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					                                       ANTHOLOGY
        Impacts of the Minimum Wage Increase on
                  Teenage Employment
                                        YU HSING
                              Southeastern Louisana University

The federal government recently approved an increase in the minimum wage from $4.25
to $4.75 effective on October 1, 1996 and $5.15 on September 1, 1997. Some estimated
that a total of 11.8 million workers may be affected directly or indirectly by the new
measure. There are pros and cons on the issue. Those who favour the increase argue
that during 1991-1996, the minimum wage had not been adjusted, while the inflation rate
went up by 16.4 percent. The old minimum wage made it difficult to raise a family. Those
who oppose the increase maintain that the increase in the minimum wage 21.2 percent
is too much for many small businesses to absorb. Some businesses may reduce fringe
benefits to accommodate the increase. High school dropout rates may rise due to the
more attractive wage rate. Prices of many items will increase eventually. Finally, it will
hurt the poor that the new law intends to protect. The literature is summarized by Brown
(JEL, 1982; JEP, 1988;), who indicates that teenage employment will decline by 1 to 3
percent if the minimum wage rises by 10 percent. Results reported by Neumark and
Wascher (ILRR, 1992) are consistent with Brown’s conclusion. However, based on more
recent data, Katz and Krueger (ILRR, 1992) and Card (ILRR, 1992) showed that
increases in the minimum wage have very little effect on teenage employment.
         In this study, teenage (aged 16-19) employment (TE) is determined by the real
minimum wage rate (MW), the unemployment rate of experienced workers (UR) as a
proxy for aggregate economic conditions, the percent of teenage population enrolled in
school (EN), a time trend (T), and lagged teenage employment for the possible partial
adjustment process, Economic theory suggests the TE varies negatively with MW, UR,
and EN and positively with the lagged TE. The sign of the time trend is uncertain, as it
may capture several other factors not included in the regression. The sample runs from
1959-94. Autocorrelation was tested and corrected. Estimated regression parameters
and t-rations in parentheses based on the double-log form are reported below. The
adjusted is 0.973 and all the coefficients are significant at the 5 or 1 percent level except
for that of EN.
         Major findings are that when the real minimum wage rises by 10 percent,
teenage employment would decline by about 2.05 percent in the short run (one year)
and 3.47 percent in the long run. In other words, the increase in the minimum wage from
$4.25 to $5.15 would reduce teenage employment by 0.185 million in the short run and
0.306 million in the long run, assuming the Consumer Price Index rises by 3 percent in
1996. Its overall impact is expected to be greater than the above estimates because of
the pressure to raise wages for other workers to reduce wage compression. However,
the adverse impact may be mitigated if the country continues to have a strong economy
and low unemployment rates.

TEt  1.790  0.205MWt  0.193URt  0,150 EN t  0.112T  0.00068T 2  0.409TEt 1.
       (1.294)(-1.963)  (-5.587) (-1.035)        (2.341) (-2.241)     (3.104)

				
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posted:11/26/2011
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