More Evidence On The Damage That Minimum Wage Laws Cause

See Minimum Wages and Teen Employment: A Spatial Panel Approach by Charlene M. Kalenkoski, Associate Professor, Ohio University and Donald J. Lacombe, Research Associate Professor, West Virginia University. (Hat Tip: Division of Labor) Excerpts:

"Abstract: The authors employ spatial econometric techniques and Annual Averages data from the U.S. Bureau of Labor Statistics for 1990-2004 to examine how changes in the minimum wage affect teen employment. Spatial econometric techniques account for the fact that employment is correlated across states. Such correlation may exist if a change in the minimum wage in a state affects employment not only in its own state but also in other, neighboring states. The authors show that state minimum wages negatively affect teen employment to a larger degree than is found in studies that do not account for this correlation. Their results show a combined direct and indirect effect of minimum wages on teen employment to be -2.1% for a 10% increase in the real effective minimum wage. Ignoring spatial correlation underestimates the magnitude of the effect of minimum wages on teen employment."

"In our particular application, it may be that teens may cross state lines to obtain employment in a higher-wage state or that there are "employment centers" that draw employees from surrounding states, perhaps due to geographic features, such as valuable natural resources, that cross state boundaries, drawing employment into a particular region.

"as a state increases its real effective minimum wage, teen employment in adjacent states (as defined by our W matrix) decreases as well. One possible explanation for the effect is that as a state increases its real effective minimum wage, it becomes more attractive to workers in neighboring states who decide to queue for jobs in the state that raised its minimum wage. Consequently, teen employment in the neighbor state will decrease."

"Conclusion

Previous studies of the minimum wage have neglected the issue of spatial dependence. This has potentially led to biased, inconsistent, and inefficient parameter estimates. The advantages of using spatial econometric techniques in a panel data setting are, firstly, that spatial dependence can be modeled and controlled for and, secondly, that spatial spillovers can be accounted for to produce more accurate estimates of the quantities of interest. Using a panel data set covering the period 1990-2004, we examine how changes in the real effective minimum wage affect teen employment. Estimation of the standard panel data model with state- and year- fixed effects but no controls for spatial dependence suggests that, as the real effective minimum wage increases by 10%, teen employment decreases by 1.78%, a finding that is consistent with estimates from other studies. Controlling for spatial dependence through estimation of a SAR model indicates that a 10% increase in the real effective minimum wage results in a 2.11% decrease in teen employment, a larger estimate because it includes both direct and indirect effects. Thus, studies that ignore spatial dependence may underestimate the negative effect of minimum wages on teen employment.""