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Making Work Pay: The Impact of the 1996-97 Minimum Wage Increase

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1998 | EPI Study

MAKING WORK PAY
The Impact of the 1996-97 Minimum Wage Increase

by Jared Bernstein and John Schmitt

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Executive Summary

Federal legislation increased the minimum wage from $4.25 to $4.75 on October 1, 1996 and to $5.15 on September 1, 1997. This study examines the impact of these increases on the employment opportunities, wages, and incomes of low-wage workers and their households.

The principal findings are that:

* The 1996 and 1997 minimum wage increases raised the wages of almost 10 million workers. About 71% of these workers were adults and 58% were women. Just under half (46%) worked full time and another third worked 20 to 34 hours per week.

* The average minimum wage worker is responsible for providing more than half (54%) of his or her family’s weekly earnings.

* The two-stage increase disproportionately benefited low-income working households. Although households in the bottom 20% of the income distribution (whose average income is $15,728) receive only 5% of total family income, they received 35% of the benefits from the minimum wage increase.

* Four different tests of the two increases’ employment impact — applied to a large number of demographic groups whose wages are sensitive to the minimum wage — fail to find any systematic, significant job loss associated with the 1996-97 increases. Not only are the estimated employment effects generally economically small and statistically insignificant, they are also almost as likely to be positive as negative.

These empirical results, particularly those showing strong wage gains and no negative impact on job opportunities, are at odds with traditional economic theory, which argues that a rise in the minimum wage must cost jobs. Over the last decade, however, new economic models designed to reconsider low-wage labor markets may help explain the increasingly weak link between the minimum wage and low-wage employment opportunities. These more recent models, often referred to as “dynamic monopsony” models, incorporate the costs of recruiting, training, and motivating low-wage workers, variables neglected by more traditional models. Not only do these new models more realistically reflect the character of the low-wage labor market, but they also offer a better explanation of our central finding: the 1996-97 increase in the minimum wage has proven to be an effective tool for raising the earnings of low-wage workers without lowering their employment opportunities.

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