The desirability of raising the minimum wage has long revolved around just one question: the effect of higher minimum wages on the overall level of employment. This report adds an important new dimension to that debate by showing that an even more critical effect of the minimum wage rests on the composition of employment — who gets the minimum wage job.
Kevin Lang’s paper focuses on employment in eating and drinking establishments, a Bureau of Labor Statistics classification including fast food (the focus of numerous recent minimum wage studies) and table service restaurants, as well as cafeterias. The report shows that the effect of higher minimum wages in the late 1980s was to displace adults employed in food service in favor of younger workers.
Consistent with this shift towards younger workers, the study reports that the higher minimum wage increased the share of employment that was on a part-time rather than full-time basis.
Two forces in the labor market work to exclude adult workers after a minimum wage increase. Higher wages swells the pool of job applicants by making these jobs attractive to a larger portion of the population. Many of these new workforce entrants are students and teens electing to enter the workforce. This expanded pool of applicants allows employers to be more selective in the workers they hire. At the same time, the labor costs associated with the higher wage require employers to be more selective in their hiring practices; the costs of an incorrect hiring decision become much higher. Many employers making hiring decisions simply conclude that younger workers are more desirable as workers than adults whose only employment option is at the minimum wage.
Dr. Lang’s analysis exploits the differences in state-level minimum wages that arose in the late 1980s, a period in which many states raised their minimums while the federal minimum remained constant. When the federal minimum wage rose to $4.25 in 1990-91, its effect on wages was stronger in states which had lower wages. This disparity in minimum wage effects made it possible to estimate inter-state differences in employment composition: the displacement effect on older workers from the federal increase to $4.25 was greater in lower-wage states. After the federal increase, a state where average food service wages were already $4.50 showed approximately 9 percentage points greater adult employment gains than did a state where average wages were $1 lower. The greater the effect the minimum wage increase had on wages, the larger was the resulting displacement of older workers.
Some economists have concluded that higher minimum wages can increase the flow and quality of applicants for entry-level jobs. However, this report shows that the increased competition from better workers hurts the most disadvantaged applicants.
Ironically, the effect of higher minimum wages may be to undercut the welfare-to-work transitions that are at the core of efforts to reduce welfare dependency. Many welfare recipients simply don’t have the education or skills to compete with the more qualified workers who may be attracted to entry-level positions after a minimum wage hike. For these welfare recipients, increasing the minimum wage closes off economic opportunities at the very time that public policy stands poised to require greater work effort on their part.
These findings quantify and confirm a feature frequently reported on in the popular press: the adverse effects employers feel from a higher minimum wage are somewhat offset by the fact that they are able to select from a higher quality of job applicants. More and better workers do respond to higher wages, and they do get jobs. The losers are those former workers whose skills do not allow them to compete successfully.
The analysis controls for the changing size of the workforce, changes in its educational characteristics, as well as changes in the national economic climate over the sample period. Data source for the estimation were the National Bureau of Economic Research Current Population Survey extracts for the years 1987 to 1991.
