ECON 361: Income Distributions and Problems of Inequality

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1 ECON 361: Income Distributions and Problems of Inequality David Rosé Queen s University March 28, /1

2 Last class... Measuring Discrimination - Oaxaca Blinder Decomposition Orchestrating Impartiality (2000) - C. Goldin & C. Rouse Today... Finish discussing More Power to the Pill (2006) - M. Bailey General Discussion about the Minimum Wage Fast-Food Industry Case Study (1994) - D. Card & A. Krueger 2/1

3 The Minimum Wage: The intent of the minimum wage is to create a wage floor for the labour market, and to ensure a minimum standard of living for employees. It also serves as a form of protection to the most vulnerable workers, who are typically in an unequal position in the employer-employee bargaining relationship. - Ontario Ministry of Labour 3/1

4 What s the Goal of the Minimum Wage? Min. Wages are intended to increase the take home compensation of unskilled workers. Provide a minimum standard of living to employees. Seen by many as a way of affecting the income distribution / combating poverty. 4/1

5 Keep in mind: Other policies for reducing poverty Traditional social assistance programs (transfers from government to people below the poverty line). Earning Income Tax Credit (USA) / Working Income Tax Benefit (Canada). These programs subsidize or top-up labour market income for eligible individuals. The notion is to encourage people to enter the labour market. Targeted relief (e.g. Canada Child Tax Benefit, OAS). 5/1

6 Minimum Wage Map: Canada 6/1

7 Proportion of Minimum Wage Workers Across Provinces 7/1

8 Age Distribution of Min-Wage Earners: Canada 8/1

9 Real vs. Nominal Federal Min-Wage: U.S.A. 9/1

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11 Minimum Wage: Land of the Free 11/1

12 Many governments like the idea of a minimum wage (or an increase) more than other poverty fighting plans because they don t have to pay for it directly (unlike transfer programs). Government s love the idea of low-wage workers taking home more $. Wait... You said workers... Isn t the minimum wage a blood-thirsty job killer? 12/1

13 Estimated Min-Wage Effects 13/1

14 Adjustment Channels (Schmitt, 2014) Apart from firing workers firms have other ways of responding to a higher price for unskilled labour: Reduction of hours worked. Reduction of non-wage benefits. Reduction of training. Change in employment composition. Substitute towards higher-skilled labour (which is now relatively cheaper). Charge higher prices. Depends on the price elasticity of demand (inelastic demand... jack-up the price, np). Wage compression. Less generous compensation for higher-skilled workers. 14/1

15 Minimum Wages and Employment (Card & Krueger, 1994) This is one of the most cited papers in the minimum wage debate. Has all the important ingredients for a good paper: Interesting (and simple) methodology. Novel data set. Counter-intuitive finding. Queen s grad is an author! (David Card, B.A. 1978) 15/1

16 Motivation: Try to quantify the impact of a change in the minimum wage on firms (and workers) that are strongly affected by the change. Previous studies found very little employment effect even though conventional economic theory has an unambiguous prediction. Research Question(s): How do employers in a low-wage labour market respond to an increase in the minimum wage? More specifically, how do fast-food establishments respond to a change in the minimum wage? 16/1

17 Methodology Basic idea: compare employment of fast-food workers in New Jersey and Eastern Pennsylvania before and after the NJ minimum wage increased from $4.25 to $5.05 on April 1 st, Also, compare high-wage stores in NJ (unaffected by min. wage increase) to low-wage establishments. Combination of phone call and site visits to create the data set on fast-food establishments. 1 st wave of interviews (phone) was done before the min-wage increase (late Feb./early March 1992). 2 nd wave of interviews (phone and site visits) was done after min-wage increase (Nov. and Dec. 1992). Why wait so long? 17/1

18 First... where is New Jersey? 18/1

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22 Question: Suppose they find that employment in NJ increased after the increase in the minimum wage, what can we say about the impact of the minimum wage? Nothing really... this would simply be a correlation, nothing causal. Something else, like an improving economy, could be the explanation. The diff-in-diff approach is way to try to measure a causal effect. 22/1

23 Diff-in-Diff: Intuition Underlying premise: NJ and Eastern Pennsylvania have roughly the same economic conditions. In the absence of Minimum Wage, the change in NJ employment (or other measure) would have been the same as that of E. Pennsylvania. If there changes are significantly different then this is evidence of the minimum wage change having an effect. So, if NJ and E. Pennsylvania record the same changes in employment = minimum wage has no effect. If NJ records a big drop in employment, and E. Pennsylvania remains the same = min. wage kills jobs. 23/1

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26 Diff-in-Diff Regression The change in employment from wave 1 to wave 2 at store i is decomposed as follows: Employment i = a + bx i + cnj i + ɛ i where: X i is a set of store i s characteristics (that we want to control for) E.g. corporate vs. franchise ownership, part of a chain (B.K., Wendy s, etc.) NJ i = 1 if the store is in NJ ( = 0 is store is in E. Penn.) 26/1

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