Comment on David Neumark and William Wascher, "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws"

Abstract

We re-examine the evidence presented by Neumark and Wascher (1992) on the employment effect of the minimum wage. We find three critical flaws in their analysis. First, the school enrollment variable that plays a pivotal role in their specifications is derived on the false assumption that teenagers either work or attend school. Measurement error biases contaminate all the empirical estimates that use this enrollment variable. Second, Neumark and Wascher measure the effect of the minimum wage by a coverage-weighted relative minimum wage index. This variable is negatively correlated with average teenage wages. Taken literally, their results show that a rise in the coverage-weighted relative minimum wage lowers teenage wages. Examining the direct effects of state-specific minimum wages, we find that increases in state minimum wages raise average teenage wages but have essentially no employment effects. Finally, a careful analysis of Neumark and Wascher's data shows that subminimum wage provisions are rarely used. This casts doubt on their claim that subminimum provisions blunt any disemployment effect of the minimum wage. Neumark and Wascher contend that other minimum wage studies are biased by failing to control for school enrollment, and by failing to consider the lagged effects of minimum wages. We re-analyze the experiences of individual states following the April 1990 increase in the Federal minimum wage, allowing for a full year lag in the effect of the law and controlling for changes in (properly measured) enrollment rates. Contrary to their claims, allowing for lagged effects and controlling for enrollment status actually strengthens the conclusion that the 1990 increase in the Federal minimum had no adverse employment effect.