"The Effect of Minimum Wages on Immigrants’ Employment and Earnings"

Here's more on the effects of the minimum wage:

The Effect of Minimum Wages on Immigrants’ Employment and Earnings, by Pia M. Orrenius and Madeline Zavodny, FRB Dallas: Abstract This study examines how minimum wage laws affect the employment and earnings of low-skilled immigrants and natives in the U.S. Minimum wage increases might have larger effects among low-skilled immigrants than among natives because, on average, immigrants earn less than natives due to lower levels of education, limited English skills, and less social capital. Results based on data from the Current Population Survey for the years 1994-2005 do not indicate that minimum wages have adverse employment effects among adult immigrants or natives who did not complete high school. However, low-skilled immigrants may have been discouraged from settling in states that set wage floors substantially above the federal minimum.

...Conclusion The standard model of competitive labor markets predicts that minimum wages raise earnings and reduce employment probabilities for workers who are at the bottom of the wage distribution. Along with teens and young adults, the foreign-born account for a large share of low-wage workers in the U.S., and the size of the foreign-born workforce has been rising in recent years. Immigrant workers may be particularly affected by minimum wage increases given their relatively low levels of human capital, such as less formal education, limited English proficiency, and lack of institutional knowledge.

The results of our analyses of state-level data indicate that higher minimum wages boosted average hourly earnings among adult immigrants who did not have a high school diploma or equivalent education. However, we do not find evidence of adverse employment or hours effects among this group. We do find evidence of a decline in work among teens, with a difference by gender in whether employment or hours changed in response to higher minimum wages.

Our failure to find an adverse employment effect among low-skilled adult immigrants despite a positive wage effect could result from employers substituting those workers for teens when the minimum wage increases. In addition, immigrants’ locational choices could respond to changes in minimum wages. We find some evidence that this may occur, as the educational composition of immigrants within states and the distribution of low-skilled immigrants across states are related to minimum wage levels.

The period we examine, 1994-2005, marks an era when immigrants began settling in large numbers in new parts of the U.S. in addition to going to traditional gateways like California, New York, and Texas. As the U.S. in the 1990s experienced the largest inflow of foreign-born people ever in its history, North Carolina and Georgia were the states that experienced the greatest percentage gains in foreign-born population. Notably, these two states did not increase their minimum wage beyond the federal level during that period. If firms that hire low-wage immigrants increased employment more in states with lower effective minimum wages, immigrants likely responded by moving to those states. The effect of minimum wages on locational choices among firms that hire immigrants versus natives is a promising subject for future research.

The large increase in the federal minimum wage that is set to occur in 2008 and 2009 will provide an opportunity for economists to examine the effects of a sizable increase in minimum wages across most of the country. The two-step increase in the federal minimum wage to $7.25 per hour from $5.85 exceeds the state minimum wages as of January 2007 in all states except California, Connecticut, Hawaii, Massachusetts, Oregon, Rhode Island, Vermont, and Washington. By creating a relatively high national wage floor, the proposed increase would reduce firms’ opportunity to move to areas with low state minimum wages or expand operations in those areas, possibly leading to larger disemployment effects among immigrants than those found in this study.

Comments

[Elliott in IA]

Or maybe it won't have much effect, since firms that employ illegal immigrants are not above breaking minimum wage laws, either. Here's a story that didn't get noticed outside of Iowa: http://www.gazetteonline.com/apps/pbcs.dll/article?AID=/20080515/NEWS/949618896/1006/news
It involves the biggest customs raid to-date.
Not only is the employer alleged to have paid $5/hour (the Iowa minimum wage is now $7.25), but they are also alleged to have helped the immigrants get fake IDs, physically abused them, and forced them to buy used cars from the employer.
This comment may not be completely germane to the post, but there are a lot of aspects of this "underground economy" that we seem to choose to ignore.

[ken melvin]

There's reality and then there's deniality.

[2slugbaits]

It certainly makes sense that employers would want to substitute teen workers with immigrants. For lots of reasons. Employers may believe that adult immigrant workers are likely to be more responsible than teen workers (then again, my dog is more responsible than my teenage son and daughter...not that I was any better when I was their ages). But the main reason employers might want adult immigrant workers is because employers would have more leverage over immigrants than they would middle-class teenagers working at the local WhataBurger. Minimum wage jobs for teenagers are throwaway jobs. And teenagers are likely to have a higher reservation wage.

Personally I think this is a good thing. I'd rather see teenagers being pushed out from behind the MickeyDee's counter and spending more time at the library. So in this sense I see the minimum wage as offering a kind of positive externality in the form of teenage unemployment. A little paternalistic? You bet.

[James Killus]

I'm trying to come up with some downside to a State's setting its minimum wage substantially above the Federal level, and I'm failing. It looks like a good deal even for the "immigrants are destroying the country" crew.

In any case, I certainly would like to see "race to the bottom" replaced by "climb to the top" at least once in a while. Just to see what happens, if nothing else.

[2slugbaits]

James Killus,

Let's not go overboard here. The minimum wage is a balancing act. It clearly puts some upward pressure on unemployment, but there are also some offsetting benefits. At some point the negative unemployment benefits begin to outweigh the positive benefits. First hit will be teenagers. And you can go to the BLS site and see what happened to 16-19 year old employment immediately after the minimum wage was increased. Teenage unemployment increased even in those months when overall employment improved or was unchanged.

A few days ago Mark posted another paper on the British minimum wage. The takeaway from that paper was that the minimum wage is an effective way to combat monopsony powers. Of course, that's not exactly a new idea for economists. Go check out the wikipedia example of monopsony power: http://en.wikipedia.org/wiki/Monopsony

[anne]

James Killus:

I'm trying to come up with some downside to a State's setting its minimum wage substantially above the Federal level, and I'm failing.

[Me too, but there are the fiends who care nothing for the dignity of workers.]

[anne]

http://www.nytimes.com/2008/05/24/business/24farm.html?ref=business&pagewanted=print

May 24, 2008

Burger King Grants Raise to Pickers
By ANDREW MARTIN

After a contentious battle that included allegations of spying, Burger King announced on Friday that it had reached an agreement to improve the wages and working conditions of tomato pickers in Florida.

At a news conference on Capitol Hill, the hamburger chain, based in Miami, said it would pay tomato prices adequate to give workers a wage increase of 1.5 cents a pound. A penny a pound will go into the workers' pockets. The extra half-cent is intended to cover additional payroll taxes and administrative costs for tomato growers.

The 1-cent increase means that for every 32-pound bucket of tomatoes they pick, the workers will earn 77 cents, instead of 45 cents. That is a 71 percent increase, the first substantial one in decades for the workers. At the old wage, a farm workers' group said, the pickers typically earned $10,000 to $12,000 a year.

"If the Florida tomato industry is to be sustainable long term, it must become more socially responsible," said Amy Wagner, a senior vice president at Burger King....

In a statement, Burger King's chief executive, John W. Chidsey, said he was sorry for previous negative remarks directed toward an activist group that has fought on behalf of the pickers, the Coalition for Immokalee Workers. Immokalee is a town in southwest Florida where many of the farm workers live in decrepit shacks and trailers.

Mr. Chidsey praised the workers' organization as "being on the forefront of efforts to improve farm labor conditions, exposing abuses and driving socially responsible purchasing and work practices in the Florida tomato fields."

McDonalds and Yum Brands, the parent of Taco Bell, had already agreed to similar deals. But it remained unclear on Friday if workers would receive the pay increase, because Florida tomato growers had resisted it.

The Florida Tomato Growers Exchange, which represents 90 percent of the state's tomato growers, told The News-Press in Fort Myers, Fla., on Thursday that it was withdrawing its threat of imposing $100,000 fines on members who provided a penny-a-pound pay raise....

[anne]

http://www.nytimes.com/2006/11/21/us/21janitor.html?ex=1321765200&en=f139e42d0ca84d0a&ei=5090&partner=rssuserland&emc=rss&pagewanted=print

November 21, 2006

Cleaning Companies in Accord With Striking Houston Janitors
By STEVEN GREENHOUSE

Houston’s major cleaning companies and the union representing 5,300 janitors there announced a tentative contract yesterday that ends a monthlong strike, raises the workers’ hourly wages by nearly 50 percent over two years and provides them health coverage.

Under the three-year deal, the first for the janitors since they unionized last year, their pay, which now averages $5.25 an hour, will increase to $6.25 on Jan. 1, 2007; to $7.25 on Jan. 1, 2008; and to $7.75 on Jan. 1, 2009.

Further, the employers agreed to increase a janitor’s typical shift to six hours a day, from four. Many of the janitors had said they were being given too few hours of work to support their families.

As a result of the rise in both hourly pay and the hours in the workweek, the employees expect to see their paychecks double over the next couple of years.

“It’s a moment of great victory,” said Mercedes Herrera, a janitor for five years who earns $5.15 an hour. “We all came together, and the union gave us strength. Many of us have never received a raise. I’ve earned the same ever since I started, so the raise is great.”

D. Michael Linihan, the lawyer who negotiated for the Houston Area Service Contractors Association, said the five struck companies — ABM, GCA, OneSource, Pritchard and Sanitors — were pleased to have reached the agreement.

“Throughout this long process,” Mr. Linihan said, “we have worked diligently to do two things: one, to protect the interests of our customers, and secondly to ensure that our employees are treated fairly.”

The Service Employees International Union’s organizing of the janitors last year was hailed by the labor movement as a big victory. Not only was it one of the biggest unionization successes ever in the South, it overcame several other significant hurdles as well: most of the janitors were part-time employees, worked for subcontractors and were immigrants who spoke little English, and many were also illegal immigrants.

Despite that success, the efforts to negotiate a first contract deadlocked, and about one-third of the janitors went on strike on Oct. 23. The dispute became unusually rancorous. The union’s strategy was to pressure not just the cleaning companies but also large building owners, and more than 50 of the workers’ supporters were arrested in demonstrations, including sit-ins at the Chevron building and on the main boulevard in front of the Galleria mall.

In addition to the increase in pay, the agreement calls for the janitors to begin receiving individual health coverage, with the workers paying $20 a month in premiums toward it. Family health coverage will become available beginning Jan. 1, 2009, and will cost the workers $175 a month.

The accord also provides for many janitors to have paid days off for the first time. They are to receive six paid holidays and will be able to accrue paid vacation time....

[spencer]

2slugs-I've done as you suggest and looked at the relationship between teen employment and the minimum wage and I can not find the relationship you suggest is there. Actually, when I look at the relationship between teen employment and the real minimum wage I find a positive 0.2 correlation. On balance, the data you suggest looking at implies that there is a positive relationship between teen employment and the minimum wage.

[OhNoNotAgain]

"First hit will be teenagers. And you can go to the BLS site and see what happened to 16-19 year old employment immediately after the minimum wage was increased. Teenage unemployment increased even in those months when overall employment improved or was unchanged."

So, let's use a little logic here. Who, or what, made up the difference ? We know that teenagers are exclusively employeed as hourly employees, so where did those hours go ? I don't think Burger King and McDonalds started closing earlier. Is the idea then that businesses like these started cutting back on the number of people working there ? Personally, I find that hard to believe. These type of work environments really risk increasing turnover, which is already huge, if they put too much pressure on their employees, especially when they're teenagers. Teenagers usually have the ultimate wage bargaining chip - they can just quit and go back to bothering mom and dad for a couple of bucks. My guess ? I think that these businesses just ate the difference, for the most part.

[John]

Okay, according to standard economic theory, an employer should employ someone if the gain from adding that last person outweighs the cost of adding him -- wages, taxes, benefits, paperwork, etc.

Let's consider what I call the "Downsizing Marginal Function," assumed by many employers when they go into the downsizing mental state. If you can distribute the work of one worker around the rest of the employees, the marginal gain of employing him is zero. On the other hand, if you have too few employees doing the needed work, the marginal gain is some number M -- say M=$50 for a concrete number.

At the boundary (say a=20), some but not all of the last employee's work may be distributed to other employees. So his marginal gain is G a

Obviously, the only employee affected by the minimum wage, or any change thereof, is the ath (20th) employee. If G=$2, the minimum wage won't his employment -- he isn't employed.

If G=$42, he is employed regardless of the minimum wage.

If G=$12, the minimum wage might affect him and a change in the minimum wage might affect him.

Conclusion: a change in the minimum wage should have a minute direct effect in increasing unemployment.

[2slugbaits]

spencer,

We may be looking at two different types of data. I am looking at the effect on teenage employment, not the unemployment rate. In fact, in my earlier post I was pretty careful not to refer to the unemployment rate. Just looking at the seasonally adjusted numbers of people employed beginning Jun 07 (immediately before the minimum wage was changed):

Month.........Age > 19..........Age 16-19
Jun07.........140,120..............5968
Jul07.........140,116..............5930
Aug07.........140,101..............5653
Sep07.........140,365..............5895
Oct07.........140,101..............5914
Nov07.........140,814..............5832
Dec07.........140,410..............5801
Jan08.........140,524..............5724
Feb08.........140,312..............5681
Mar08.........140,252..............5717
Apr08.........140,408..............5923

The correlation is statistically insignificant (p=.715), but for what it's worth, it is negative at -0.124.

But the big point is that total teenage employment has never returned to its pre-midsummer level before the minimum wage took effect. And we're talking here in terms of the absolute number of teenage workers, not the teenage unemployment rate, which I believe can be a little dicey because the reservation wage for teenagers can be volatile. On the other hand, look at civilian employment age > 19. Here employment was generally above the midsummer 2007 level. All of this suggests that employers were doing exactly what we would expect them to do; viz., substitute teenage workers with adult workers. Great news for adults, bad news for teenagers. I think that's a fine policy outcome and one that I support.

[2slugbaits]

OhNoNotAgain,

Businesses had another option. They could look to hiring unskilled adult immigrants. Adults...even unskilled adults, are generally more reliable workers and employers usually have more leverage over adult workers precisely because adult workers can't quite and go bug mom and dad. That's why a raise in the minimum wage makes those marginal adult workers relatively more attractive than teenage workers. I think this is consistent with the conclusion of the paper Mark cited.

[anne]

No; the employment-minimum wage effect may be positive or negative, but there is too much about the labor market as a whole through the period that is not being recorded to know how to read this data. I am interested in a well-modeled study, but content to look away from the employment data to to effect of a minimum wage increase on the well-being of those who are employed.

[2slugbaits]

anne,

I am not opposed to the minimum wage. In fact, I supported the last increase. But I gave my support with eyes wide open knowing that the likely effect would be an increase in teenage unemployment. I think spencer can vouch for this because he and I discussed the issue over at AngryBear last summer. I see it as a tradeoff between increased teenage unemployment and an improvement in wages and employment for low income adults. For me that's an easy call. But we shouldn't fool ourselves into believing that we can continue to increase the minimum wage without bound and not expect some kind of negative impact on adult employment.

[anne]

2SB

"I am not opposed to the minimum wage. In fact, I supported the last increase. But I gave my support with eyes wide open knowing that the likely effect would be an increase in teenage unemployment."

Oh, I understood that and was not complaining about you in anyway. Rather, I am willing to allow for a negative job creation effect, should there be such an effect, for the sake of the benefits to the employed. The need then is to develop policy that will counter an negative job creation effect.

What I am complaining about is placing a worker in poor conditions and supposed making that up with the tax system or the earned income tax credit. Create a fair bond of obligations between employer and worker, and for that fair wages and benefits are necessary.

[anne]

There is a sense that what is inherent unfairness can be met always by modifying tax structure. Direct attempts at fairness are set aside, as with requiring vehicle efficiency improvements, with the idea that we will tax our way to fairness while fairness never comes by such indirection. Allow for workers to have fair wages and benefits and the employer-worker relation is changed inherently to be less exploitative.

There is the complaint.

[OhNoNotAgain]

"Businesses had another option. They could look to hiring unskilled adult immigrants. Adults...even unskilled adults, are generally more reliable workers and employers usually have more leverage over adult workers precisely because adult workers can't quite and go bug mom and dad."

It's certainly possible, and like you, I certainly welcome that as a positive thing. Adults that have families and other important responsibilities should certainly take precedence when it comes to jobs. Perhaps we're heading back to a time when adults actually worked at department stores, restaurants, etc. ?

[James Killus]

2slugbaits,

I'd also like very much to see an example of a State "going overboard" on setting its minimum wage. We always hear scare stories about what would happen at a $10, $20, or whatever minimum wage, but we never actually get to see the results. Would all the MacDonalds leave the State? Would this be a bad thing? Inquiring minds want to know.

What we do know is that no State has ever seemed to manage to produce even the glimmer of one of these harsh results. Which pretty strongly suggests that no one has ever really come close.

[2slugbaits]

James Killus,

We don't see many (if any) examples of state's going overboard. That's probably because there are enough competing forces within state legislatures to keep things in balance. One reason is that politicians (correctly) believe that pushing the minimum wage too high will increase adult unemployment. What concerns me is that politicians are apt to misread some of these studies on minimum wage and conclude that there is no relationship between the minimum wage and unemployment...as many on this blog seem to have concluded. That could relax any inhibitions against a too high minimum wage.

And I do hear many activists calling for minimum wages that are high enough to at least equal the federal poverty level, which would put the minimum wage well north of one of those scary numbers you cited.