Minimum Wage and the Earnings Distribution: New Methods and New Models
Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: David Autor, Massachusetts Institute of Technology
Earnings Inequality and the Minimum Wage: Evidence From Brazil
AbstractWe quantify the effect of a minimum wage on compression throughout the earnings distribution. Using the case of Brazil, which experienced a large decrease in earnings inequality while its real minimum wage increased from 1996-2012, we establish three empirical facts: (i) the decrease is bottom-driven but widespread; (ii) reductions in the firm productivity-pay premium and in the worker skill premium explain a large share of the decrease; and (iii) greater bindingness of the minimum wage is associated with compression up to the 75th earnings percentile. To assess the causal link between the minimum wage and earnings inequality, we develop an equilibrium search model with heterogeneous firms and workers. We show that the minimum wage is consistent with the above three facts and explains 70 percent of the observed inequality decrease, with half of the effect due to spillovers further up the earnings distribution.
The Effect of Minimum Wages on Low-Wage Jobs: Evidence from the United States Using a Bunching Estimator
AbstractWe propose a novel method that infers the employment effect of a minimum wage increase by comparing the number of excess jobs paying at or slightly above the new minimum wage to the missing jobs paying below it. Using state-level variation in U.S. minimum wages, we implement our method by providing new estimates on the effect of the minimum wage on the (frequency) distribution of hourly wages. First, we present a case study of a large, indexed minimum wage increase using administrative data on hourly wages from Washington state. Then we implement an event study analysis pooling 138 minimum wage increases between 1979 and 2016. In both cases, we find that the overall number of low-wage jobs remained essentially unchanged. At the same time, the direct effect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution. Our estimates by detailed demographic groups show no indication that the lack of disemployment effect job loss is not explained by labor-labor substitution at the bottom of the wage distribution. We also find no evidence of disemployment when we consider higher levels of minimum wages. However, we do find some evidence of job lossesreduced employment in tradable sectors. In contrast to our bunching-based estimates, we show that conventional studies can produce misleading inference due to spurious changes in employment higher up in the wage distribution.
Reexamining the Ripple Effect of Minimum Wages
AbstractThis paper reexamines the wage spillover effect of minimum wages on individual low-wage workers. I show that if wage growth declines as low-wage individuals move up the wage distribution, then estimates of this spillover that use short two-year panels to estimate a distributed lag model, as is common in this literature, will be biased towards zero. This bias will be particularly large if some or all of the ripple effect takes place with a lag. Using the Survey of Income Program Participation, I find that this is indeed the case. The magnitude and persistence of the ripple effect depend upon the duration of the panel and in particular, whether one groups individuals to wage intervals using a wage prior to the earliest lagged minimum wage in the specification. In the context of the treatment effects literature, this makes a lot of sense. It is well understood that the inclusion of post-treatment covariates may be a function of the intervention and therefore, bias the estimates of the treatment effect. Thus, my results suggest that the ripple effect may be larger, more persistent, and extend further into the wage distribution than previously believed.
David S. Lee,
University of Western Ontario
Massachusetts Institute of Technology
University of Massachusetts-Amherst
- J3 - Wages, Compensation, and Labor Costs
- J2 - Demand and Supply of Labor