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JAMES FRANCIS MCCARLEY
1970

 

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574 LIBRARY

WM Michigan State
University

 

This is to certify that the

thesis entitled
THE EFFECTS OF INCREASES IN THE
FEDERAL MINIMUM WAGE 0N SELECTED

INDUSTRY LABOR MARKETS FOR THE
I 96%?9s3enfe'3‘ LSD

JAMES FRANCIS MCCARLEY

has been accepted towards fulfillment
of the requirements for I

PH.D. degree in ECONOMICS I

  
   

Major professor

May 8, I970

Date _____.___

0-169
I

 

 

 

ABSTRACT

THE EFFECTS OF INCREASES IN THE
FEDERAL MINIMUM WAGE ON SELECTED
INDUSTRY LABOR MARKETS FOR THE 1960-63 PERIOD

By
James Francis McCarley

Since the enactment of the Fair Labor Standards Act
of 1938, economic literature has been filled with studies
attempting to determine its impact on employment. These
studies have been undertaken by both the Department of Labor
and independent investigators. In general, they have used
a static-tabular approach in their analysis.

The Department of Labor studies have been interpreted
as indicating that increases in the statuatory minimum have
had negligable, and in some cases, even positive effects
on employment. These results have been rationalized by some
economists on the grounds that wage costs are not an impor-
tant consideration to firms or that existing unskilled
.labor suddenly became more efficient.

Critics of the Department of Labor studies maintain
that the unorthodox conclusions result from a failure to
consider changes in exogenous variables and to employ ade-

quate statistical procedures. The independent investigators,

James Francis McCarley

however, have often been guilty of the same criticisms
raised against the Department of Labor.

To overcome these shortcomings we have attempted in
this study to specify a model which was subject to inferene
tial tests. To accomplish this task, a model was developed
to explain desired and equilibrium levels of industry employ-
ment, and from it a reduced form expression was obtained.
Because incomplete adjustment to equilibrium levels of
industry employment may occur, a stock adjustment model was
introduced. A reduced form expression for the observed
level of industry employment as a function of the minimum
wage, the average wage rate in the industry, a trend vari-
able, and the lagged observed level of industry employment
was then obtained.

The final form of the model developed was used to
estimate the impact from increasing the federal minimum
wage on selected high and low wage SIC three digit manu-
facturing industries for the 1960-63 period. Both ordinary
least squares and ZEF estimation procedures were used,
with and without log conversions. In each case the results

were theoretically consistent.

THE EFFECTS OF INCREASES IN THE
FEDERAL MINIMUM WAGE ON SELECTED
INDUSTRY LABOR MARKETS FOR THE 1960-63 PERIOD

By

James Francis McCarley

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Economics

1970

ACKNOWLEDGEMENTS

As with most research, this thesis has been a cooper-
ative endeavor. Many individuals have been influential at
various stages in its development.

I am particularly indebted to my committee chairman,
Professor John P. Henderson, who has given endlessly of his
time. His assistance and encouragement were both needed
and welcomed. But more than this, he has been a significant
influence to a generation of graduate students through his
roles as a teacher, counselor and friend.

I would also like to thank Professor Jan Kmenta for
his patience and helpful suggestions in the preparation of
this dissertation. His comments were always penetrating
and useful. Even more, however, his standards of research
stand as a goal for future work.

Professor Roy F. Gilbert has also given generously of
his time. His assistance in programming, word by word
evaluation and other helpful comments were invaluable.

Professor Bruce T. Allen also added a great deal to
this effort through his editorial assistance and useful
comments.

In addition, I would like to thank my wife, Judy, who
typed the many rough drafts, and Ann Brown and her excellent

staff of typists who are responsible for this presentation.

11

Finally, I would like to acknowledge my indebtedness to

Tracy W. Murray for his assistance in programming.

111

TABLE OF CONTENTS

ACKNOWLEDGMENTS. . . . . .
[IST OF TABLES . . . . . . . . . . .
LIE ‘T OF FIGURES. . . I
Chapter
I. INTRODUCTION . . . . . . . . . .
I. Review of Impact Studies. .

Studies Following the FLSA of 1938..
Studies Following the 1949 Amendment
to the FLSA . . . . . . .
Studies Following the 1955 Amendment
to the FLSA . . . . . . . .
Studies Following the 1961 Amendment
of the FLSA . . .
Summary and Evaluation .of Studies .
II. The Present Study.

11. THE MODEL

Introduction . . . . .
Equilibrium Levels of Employment .
Partial Adjustments to Equilibrium Levels
of Employment in Industry Labor Markets.
Summary and the Final Form of the Model

III. THE EMPIRICAL STUDY

Introduction , . . . . . .
The Empirical Model. .

The Selection of Industries and the Data.
The Estimation Procedure . . . . . .

The Results . . . . .
Some Implications of the Results . .
Summary. . . . . . . . . . . .

iv

Page
ii
vi

vii

O\UOL/O

12
18
23

23
23

3O
32

3A
34

35
37
38
Al
“3

Chapter Page

IV. CONCLUDING REMARKS . . . . . . . . . MU
BIBLIOGRAPHY. . . . . . . . . . . . . . “8
APPENDIX A . . . . . . . . . . . . . . 56

Table

3.1.

A.3.

LIST OF TABLES

Changes in Industrial Production Indexes,
Selected Manufacturers, l9U9-6u . . .

ZEF Results From Estimating Equation
(3.1) O o o o o o o o o 0

Ordinary Least Squares Results From Estimat-
ing Equation (3.1). . . . . . . .

Ordinary Least Squares Results From Estimat-
ing Equation (3.1) (In Ln)

ZEF Results From Estimating Equation
(3.1) (In Ln) . . . . .

vi

Page

19

NO

57

58

59

LIST OF FIGURES

Figure Page

1.]. Industry Labor Markets (Unskilled Labor). . 21

vii

CHAPTER I
INTRODUCTION

In 1938 the Congress passed the Fair Labor Standards
act to eliminate poverty resulting from substandard wages,
to maintain purchasing power at sufficiently high levels
to insure full employment, to prevent downward wage spirals
during periods of falling aggregate demand, and to foster
fair methods of competition.1 To accomplish these goals,
the 1938 Act established a minimum hourly rate for all
industries engaged in interstate commerce of 25 cents between
October 2M, 1938 and October 23, 1939, and provided for an
additional increase to 30 cents an hour beginning October
2“, 1938.2 It also provided that by October 2“, 19H5 the
minimum rate for all industries covered by the Act would
be increased to A0 cents an hour.3 The minimum rate, how-
ever, could be raised to #0 cents an hour for some indus-

tries before the 19A5 deadline, after appropriate testimony

 

1Donald E. Cullen, "Minimum Wage Laws," New York State
School of Industrial and Labor Relations, Bulletin “3,
(Ithaca, N. Y.: 'Cornell University, February, 1961), p. 3.

2U. S., Statutes at Lar e, Vol. LII (1938), "Fair
Labor Standards Act of I938," June 25, 1938, ch. 676, sec. 6,
p. 1062.

31bid.

before industry committees, by the Administrator of the
Wage and Hour Division of the Department of Labor, pro-
viding such increases did not substantially reduce employ-
ment or give a competitive advantage to a particular group.
Subsequent amendments to the Fair Labor Standards Act
of 1938 increased the minimum hourly rate to 75 cents on
January 25, 19505 and to $1.00 an hour on March 1, 1956.6
In addition, the minimum rate was raised to $1.15 an hour
on September 3, 1961 on those occupations previously covered
and to $1.00 on those employments then included under the
Act.7 In September of 1963 the minimum rate was again
increased to $1.25 an hour on previously covered Jobs and
to $1.15 an hour on those occupations initially covered
in 1956.8 The most recent extension of the minimum wage
raised the minimum hourly rate to $1.40 on February 1, 1967
and provided for an additional increase to $1.60 an hour

on February 1, 1968.9 In addition the 1966 amendments

 

”Ibid., sec. 8, p. 106A.

50.3., Statutes at Large, Vol. LXIII, pt. 1 (19u9),
"Fair Labor Standards Amendments of 19A9," Oct. 26, 19A9,
ch. 736, sec. 6, p. 912 and Ibid., sec. 16, p. 920.

6U.S., Statutes at Lar e, Vol. LXIX (1955), "Fair
Labor Standards Amendments 0 1955." Aug. 12, 1955, ch.
867, sec. 3, p. 711.

70.3., Statutes at Large, Vol. Lxxv (1961), "Fair
Labor Standards Amendments 0 1961," May 5, 1961, Pub. L.
87-30, 880. 5’ p. 67.

8Ibid.

90.3., Statutes at Lar e, Vol. Lxxx, pt. 1, (1966),
"Fair Labor Standards Amen ments of 1966," Sept. 23, 1966,
Pub. L. 89-601, sec. 301, p. 8381.

 

provided for a minimum hourly rate of $1.00 for those indus-

tries that were not previously covered by the Act.10

I. Review of Impact Studies

 

Following the enactment of the Fair Labor Standards
Act and its subsequent extensions, a great deal of contro-
versy arose regarding the effect of establishing wage rates
at levels different than those determined by the market.
As a result of this controversy various industry studies
were undertaken to determine the impact of such action after
the passage of the original Act and each of its amended

forms.

Studies Followingthe FLSA of 1938
H. M. Douty analyzed the impact of establishing a
minimum wage in the seamless hosiery industry from Septem-

ber, 1938 to September, 19%.11

The study was composed of
two samples: the first related the effect of the wage
change on all the firms in the industry in 1938 and 19A0,
and the second compared 91 plants which were included in
the Bureau of Labor Statistics surveys of 1938 and 19A0,
and still in business in 19140.12 The establishment of

these minima had a decided upward push on wages in the

 

lolbid,, sec. 302-303, p. 838-839.

11H. M. Douty, "Minimum Wage Regulation in the Seam-
less Hosiery Industry," Southern Economic Journal, Vol. VIII,
(October, 19u1), p. 176.

12Ibid., p. 179.

industry increasing average hourly earnings from 35.1 cents
to ”1.3 cents between 1938 and 191m.13 The effect of estab-
lishing a minimum wage in this industry varied greatly among

1” or the 91

plants with widely separated wage levels.
plants included in both the 1938 and 1940 surveys there was
a 3.9 per cent reduction in employment.15 When all plants
in the survey were considered the average decline in employ-
ment was greatest for those plants which were paying

average wages below the 32.5 cent average for the industry
in 1938.16 This largely explains the narrowing of average

wage rates between the North and the South17

and the larger
decreases in employment in the South as opposed to those

in the North (employment decreased by 5.5 per cent in the
South and increased by 5.0 per cent in northern plants).18
In those southern plants where average hourly rates were
32.5 cents, employment also increased.19 This study did
not indicate that minimum wages resulted in the dislocation

of employment because of plant failures, although some

 

131b1d. luIbid., p. 182.
15Ibid., p. 183. 16Ibid.

l71b1d., p. 179.

18Ibid., p. 18“. Conclusions similar to these were
also reacfied by: J. F. Maloney, "Some Effects of the
Federal Fair Labor Standards Act Upon Southern Industry,
Southern Economic Journal, Vol. 9, (July, 19A2), pp. 15-23.

19

 

Douty, loc. cit. ‘

transfer of workers from low to high wage firms did occur.20

While total employment for the industry did not appear to
be significantly affected, Douty does suggest that there
may have been some improvements in managerial performance
and a substitution of new machinery for old.21
A second study utilizing the 1938 and 19AO surveys
of 97 plants in the seamless hosiery industry attempts to
determine the effect of the minimum wage on employment in
the low wage mills between October, 1938 and September,
1939.22 This investigation divides the sample into three
groups: the first paying average hourly earnings of less
than 25 cents before October 24, 1938, the second paying
average hourly earnings between 25 cents and 27.5 cents
and the third paying average hourly earnings between 29
cents and 35.5 cents.23 After the imposition of the 25
cent minimum the average hourly earnings for all three
groups increased with the largest increase occurring in
those plants included in Group 1.2“ The Group I plants,
however, experienced significant decreases in both the

number employed and man-hours worked while both of these

factors either remained constant or increased for the

..< ~

/’”"'-—~\
201bid., p. 186. “ €}1Q1a.

22A. F. Hinrichs, "Effects of the 25-cent Minimum
Wage on Employment in the Seamless Hosiery Industry,"
Journal of the American Statistical Association, Vol. XXXV
(March, 1940), p. 13.

 

/i§3Ihid., p. 15. 2”Ibid., p. 17.

Group II and Group III plants.25 In addition to the wage
and employment adjustments which occurred in the low wage
mills there were changes in production methods from those
that were labor intensive to those that were capital

26

intensive.
Studies Following the 1949
Amendment to the FLSA

The effect of the l9U9 amendment to the Fair Labor
Standards Act on southern sawmills, fertilizer, men's dress
shirts and nightwear, men's seamless hosiery, and wood
furniture industries was analyzed by the Bureau of Labor
Statistics for the payroll periods just before and after
the Act became effective.27 In each of these five indus-
tries a substantial number of employees were earning less

than 75 cents an hour in 1919.28

Examination of payroll
records after the new Act became effective indicated adjust-
ments in average earnings higher than necessary to comply
with the new minimum, a narrowing of wage rates paid by
firms in these industries, and a narrowing of occupational
wage differentials in those industries paying their employ-

29 The investigation did not, however,

ees by piece rate.
indicate any significant nonwage adjustments in the five

industries surveyed.30 The change in capital expenditures

 

25Ibid., p. 19. 26Ibid., p. 22-23.

vZIH. S. Kantor, "Economic Effects of the Minimum
Wage,g Monthlijabor Review, Vol. LXXVIII (March, 1955),
p. 30 .

28

 

Ibid. 291bid., p. 309. 3°Ibid.A

and hours worked did not significantly change for the

short period considered except in the fertilizer and saw-
milling industries where the trend toward mechanization

was continued.31 Additional surveys made for high wage and
low wage covered and noncovered industries for the period
1938 to 1951 did, however, indicate increases in average
hourly earnings of 121 per cent for the first group, 171
per cent for the second group and 125 per cent for the

32

third group. It was also concluded from these later
studies that the effect from establishing wage minima was
not only to increase but to substantially maintain the
relative improvements in earnings for those workers affected

33

by the minimum wage increase.

Studies Following the 1955
Amendment of the FLSA

 

 

The effect of raising the minimum wage from 75 cents
to $1.00 an hour was investigated by the Department of
Labor for selected low-wage industries. These studies
attempted to determine the impact from increasing the
minimum wage on nonseasonal and seasonal industries as
well as any diffusive effects it might have. They all
utilized payroll surveys taken by the Bureau of Labor
Statistics prior to and following the effective date of

the 1955 amendment.

 

3lIbid.
32Ibid., p. 311.
331bid.

Nonseasonal industries.--The effect of the 1955 amend-

 

ment on the cigars, fertilizer, seamless hosiery, and

wooden containers industries was examined by the Bureau of
Labor Statistics for the August, 1955, February and April
1956, and April, 1957 payroll periods.3u The initial impact
on these industries followed the same pattern as in pre-

35 i.e.

vious studies, , average hourly earnings in each
industry increased, a larger proportion of workers just
earned the new minimum compared to those that had pre-
viously earned the 75 cent minimum, and a narrowing of the
dispersion of average hourly earnings.36 Most of these
changes occurred on the date the new amendment became
effective.37 Analysis of subsequent payroll periods,
however, indicated that the wage structure in these indus-
tries restored itself with the degree of restoration vary-
ing widely in each industry.38
Employment for the five industries decreased by
slightly over A per cent between August 1955 and April
1956, and by more than 8 per cent between April 1956 and

April 1957.39 Total employment between the 1955 and 1957

 

3“N. J. Samuels, "Effects of the $1 Minimum Wage in
Five Industries," Monthly Labor Review, Vol. LXXXI (May,
1958), P. “92.

35N. J. Samuels, "Effects of the $1 Minimum Wage in
Seven Industries," Part 1, Monthly Labor Review, Vol. LXXX
(March, 1957), pp. 323-28 and Part II, Monthly Labor Review,
Vol. LXXX (April, 1957). pp. uul-u6.

36

 

 

Samuels, loc. cit.

371bid., p. A93.

payroll periods declined between 6 per cent and 15 per

cent for those industries studied.LIO Some of this decline
was attributed to changes in factors such as product demand,
rather than from cost increases resulting from the higher
minimum.ul Other studies conducted by the Bureau of Labor
Statistics found that only about 15 per cent of the report-
ing firms attributed the discharge of employees to the

$1.00 an hour minimum, with the most widely used adjust-

ment being increased expenditures for machinery and equip—

ment.

Seasonal industries.—eThe payroll surveys in the

 

fruit and vegetable canning and freezing, raw cane sugar
manufacturing, and tobacco stemming and redrying indus-
tries, which are composed of a generally transitory unskilled
work force, were taken at peak employment periods in 1955

and 1956.“3 The effect on earnings and employment in

these industries again followed patterns similar to those

in other low wage industries. There was an immediate
increase in the wage level, a greater concentration of

workers at the new minimum and a substantial reduction in

 

uolbid. ulIbid., p. 49A.
“2

N. J. Samuels, "Plant Adjustments to the $1 Minimum
Wage,"8MonthlyLabor Review, Vol. LXXXI (October, 1958),
p. 113 .

 

“3N. J. Samuels, "Effects of the $1 Minimum Wage in
Three Seasonal Industries," Monthly Labor Review, Vol..
LXXX (September, 1957), p. 1087.

lO

occupational and geographic wage differentials.uu Employ-
ment decreased by 12.5 per cent in rawcxnuesugar manufact-
uring and by 11.3 per cent in fruit and vegetable canning
and freezing, but increased by 1.6 per cent in tobacco stem-

45 The total employment for all three

ming and redrying.
industries fell by 3.5 per cent between the 1955 and 1956
period.I46 The variations in employment in the raw cane
sugar manufacturing was attributed to obsolescence of exist—
ing plants which made them unprofitable and necessitated
some of them closing.“7 It was believed, however, that in
tobacco stemming and redrying normal fluctuations in employ-
ment could have accounted for the 1.6 per cent increase in

48

employment recorded.

Diffusive effects.—-Area studies were conducted using

 

payroll data which divided industries into groups subject
to the $1.00 an hour minimum and those not covered by the
1955 amendment. In these studies the average pay levels
between the subject and nonsubject industries widened when
the new minimum became effective and narrowed in the
following year, but remained wider in April 1957 than in
February, 1956.“9 A comparison of the April 1957 payroll

period with the June 1959 payroll period indicated no clear

 

“I912. uSIbid., Table I, p. 1088.
u6Ibid. "7333., p. 1090. u81bid., p. 1091,

 

”9L. Badenhoop, "Effects of the $1 Minimum Wage in
Seven Areas," Monthly Labor Review, Vol. LXXXI (July, 1958),

p. 737.

 

ll

pattern of change in relative wage differentials between

50 Comparing the firms

covered and noncovered'industries.
which were required to adjust with those that were not it
was found that the adjusting firms increased production
more, introduced more machinery, increased efficiency at
a faster rate, and utilized opportunities to reduce over-
time more than did firms not facing an adjustment mandate.51
In most cases it was believed that wage and nonwage adjust-
ments were made with little or no general effect on
employment.52
M. R. Colberg, utilizing data for 517 manufacturing
plants, compared the impact of the $1.00 an hour minimum
on high and low wage Florida counties.53 During the four
month period between January and April 1956 the new legal
minimum had only a slight effect on man-hours worked in
high wage counties but a very substantial dimunitive effect
54

in the low wage group. From January 1956 to January 1957,

however, man-hours worked increased 5.1 per cent for the

 

50H. Schaffer, "Effects of the $1 Minimum Wage in
Siqufieas," Monthly Labor Review, Vol. LXXXIII (May, 1960),
D. 7 .

51p. A. Brinker, "The $1 Minimum Wage Impact of
Fifteen Oklahoma Industries," Monthly Labor Review, Vol.
LXXX, (September, 1957), p. 1092.

52

 

Ibid., p. 1092 and Badenhoop, loc. cit.

53M. R. Colberg, "Minimum Wage Effects on Florida's
Economic Development," Journal of Law and Economics, Vol.
III, (October, 1960), pp. 106-117.

5"Ibld., p. 113.

high wage counties and decreased by less than 1 per cent

55

in the low wage group. The increase in employment in the

high wage counties was largely attributed to increases in
product demand during this period.56 In the low wage group
it was felt that the small decline in employment was due

to a movement toward a better quality of worker and an
attempt to utilize these workers more effectively during

57

seasonal peaks. The decreases in employment were found

to be greater the larger the required increase in the wage

58

rates. Colberg attributes part of the decline in popu-

lation in the low—wage counties to a lack of employment
opportunities resulting from the $1.00 an hour minimum

59

wage.

Studies Following the 1961
Amendment of the FLSA

 

 

The 1961 amendment to the Fair Labor Standards Act

initially increased the minimum rate from $1.00 to $1.15

an hour and extended its coverage mainly to workers in the
retail and construction industries at $1.00 an hour. At a
later date it raised the $1.15 an hour rate to $1.25 and

the $1.00 an hour rate to $1.15. To determine the impact

of these changes the Department of Labor conducted a nation—
wide survey of the retail trade and selected surveys for
non—metropolitan areas in the North Central and southern

regions and small metropolitan areas of the South.

 

551biu., p. 113. 561818., Table 3, p. 112.

58

571bid. Ibid. 591bid., p. 116.

13

The surveys conducted between 1960 and 1962 indicated
no general upward pressure on the wage structure resulting
from increases in the statutory minimum.60 The wage
effects that did occur were generally confined to those
increases necessary to bring the wages of covered workers
to the new minimum level.61 The greatest impact occurred
in the non-metropolitan areas of the South where “A per
cent of the workers in the wholesale trade and 27 per cent
of those in manufacturing received the wage increases
necessary to bring their hourly earnings to $1.15.62 In
some low wage areas employees earning $1.15 an hour or
slightly higher did receive wage increases but there was
no consistent pattern to these increases.63 In addition,
workers in noncovered industries did not benefit from the
changes that occurred in subject industries, except for
food service workers in newly covered retail stores.6u

Further studies that were conducted indicated that
not only did unemployment decrease between 1961 and 1965

but that employment increased at a faster rate and to a

greater extent among the less skilled groups in the society

 

6OU.S. Department of Labor, Wage and Hour and Public
Contracts Division, Report Submitted to the Congress in
Accordance with the Requirements of Section A (d) of the
Fair Labor Standards Act, (Washington: Government Printing
Office, January 19637, p. 111.

61Ibid.

62Ibid., p. v.
63

6“Ibid.

Ibid., p. iii.

1“

during this period.65 Other studies that included 3A areas
in the North Central and southern nonmetropolitan areas,

as well as metropolitan localities in the South, indicated
that in 25 areas employment increased, in eight areas
employment decreased and in one area there was no change.66
In the 25 areas Showing employment advances 15 had increases
of 15 per cent or more, and in the eight areas where employ—
ment declined the percentage of decline was six per cent

67

or less. These studies maintained that there was no

reason to believe employment increases would have been any
larger if the minimum wage had not been raised or extended.68
In general, the conclusions reached were that the 1961
amendment did not result in employment decreases, inflation,
a retardation of economic development or smaller profits.69
The Department of Labor also conducted a nationwide
survey of the impact of the new wage minima on the retail
trade for the June 1965 payroll period, which was nine

months after the $1.15 an hour edict became effective for

this sector. This study followed previous surveys which

 

65U.S. Department of Labor, Wage and Hour and Public
Contracts Division, Minimum Wage and Maximum Hour Standards
Under the Fair Labor Standards Act - An Evaluation and
Ap risal, (Washington: Government Printing Office, January
19%55, p- 7.

66Ibid.
67

Ibid., pp. 7-8.
68Ibid., p. 7.
69

Ibid., p. 10.

15

were made in June 1961, which was one month after the $1.00
an hour minimum became effective, and in June 1962 which

70

was nine months after its effective date. In this case

about 70 per cent of the employees were at the new minimum.71
Employers, however, seemed to anticipate the $1.25 an hour
minimum which was to become effective in three months since
more workers were concentrated at this rate than at the
$1.15 an hour level.72 The greatest proportional effects
on employee earnings occurred in the nonmetropolitan areas

73

and in the southern regions. In the noncovered portions
of the retail trade the proportion of workers earning less
than $1.25 an hour was reduced by 33 1/3 per cent since the
June 1962 study.714 Employment levels were higher for all
regions surveyed after the introduction of each of the

75 Much of the employment decline which occurred

minima.
in nonmetropolitan areas was thought to be due to a statis-
tical reclassification of these areas resulting from popu-
lation growth.76 In the various retail lines employment

decreases were greatest in the limited price variety stores

where the decline in employment levels more than offset

the increases that occurred after the $1.00 an hour minimum

 

70U. S. Department of Labor, Wage and Hour and Public
Contracts Division, Studies of the Effects of the Minimum
Wage and Maximum Hour Standards of the Fair Labor Standards
Agt_in the Retail Trade, (Washington: Government Printing
Office, January, 1966), p. 1.

 

71Ibid., p. 3. 72Ibid. 73Ibid.
7u1bid. 75Ibid., p. u. 76Ibid.

16

became effective.77 In the noncovered segments of the retail

trade sector, employment levels increased during each of the
78

periods surveyed.

:Summary and Evaluation of Studies

The investigations of the Department of Labor on the
inmact of various minimum wages found (1) an increase in
Eiverage hourly earnings, (2) a narrowing of occupational and
ggeographic wage differentials, (3) some diffusive effects
taut no consistent pattern to their change, (A) some concen-
txration of workers' average hourly earnings at the new
rninimum, or its anticipated level, (5) some, but not complete,
Iwestoration of prior wage differentials over longer periods
811d (6) only slight increases or decreases in employment.

The conclusions of these studies regarding the effects

Orl employment from increasing wage rates by imposing mini-

InLun wages have been challenged by several authors.79 In

Igenneral, it is the contention of this group that labor

k

77Ibid. 78Ibid.

79Note for example the following studies: Yale
Brnozen, "Minimum Wage Rates and Household Workers," The
:lgugrnal of Law and Economics, Vol. 5, (October, 1962I:_pp.
lCJ3-109; M. R. Colberg, pp, 912:, pp. 106-116; David E.
K£Iun, "Minimum Wages, Factor Substitution and the Marginal
PI‘oducer," Quarterly Journal of Economics, Vol. 79, (August,
14965), pp. H78-E86; G. Macesich and C. T. Stewart, "Recent
Department of Labor Studies of Minimum Wage Effects,"
§£authern Economic Journal, Vol. 26, (April, 1960), pp. 281-
2590; J. M. Peterson, "Employment Effects of Minimum Wages,
1938-50," Journal of Political Economy, Vol. 65, (October,
1957), pp. 512-30 and C. P. Sawaya,_"The Employment Effects
01‘ Minimum Wage Regulation in the Southern Pine Lumber
Irldustry," (unpublished Doctoral dissertation, University

‘3? Indiana, June 1958).

l7

markets are substantially competitive in nature and that
wage increases through statutory means must therefore result
in unemployment in the low wage groups. If unemployment is
not apparent they feel that it must either have been off-
set by changes in exogenous variable or hidden by con-
sidering only gross changes in employment. A further con-
tention seems to be that the statistical analysis utilized
.is sufficiently unsophisticated as to neither preclude nor
(zonclude the results derived from the above studies.

Other authors, however, believe that the results
(obtained from the Department of Labor studies are substan—
t:ially valid. They contend that statutory increases do
ntDt cause unemployment either because (1) wage costs are
DIDL an important consideration to non—profit maximizing
llirmm8o or (2) that existing factors suddenly become more

(Efficient and therefore do not necessitate changes in the

filrmfls factor mix.81 It is the belief of these authors

x

80Richard A. Lester, "Shortcomings of Marginal Anal-
yESIS for Wage—Employment Problems," American Economic
Heaview, (March, 19A6), p. 76. Professor Machlup in an
arrticle rebutting Lester and other anti-marginalists con-
teuaded their failure to see the applicability of marginal
armalysis was often due to a lack of full insight into the
thueory itself, to the utilization of inappropriate research
tEéchniques, or to an inability to interpret correctly the
ITEsults of their investigations. He concluded that Lester's
Stdady has neither discredited or disproved orthodox theory
01‘ the firm. Fritz Machlup, "Marginal Analysis and Empir—
110aa1 Research," American EconomictReview, Vol. XXXVI, No.
“, Pt. 1, (September, 1936), pp. 519-5u.

3 81Lloyd G. Reynolds, Labor Economics and Labor
Ewélations, (New York: Prentice-Hall, Inc., 1956), p. 661.

\w

 

18

that the assumption of a competitive model is invalid and

that orthodox theory is generally inept in this instance.

II. The Present Study

 

The studies previously discussed in this chapter
have typically assumed that industry labor markets were in
equilibrium prior to an increase in the minimum wage. Since
the demand for labor is a derived demand, this assumption
implies that industry product markets were also in equili—
brium during these periods. An indication that this con-
tention may not be valid can be seen in Table 1.1 which
shows changes in the Federal Reserve Board Index of pro-
duction activity for selected manufacturers. During the
periods of the 1950, 1956 and the 1963 increases of the
federal minimum wage, aggregate output was in general expand-
ing for each of these industry classifications. For the
1961 change in the minimum wage, however, production activity
was declining for most industry groups.

Under the above conditions the impact of the minimum
wage need not lead to a decrease in equilibrium levels of
employment. Since manufacturing industries were already
expanding employment in an attempt to increase output, it
is possible that the equilibrium level of industry employ-
ment could increase, decrease, or remain constant after the
increase in the federal minimum.

The disemploying effects of an increase in the mini-

mum wage may, however, still be present. They result

19

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20

because the equilibrium level of output that would have
maximized profits of the firms in the industry before the
minimum was raised may be greater than the level of employ-
ment after the increase in the federal minimum.

These disemploying effects of an increase in the
minimum wage on unskilled labor can be illustrated in

Figure 1.1 where N is the equilibrium level of employment

1
at the present level of the minimum wage, Wm, in the industry
labor market. The period of expansion in the industry can
be represented in this graph by a shift in the demand curve

for unskilled labor from D to D’. With this increase in

J J
the demand for unskilled labor the new profit maximizing
&
level of employment in the industry would be N2 at the

wage rate Wm. An increase in the minimum wage to W$ at this

point would cause this industry to employ N units of labor

2
0
instead of the level N2. The effect of an increase in the
federal minimum would, therefore, cause a decrease in the

r
potential level of employment by the quantity N2 — N2.

The magnitude of this decrease will depend upon the elas~
ticity of the demand function for unskilled labor in the
industry.

The above analysis is used in the present study, but
it is modified because data is only available for observed
levels of total industry employment. The total employment,
however, may be interpreted as the sum of the unskilled

and skilled levels of industry employment. A model to

21

Wage
Rate

Wt \\\\\
m

b——_—-

N N N* Labor/t

 

Figure l.1.--Industry Labor Markets (Unskilled Labor).

establish profit maximizing or equilibrium levels of each
type of labor can be developed and a reduced form expres-
sion for the total equilibrium level of industry employ-
ment obtained. Because of incomplete adjustment, the
equilibrium level of industry employment are in general
unobservable. An expression.for the observed level of

industry employment is, therefore, derived.

The final form of the model developed is applied to
selected high and low wage SIC three digit manufacturing
industries for the 1960—63 period. Both ordinary least

squares and Zellner's two stage Aitken's estimation proce-

dures are used. The hypothesis to be tested is that the

minimum wage increases may have reduced observed levels of

industry employment.

CHAPTER II

THE MODEL

Introduction

 

In this chapter we examine the effect of minimum wage
increases on an industry's equilibrium level of employment.
First, a model is developed to explain the determination
of profit maximizing levels of employment for an individ-
ual firm. The aggregate equilibrium level of employment
is then obtained by summing these quantities over the
individual firms. A stock adjustment model is then intro-
duced to allow for the possibility that industry labor
markets do not instantaneously adjust to their desired
levels of employment. The final form of this model is used

in Chapter III to test the central hypothesis of this study.

Equilibrium Levels of Emplgyment

For the period of this study the following assump-
tions will be made: 1) the firms in each industry are
rational economic units that have sufficient knowledge
of their cost and revenue data to maximize profits; 2) the
firms' production functions are multivariable with first
derivatives that are positive and monotonically decreas—
ing over the relevant range of input quantities; 3) tech-

nology is constant; A) product demand is a function of and

23

2U

varies inversely with product prices; 5) the industry
supply functions of labor are perfectly elastic; and 6)
unskilled labor operates at the minimum wage rate and
skilled labor at the skilled rate.

The equilibrium level of employment for the 12$
firm in a typical industry can be determined, given the
above assumptions, once the product demand, productiOn and
profit functions for the firms have been specified. Assume

that these functions for the ER firm have the following

 

 

 

 

 

 

form:
Xi,t = X<nl,i,t’n2,i,t) (production function) (2.1)

3X 8X 32X > 0

3 .9
an1,i,t 3“2,i,t 3n1,i,tan2,i,t
2 2
and an 33% an 38% < 0
1,1,t l,i,t 2,i,t 2,i,t

(i = 1,9,3, In)
(t = 1,2,3, . . . ,m)
pi t - P(xi t,t) (product demand function) (2.2)

’ 3

GP
< O

Bxi,t
"l,t - Xi,tpi,t ‘ wl,t“1,i,t ‘ w2,tn2,i,t ’ fi,t (2'3)

 

t.-

 

 

25

where the arguments are defined in the following way:

xi t = the output of the 122 firm in a typical industry
’ during period t.
pi t = the output price of the iEE-firm in a typical
’ industry during period t.
“1 t = the profits of the 1E2 firm in a typical
’ industry during period t.
n1 1 t = the input of unskilled labor by the i25 firm
’ ’ in a typical industry during period t.
n2 1 t = the input of skilled labor by the 139 firm in
3 3

a typical industry during period t.

t = a trend variable which represents autonomously
induced shifts in the firm's product demand
functions.

f1 t = the fixed costs of the iEll firm in a typical
’ industry during period t.

wl t = the level of the federal minimum wage during
’ period t.

w2 t = the skilled wage rate in a typical industry
' 3

during period t.
The equilibrium and profit maximizing levels of
employment are obtained from the first order conditions for
profit maximization. Setting the first partial derivatives
of the profit function with respect to each type of labor

equal to zero, we obtain the following:

 

--*——-.n1 t = xi .{ a” I.” + 15- ---—.. 5‘: I <2-I>
1,i,t ’ i,t l,i,t 1,i,t
+ P 8X — w - 0

26

 

and
a”i,t P ax 8P 6t
3n = x1 t{ ax an +‘FE 6n } ' (2'5)
2,i,t ’ i,t 2,i,t 2,i,t
ax
+ p ——————— - w — O
3n2,i,t 2,t

From these two profit maximizing equations, the pro-
duction function and the demand equation, we can derive
reduce form expressions for the equilibrium quantities of
unskilled and skilled labor. Both the quantity of unskilled
and skilled labor depend only upon the predetermined vari-

ables w and t. These reduced form equations can

1,t w2,t

be written as:

n1,i,t = N1 (w1,t,w2’t,t) (2.6)
and
“2,1,t = N2 (wl,t’w2,t’t) (2'7)

The equilibrium levels of unskilled and skilled labor
can now be derived for a particular industry by summing
over the profit maximizing levels of nl,i,t and n2,i,t for
the various firms in that industry. If there are n firms
in the industry the equilibrium levels of each type of

employment can be expressed as follows:

27

n *

“1,t = §=l n1,i,t = N1 (wl,t’w2,t’t) (2.8)
(i=l,2,3, . . . ,n)

* _ n _ N* (

n2,t ‘ §=l n2,1,t ‘ 2 (wl,t’w2,t’t) 2'9)
* r

where nl t and n2 t are equilibrium quantities of unskilled

3 3

and skilled labor desired by firms in a typical industry
during period t. The other arguments have the same meaning
as before.

The exact mathematical form of equations (2.8) and
(2.9) are unknown. As is well known, however, a wide class
of functions can be closely approximated by a linear func-
tion.82 Therefore, equations (2.8) and (2.9) will be writ—

ten in the following form.

 

*
“1,t = E10 + Bllw1,t + B12w2,t + 813 t (2.10)
and
* ~ + a + B + B t (2 11)
“2,t ‘ B20 21"1,t 22w2,t 23 '
From equations (2.1) through (2.9) we would expect
that:
a *
n
B11 - a l t < 0
w1,t
82

Arthur S. Goldberger, Econometric Theory, (John
Wiley and Sons, Inc., New York), p. 127.

28

B = Bnl t > 0
12 SW <
2,t
8*
n
1 t
=—.__—J.__
B13 at > O
8*
n
B21 = a 2 t 3 O
w1,t
3*
n
B22 = 3W2 t < O
' 2,t
3*
n
2 t
_ ,
B23 at > 0
Since:
*_* +* (212)
nt ‘ n1,t “2,t °

*
where nt is the total equilibrium quantity of labor in a

*
typical industry during period t, and the variables nl t
3
e
and n2 t are to be interpreted as they were previously
3
defined in equations (2.9) and (2.10).

Then:

t + (2.13)

29

Since skilled wage rates, as they have been defined
above, are generally unavailable for manufacturing indus—
tries, an alternative formulation is used. This can be
accomplished by interpreting the average wage rate-in the
industry as a weighted average of the unskilled and Skilled
wage rates during period t. Mathematically, this relation-

ship is as follows:

 

- l t 2 t
= ____’..._. .._.L_.
wt ‘n w1,t I n w2,t (2'1“)
t t
or
n n
t — l t
2,t r12,t t n2,t 1,t

where W is the average wage rate in a typical industry dur-

t
ing period t; n1 t is the observed number of unskilled work-
3
ers in a typical industry during period t; n2 t is the
3

observed number of skilled workers in a typical industry

during period t; n is the sum of n and n ; and the
t 1,t 2,t

other arguments are to be interpreted as before.

Substituting equation (2.15) for w in equation

2,t
(2.13) and simplifying yields:
* — + +8 B +B Elei} (2 16)
nt ‘ (B10 820) I {(511 21) ‘ ( 12 22) n2 t w1,t °
3
nt _
+ {(812+B22) H:——} wt + (813+B23) t

2,t

30'

n = B + 8 w + 8 W + B t (2.17)

where it follows that:

 

 

 

B0 = (B10+B20)
a *
n n
= _ l t t >
81 I (Bll+B2l) (312+B22) H—T'} aw < O
2,t 1,t
n 8n*
_ t _ t >
82 {(Bl2+B22) n2 } a- < O
,t wt
*
ant
B3 - (813+B23) at > 0

Partial Adjustments to Equilibrium
Levels of Employment in
Industry Labor Markets

 

In the previous section we have developed a model to
establish equilibrium on desired levels of employment for
industry labor markets. Even though these equilibrium
levels of employment are desired by the industry their
adjustment to them may not be complete during any given
period t. The following stock adjustment model is, there-
fore, employed to allow for these possible differences
between the desired and observed levels of industry employ-

ment.

R
) = A(n

(n —n t

t t-l ' nt_1) 023:1 (2.18)

O I”

31

*
nt = Ant + (l—A) nt-l + et (2.19)

Where n is the observed level of employment in a typical

t-l
industry during period t-l; A is the coefficient of adjust-

ment; 5 is an error term which meets the standard assump-

t
tions of the Classical Linear Regression Model;83 and the
other arguments have their previous interpretations.

The coefficient of adjustment (i.e., A) in equation
(2.18) reflects the degree to which the desired and observed
change in industry employment have approached each other
between the periods t and t—l. Theoretically A can take
on any value between zero and one. If the value of A equals
one, then nt = n:
complete adjustment to its desired or profit maximizing

and the industry labor market has made a

level of employment in the current period. If, however,
the industry has failed to make any adjustment toward the

equilibrium level of employment, then nt = nt-l and the

value of A equals zero.

*
Since nt in equation (2.19) is unobservable we will

replace it with equation (2.17) and obtain the following:

AB t (2.20)

:3
II

+ "I
0 + AB1wl,t AB2“t + AB3

+ (l—A) nt_ + e

l t

where the arguments have the same meaning as before.

 

83Goldberger, op. cit., p. 162.

32

Summary and the Final Form of the Model
In this chapter, we have developed a model to explain
the desired and equilibrium levels of employment in industry
labor markets. From this model a reduced form expression
was obtained. Due to incomplete adjustments, however, the
equilibrium levels of employment are in general unobservable.
We, therefore, derived an expression for the observed level

of industry employment as a function of the predetermined

variables w1,t, fit, t and nt_1. The final form of our

model appears as:

nt = 80 + 61w1,t + 62fit + 63t +6unt-1 + at (2.21)
where:

60 = A80

61 = AB]

62 = A82

63 = A83

61 = lwA

The coefficients in equation (2.22) can theoretically
take on negative or non-negative values. This results
because the coefficient of adjustment (i.e., A) is assumed

to be a non~negative number between zero and one. If A

33

happens to be positive then our previous discussion regard-
ing the signs of the coefficients in equation (2.17) will

still apply.

CHAPTER III

THE EMPIRICAL STUDY

Introduction

 

The reduced form expression of the model developed
in Chapter II was used to estimate the impact of increases
in the federal minimum wage on observed levels of employ-
ment in selected high and low wage three-digit manufac—
turing industries for the years 1960 through 1963. In
addition, the selection of industries, the data ulitized,
and the estimation procedure are discussed in this chapter.
The empirical results are then presented. In Chapter IV

some concluding remarks are given.

The Empirical Model

 

The reduced form of the model developed in Chapter

11 appears as follows:

ht = 60 + 61w1,t + 82wt + 63t + Gunt-1 + at (3.1)

where nt is the observed level of employment in a typical

industry during period t; w1 t is the level of the federal
3

minimum wage in period t; i is the average wage rate in

t
a typical industry during period t; t is a trend variable,

nt-l is the level of employment in a typical industry during

3”

35

the period t-l and et is an error term. AS stated pre-

viously, it follows that:

 

50 = AB0
an
t <
6 = A8 = > O
1 l awl’t
3n
_ _ t <
O2 - A82 - W ) O
t
8n
6 = A8 = ~19- > O
3 3 3t —

The ZEF estimation procedure will provide asymptotically
efficient and unbiased estimates of the coefficients in equa-
tion (3.1) if certain assumptions regarding the statistical
properties of the model are fulfilled. These assumptions
include the following: 1) the function is linear in the
explanatory variables and at; 2) et is normally and inde-
pendently distributed with zero mean and constant variance;

and 3) the disturbance covariances across industries are

not necessarily equal to zero.

The Selection of Industries and the Data

 

The reduced form of the model presented in equation
(3.1) was used to estimate the impact of federal minimum
wage increases on five low and five high wage three digit
manufacturing industries for the years 1960 through 1963.

The low wage industries included saw mills and planning

36

mills, men's and boy's furnishing, knitting mills, women's
and misses' outerwear, and household furniture. Since some
previous investigatory work has been done in these areas,
it was felt that comparisons of the results may be possible.
In selecting these industries, however, consideration was
also given to the number of observations in each industry
group. The high wage industries chosen were iron and steel
foundrieS, construction and like equipment, metal working
machinery, communication equipment, and steel rolling and
finishing. The criteria for selecting this group were the
average wage rate in the industry, as well as, the number
of observations.

The employment and wage data for the above industries
were obtained from the 1963 Census of Manufacturers, and
the 1962, 1961 and 1960 Annual Surveys of Manufacturers.
Since the cross sectional and time series data were pooled,
the collection of observations on employment and wage rates
required a four period matching of this data for a given
three digit industry and state. When this was not pos-
sible, the industry for that state was dropped as a sample
observation.

Only the employment of production workers and their
respective wage rates were considered in estimating equa-
tion (3.1). Total employment was rejected in favor of
production employment because the former category included
supervisory personnel and corporate officers. Since this

latter group is usually salaried, it was believed that

37

production employment would be more representative of any
effect which changes in the minimum wage may have upon
industry employment.

As noted in Chapter I of this study, the federal mini-
mum wage was increased twice in the 1960—63 period. It was
raised from $1.00 an hour to $1.15 an hour in 1961, and to
$1.25 an hour in 1963.

Because average wage rates for production workers
are not published for each state, this variable had to be
constructed. This was accomplished by dividing the total
wages paid to production workers in each year by the corres-
ponding total man-hours worked by this group. The resulting
variable should not be interpreted as average straight time
hourly earnings since total wages paid to production work-
ers includes additional payments such as overtime premiums.
This variable should also be viewed with some degree of
caution in the apparel industry since the man-hours of pro-
duction workers were not well reported because work in the

industry is generally conducted on a piece rate basis.

The Estimation Procedure
To estimate the coefficients in equation (3.1) the
above cross sectional data was pooled for the 1960-63
period. Consistent estimates of these coefficients were
obtained by ordinary least squares under the stated assump-

tions.

38

Zellner's two stage Aitken's estimates (abbreviated
as ZEF) were also obtained.8u This procedure produces
unbiased estimates that are efficient relative to those
obtained by ordinary least squares when the disturbances
across equations are highly correlated.85 If the distur-
bances are uncorrelated the ZEF estimates are only slightly
worse in small samples than those obtained by ordinary
least squares.86

The ZEF procedure was applied to groupings of indus-
tries that were expected on a priori grounds to have highly
correlated disturbances. Generally, an attempt was made

to combine industries in the same SIC two digit classifi-

cation.

The Results

 

The ZEF results from estimating equation (3.1) appear

in Table 3.1.87 For convenience the average wage rate and

 

8”For a more detailed description of the ZEF proced-

ure and its properties, see: Jan Kmenta and Roy F. Gilbert,
"Small Sample Properties of Alternative Estimators of Seem-
ingly Unrelated Alternative Estimators," American Statisti-
cal Association Journal, (December, 1968), pp. 1180-1200.

 

85Ibid., p. 1192.

86Ibid., p. 1195.

87The ordinary least squares results are given in
Appendix A. Also shown are the results from using log
conversions and applying both estimation procedures. Gen-
erally the ZEF results are superior to those obtained by
ordinary least squares. When this was not the case, the
results are only slightly worse. In addition, the use of
log conversions did not usually increase the efficiency of
the estimates of the coefficients. A notable exception is
industry 232 where the use of ZEF with logs made all the
estimates of the coefficients significant at the ten per
cent level.

39

the coefficient of adjustment for each three digit industry
are also shown. The industries are listed in the table
from the low to the high wage group.

The minimum wage variable in the reduced form of the
empirical model is both significant at better than the five
per cent level and possesses a negative sign for five of
the ten industries investigated. Four of these were pre—
viously classified as high wage. The fifth industry in
this category has the lowest average wage rate of the ten
industries considered. The remaining five industries, how-
ever, do not have estimated values for this coefficient
that vary significantly from zero at the ten per cent level.
These results all correspond with those theoretically
expected.

Theoretically consistent results are also obtained
for the average wage variable. In all but two industries
the coefficient for this variable did not vary significantly
from zero at the ten per cent level. In the two remaining
industries, it was significant and positive for the high
wage industry, and significant and negative for the low
wage industry with the same level of confidence.

The trend variable is significant and positive for
seven industries at d = .10. In the remaining industries,
it does not vary significantly from zero with a ten per
cent confidence level. These results are also within those

previously anticipated.

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MI

The coefficient of adjustment is always significantly
different ££2fl one at confidence levels of better than one-
half of one per cent. It does not, however, differ signi-
ficantly from zero at the ten per cent level for any of the
industries studied except saw mills and planning mills.

In each case A has the appropriate magnitude and sign.

Some Implications of the Results

 

Our results indicate that increases in the federal
minimum wage reduced observed levels of employment in five
of the ten industries investigated for the 1960-63 period.
This is surprising only because four of these industries
were among these classified as high wage. In the remain-
ing industries increases in the minimum wage did not appear
to have any significant effect on observed levels of indus-
try employment at the ten per cent level. This does not
imply, as some studies seem to indicate, that increases
in the minimum wage do not adversely affect equilibrium
levels of unskilled employment in industry labor markets.
It simply means that the total effect upon the sum of
observed skilled and unskilled employment did not vary
significantly from zero. This may occur because the coef-
ficient A and/or the coefficient 81 in equation (2.17) are
equal to zero.

Even though the coefficient of the average wage
rate variable did not vary significantly from zero in

eight of the ten industries studied, we cannot conclude

“2

that skilled wage rates and equilibrium levels of skilled
employment are not inVersely related. In addition, these
results do not imply that wages are not an important con—
sideration to profit maximizing firms. The only implica-
tion is that the effect on observed levels of total industry
employment is not significant. The insignificance of the
average wage rate coefficient may occur because A is zero
and/or because the coefficient 82 in equation (2.17) is
zero.

Since the trend variable was both positive and signi-
ficant for seven of the industries studied, it appears
that increases in product demand have caused most indus-
tries to expand employment for the period we are consider-
ing. This result seems to imply that these industries
were already attempting to expand employment when the mini-
mum wage was increased. It may also explain why some stud-
ies that assume equilibrium in industry labor markets con-
clude that increases in the federal minimum wage caused
employment increases. In the three industries where the
trend variable was not significant, it may be that the
coefficient of adjustment was equal to zero. This possi-
bility is further evidenced by the fact that none of the
variables for these industries are significant and that
A did not vary significantly from zero.

The estimates of the coefficient of adjustment for
the ten industries investigated during the 1960-63 period

seem to indicate that industry labor markets adjust very

“3

slowly to their desired levels of employment. Only industry
2A2, which had the lowest average wage rate, yielded an A
estimated value of A which was significantly different from

zero and positive.

Summar

In this chapter the reduced form expression of the
model developed in Chapter II was estimated by ordinary
least squares and ZEF procedures for ten three digit manu-
facturing industries during the 1960-63 period. Theoreti-
cally consistent results were obtained in each instance.
In general these results indicated that: 1) minimum wage
increases significantly reduced observed levels of employ-
ment in half of the industries studied; 2) changes in aver-
age wage rates seldom had a significant effect on observed
levels of employment; 3) most industries were expanding
employment because product demand was increasing; and A)
industry labor markets adjust very slowly to desired levels

of employment regardless of the cause of the disequilibrium.

CHAPTER IV
CONCLUDING REMARKS

A substantial part of the investigatory work to deter-
mine the impact on employment from increasing the federal
minimum wage has been done by the Department of Labor.

In general, the results of these studies have been inter—
preted as indicating that increases in the statutory
minimum have had little or no effect on employment. In
some cases, the assertion has even been made that employ-
ment increased more rapidly in these periods after the
minimum wage increase than it had previously.

Some authors feel that the conclusions reached in
the Department of Labor studies are generally valid. They
believe that increases in the federal minimum wage do not
reduce employment either because wage costs are not an
important consideration to firms or that the existing
unskilled labor employed by the firm suddenly becomes
more efficient. These same authors further contend that
these results nullify the assumptions of the competitive
model and point out the ineptness of orthodox theory in
this instance.

Critics of the Department of Labor studies maintain

that the unorthodox conclusions result from a failure to

uu

“5

consider changes in exogenous variables and to employ ade-
quate statistical procedures. They contend that since the
minimum wage was usually raised during expansionary periods
in the economy a comparison of gross changes in employment
does not correctly reflect its impact.

Independent investigations, however, have often been
guilty of the same criticisms raised against the Depart—
ment of Labor studies. In many cases these studies have
also used static-tabular analysis to determine the effect
on employment from increasing the minimum wage in low wage
industries. In one instance, only the gross movement of
workers into low wage non-covered areas of employment was
considered an adequate indication of unemployment result-
ing from minimum wage increases. These studies were also
generally devoid of adequate statistical procedures to
effectively determine the impact from increasing the
statutory minimum wage.

To overcome these shortcomings, we have attempted
in this study to specify a model that could be tested
empirically. To accomplish this task a model was devel-
oped within the framework of orthodox theory to explain
desired and equilibrium levels of industry employment,
and from it a reduced form expression was obtained.
Because incomplete adjustment to equilibrium levels of
employment in industry labor markets may occur, a stock
adjustment model was introduced. A reduced form expres-

sion for the observed level of industry employment as a

A6

function of the minimum wage rate, the average wage rate
in the industry, a trend variable, and the lagged observed
level of industry employment was then obtained.

The final form of the model developed was used to
estimate the impact from increasing the federal minimum
wage on five high and low wage SIC three digit manufactu—
ing industries for the 1960-63 period. Both ordinary least
squares and ZEF estimation procedures were used. Each
procedure was also applied after the variables had been
converted to logs. The ZEF results without log conver-
sions were the most satisfactory. In each case the results
were theoretically consistent.

The results from applying the ZEF procedures indi-
cated that: 1) increases in the statutory minimum reduced
observed levels of employment in half the industries stud-
ied and most often among the high wage group; 2) average
wage rates often had no significant effect on observed
levels of employment; 3) increases in product demand was
causing most industries to expand employment; and A) the
adjustment of industry labor markets to equilibrium
levels of employment is slow regardless of the cause for
the disequilibrium.

The results do not imply that minimum wage increases
have neutral or positive effects on equilibrium levels of
employment, or that wage costs are unimportant to profit

maximizing firms. In half of the industries, even observed

“7

levels of industry employment appeared to be inversely
related to increases in the minimum wage. Failure to note
this relationship in the past may be due to the concentra-
tion of most studies on selected low wage industries.

It also appears that increases in product demand
may have been causing most of the industries studied to
expand employment during the 1960-63 period. If this is
the case, then the direct relationship between minimum
wage increases and observed levels of employment are under-
standable. This would seem to be a more realistic explan-
ation for the above phenomenon than either the conclusion
that firms disregard profits or that unskilled labor
magically becomes more efficient.

There seems to be sufficient evidence to accept our
hypothesis that increases in the federal minimum wage
may have reduced observed levels of industry employment.
The Sign of the coefficient of the minimum wage variable
was negative for eight of the industries studied, but
significant at the ten per cent level, for only five of
them. Regardless, this result only gives us the relation—
ship between observed employment and minimum wages, not
equilibrium levels of employment. It should be remembered,
however, that reductions in observed levels of employment
may veil even greater decreases in potential levels of

employment.

BIBLIOGRAPHY

I48

BIBLIOGRAPHY

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51

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U.

U.

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CG

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55

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June, 1958.

APPENDIX A

57

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