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Minimum wage effects on employment, substitution, and the quality of the teenage labor supply: Evidence from personal data

Author

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  • Laura Giuliano

    (Department of Economics, University of Miami)

Abstract
Using personnel data from a large U.S. retail firm with more than 700 stores nationwide, this study examines how the 1996 federal minimum wage increase affected both the level of employment at each store and also the fraction of teenagers employed. Because the minimum wage caused the relative wages of teenagers to increase at many stores, examining the relative employment of teenagers permits me to test the hypothesis of substitution toward more skilled (i.e., relatively high-wage) employees. The basic results indicate, first, that while the legislation had a much greater impact on average wages in some stores than in others, there is no significant difference in post-legislation employment growth at high-impact and low-impact stores. Second, I find that in stores where the legislation caused larger increases in the relative wage of teenagers, the employment of teenagers rose faster after the law was implemented. These results appear inconsistent with the traditional view that minimum wages lead employers to reduce employment, and to substitute relatively high-skilled, high-wage labor for the labor of the less-skilled workers whose relative wages go up. However, additional analysis suggests that the apparent contradiction can be explained in the context of a model (Drazen, 1986) that incorporates imperfect information about the quality of teenage applicants into the traditional, competitive framework. Specifically, the evidence suggests that high-quality teenagers often were not paid wages proportional to their output, and were drawn into the labor market when the minimum wage forced stores to pay teenagers more like adults. In these stores, the legislation appears to have increased the demand for teenage labor by raising the average quality of the teenage applicant pool. In contrast, where the legislation increased the wages of both teenagers and adults without compressing the wage distribution, the result was a decline in employment, as predicted by the conventional model.

Suggested Citation

  • Laura Giuliano, 2007. "Minimum wage effects on employment, substitution, and the quality of the teenage labor supply: Evidence from personal data," Working Papers 0723, University of Miami, Department of Economics.
    • Handle: RePEc:mia:wpaper:0723
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    File URL: https://www.herbert.miami.edu/_assets/files/repec/wp-0723.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Sylvia A. Allegretto & Arindrajit Dube & Michael Reich, 2011. "Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 50(2), pages 205-240, April.
    2. Manning, Alan, 2011. "Imperfect Competition in the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 11, pages 973-1041, Elsevier.

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    More about this item

    Keywords

    minimum wage; employment; teenagers; retail;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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