that calendar year.
Note, however, that the inclusion of these GDP controls may understate employment effects of the minimum wage if minimum wage hikes reduce low-skilled GDP through adverse employment effects (Sabia 2011).
The employment elasticity during expansions is simply the coefficient on the log minimum wage variable.
These estimates are obtained by summing the coefficients on the minimum wage variable and the interaction of the minimum wage variable and an indicator variable for weak growth (<2 %) in real GDP generated by the finance industry.
When I estimate an ordered probit model of the effect of minimum wage increases on the prime-age male unemployment rate (including state and year effects), I find no evidence of a statistically significant relationship, with a point estimate of −0.949 and a standard error of 2.73. This finding holds with the inclusion of state-specific non-linear time trends (third-order polynomial time effects).
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Sabia, J.J. The Effects of Minimum Wages over the Business Cycle. J Labor Res 35, 227–245 (2014). https://doi.org/10.1007/s12122-014-9180-x
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DOI: https://doi.org/10.1007/s12122-014-9180-x