Memorandum by Dr Pia Orrenius and Professor
Madeline Zavodny, Federal Reserve Bank of Dallas
1. SUMMARY
In our study, "The Effect of Minimum Wages
on Immigrants", the results indicate that higher minimum
wages in the US boost average hourly earnings among immigrants
who do not have a high school diploma or equivalent education.
Despite this so-called earnings effect, we do not find evidence
that this group suffers declines in employment or in the number
of hours worked. We do find evidence of a decline in work among
teens, with a difference by gender in whether employment or hours
worked fell in response to higher minimum wages. Our failure to
find an adverse employment effect among low-skilled immigrants
despite a positive wage effect could result from employers substituting
low-skilled adults for teens when the minimum wage rises. In addition,
immigrants' locational choices appear to respond to changes in
minimum wages. We find that the educational composition of immigrants
within states and the distribution of low-skilled immigrants across
states are related to minimum wage levels in a way that suggests
that low-skilled immigrant workers prefer states which have lower
minimum wages.
2. MOTIVATION:
THERE IS
NO CONSENSUS
ON THE
IMPACT OF
HIGHER MINIMUM
WAGES ON
EMPLOYMENT
Standard competitive economic models predict
that higher minimum wages result in less employment. Furthermore,
such models predict that adverse employment effects should be
concentrated among less-productive workers whose low skill levels
do not warrant employers paying them the higher minimums. Despite
these predictions, recent research has reached disparate conclusions
about the impact of minimum wage increases on employment of low-skill,
low-wage workers. Neumark and Wascher (2006) provide a recent
survey of this literature.
If immigrants are less productive than natives
within the low-skilled group, then standard economic theories
predict that immigrants should experience more adverse employment
effects than natives when minimum wages increase.[35]
Immigrants on the low end of the skill distribution tend to have
fewer years of education, less institutional knowledge, and worse
English language skills than low-skilled natives. Commensurate
with these differences, foreign-born workers who do not have a
high school diploma earn 14% less than natives with similarly
low educational attainment, and immigrants with a high school
diploma earn 18% less than high-school-graduate natives (Economic
Report of the President, 2005). Low-wage immigrants, particularly
those from non-English speaking countries, also have considerably
lower returns to education and less US labor market experience
than low-wage natives (Chiswick et al, 2006).
3. MOTIVATION:
IMMIGRANTS, BECAUSE
THEY ARE
THE FASTEST-GROWING
GROUP OF
LESS-EDUCATED
WORKERS IN
THE US, MAY
BE MORE
ADVERSELY AFFECTED
BY HIGHER
MINIMUM WAGES
THAN NATIVES
In the US, two developments lend urgency to
the question of how minimum wages affect the labor market opportunities
of less-skilled workers. First, the federal minimum wage increased
to $5.85 from $5.15 in July 2007. This was the first increase
in the federal wage floor in a decade. The federal minimum wage
will increase in two additional 70-cent increments over the next
two years, reaching $7.25 an hour in July 2009. A number of states
have in place minimum wages that exceed the federal level. (There
are very few industry-specific minimum wages in the US, and wage-setting
via a collective bargaining process is uncommon.)
Second, due to mass immigration over the past
20 years or so, the low-skilled labor force has grown rapidly
(Sum et al, 2002). Immigrants compose a disproportionate
share of the low-skilled labor force: almost 44% of adults in
the labor force who lack a high school diploma are foreign-born.
In fact, about one-third of foreign-born adults (aged 25 and older)
in the US do not have a high school diploma or equivalent. Given
these two developments, it is surprising to note that there are
virtually no studies to date that investigate the effect on immigrants
of higher minimum wages.
4. MOTIVATION:
THE EFFECTS
OF LABOR
MARKET POLICIES,
SUCH AS
MINIMUM WAGES,
ARE IMPORTANT
IN EUROPE
WHERE NON-EU
IMMIGRANTS DO
SUBSTANTIALLY WORSE
THAN NATIVES
OR EU IMMIGRANTS
Among Western European countries, the question
of how minimum wages and other labor market regulations affect
immigrants may be even more important than in the US. Many northern
European countries are characterized by large unemployment and
activity gaps between immigrants and natives, particularly among
young workers, with the foreign-born more likely to be unemployed
or out of the labor force (Orrenius and Solomon, 2006). If high
minimum wages limit immigrants' opportunities in the labor market,
there can be long-term adverse effects for immigrants and for
taxpayers who pay for public assistance programs. A recent Organization
for Economic Cooperation and Development (OECD) study found significantly
more adverse effects of minimum wages and other labor market regulations
on immigrants than on natives in a cross-section of OECD nations
(Jean, 2006). In particular, higher minimum wages reduce female
economic activity and male employment rates more so among the
foreign-born than natives.
5. RESULTS: GROUPS
THAT ARE
MORE LIKELY
TO BE
EARNING WAGES
AROUND OR
BELOW THE
MINIMUM WAGE
INCLUDE IMMIGRANTS,
WOMEN, THE
LESS-EDUCATED
AND THE
YOUNG
As Table 1 shows, 1.4 % of US workers earn exactly
the effective minimum wage (the higher of the federal and state
minimum wage). An additional 3.3 % earn less than the minimum
wage while an additional 8.5 % earn above the wage floor but within
125 % of the minimum wage. The fractions of workers earning exactly,
less than, and slightly above the minimum wage are all higher
among immigrants than among natives; higher among teens than among
low-skilled adults; and higher among women than among men within
age/education and nativity groups. For example, the shares of
low-skilled adult immigrants who earn exactly, less than, and
slightly more than the minimum wage are 5%, 7.6%, and 20.6%, respectively,
versus 2.4%, 5.2% and 15.6% for natives.
Table 1
SHARE OF WORKERS EARNING EXACTLY OR NEAR
THE MINIMUM WAGE AND EMPLOYMENT RATES, BY DEMOGRAPHIC GROUP
|
| Exactly
MW
| Below
MW |
Within 125%
of MW |
Employment
Rate |
|
| All workers | 0.014
| 0.033 | 0.085
| 0.633 |
| Immigrants | 0.025
| 0.048 | 0.121
| 0.626 |
| Natives | 0.013
| 0.030 | 0.080
| 0.634 |
| Not high school graduate (aged 20-54) | 0.035
| 0.062 | 0.177
| 0.614 |
| Immigrants | 0.050
| 0.076 | 0.206
| 0.679 |
| Males | 0.039
| 0.057 | 0.173
| 0.857 |
| Females | 0.071
| 0.115 | 0.278
| 0.467 |
| Natives | 0.024
| 0.052 | 0.156
| 0.576 |
| Males | 0.013
| 0.033 | 0.103
| 0.676 |
| Females | 0.039
| 0.078 | 0.233
| 0.468 |
| Teens (aged 16-19) | 0.086
| 0.117 | 0.382
| 0.416 |
| Males | 0.081
| 0.097 | 0.363
| 0.413 |
| Females | 0.092
| 0.136 | 0.402
| 0.419 |
|
Source: Orrenius and Zavodny (2007).
|
| Note: Shown are the fractions of workers in the indicated age/education group earning exactly the miniumum wage, less than the minimum wage, and more than the minimum wage but within 125% above the minimum wage, and the employment-to-population rate. Calculations are based on data from the CPS-ORG during the period 1994-2005, weighted using the outgoing rotation weights. Columns 1-3 only include individuals who earn between $1 and $100 per hour. Teens include both native- and foreign-born.
|
Low-wage workers are disproportionately young, female, and
less-educated as well as disproportionately foreign-born. Table
2 reports average characteristics for low-wage workers and for
all workers. While immigrants account for about 13% of all workers
during this period, they make up almost 23% of minimum wage workers
and 19% and 18% of workers earning below and slightly above the
minimum wage, respectively. Teenagers and workers who have not
(yet, in some cases) graduated from high school are particularly
overrepresented among low-wage workers. However, a substantial
fraction of minimum wage workers are not young; almost one-half
of low-wage workers are at least 25 years old.
Table 2
CHARACTERISTICS OF LOW-WAGE WORKERS
|
| Workers Earnings:
| |
| Exactly MW
| Below MW | Within 125%
of MW
| All Workers |
|
| Average age | 29.3
(14.3
)
| 33.5
(15.4
) |
31.8
(14.7
) | 38.5
(12.8
)
|
| Teen (aged 16-19) | 0.330
| 0.196 | 0.246
| 0.066 |
| (0.470)
| (0.3997) | (0.431)
| (0.228) |
| Young adult (20-24) | 0.212
| 0.206 | 0.209
| 0.108 |
| (0.409)
| (0.404) | (0.407)
| (0.311) |
| Foreign born | 0.225
| 0.185 | 0.180
| 0.127 |
| (0.418)
| (0.389) | (0.385)
| (0.333) |
| Female | 0.588
| 0.616 | 0.588
| 0.482 |
| (0.492)
| (0.486) | (0.492)
| (0.500) |
| Less than high school graduate | 0.461
| 0.319 | 0.359
| 0.128 |
| (0.498)
| (0.466) | (0.480)
| (0.334) |
| High school graduate, no college | 0.278
| 0.304 | 0.328
| 0.316 |
| (0.448)
| (0.460) | (0.469)
| (0.465) |
| Some college, not college graduate | 0.230
| 0.276 | 0.255
| 0.292 |
| (0.421)
| (0.447) | (0.436)
| (0.455) |
| Sample size | 26,407
| 63,427 | 162,616
| 1,948,815 |
|
| Source: Orrenius and Zavodny (2007).
|
Note: Shown are means (standard deviations) based on individual-level data from the CPS-ORG during the period 1994-2005 for workers who earn between $1 and $100 per hour.
|
6. RESULTS: MINIMUM
WAGES RAISE
THE EARNINGS
OF IMMIGRANTS
BUT DO
NOT LOWER
THEIR EMPLOYMENT
The regression results in Orrenius and Zavodny (2007) suggest
that minimum wages boost earnings among low-skilled adult immigrants
and among teens but not among low-skilled adult natives.[36]
A 10% increase raises less-educated male and female adult immigrants'
average hourly earnings by about 1.6%. Despite the significant
effect on earnings, there is no evidence of an adverse impact
of minimum wages on employment among low-skilled adult immigrants.
Among teens, in contrast, a 10% increase in the minimum wage reduces
employment by about 1.8% when controlling for state-level economic
conditions. The results also suggest that, like employment, average
hours worked do not fall among low-skilled adult immigrants when
the real minimum wage increases.
If immigrants are more likely to work in industries with
less elastic labor demand or to work off-the-books, then minimum
wage increases might have less of an effect on employment
among immigrants than among natives. However, because their earnings
rise, standard economic theory dictates their employment should
fall.
7. RESULTS: COULD
IMMIGRANTS AND/OR
FIRMS WHICH
HIRE IMMIGRANTS
BE AVOIDING
STATES WITH
HIGH OR
RISING MINIMUM
WAGES?
One potential explanation of our results within the framework
of a competitive labor market model is that low-skilled immigrants'
locational choices may be influenced by the minimum wage. Low-skilled
immigrants who have little safety net may move to another state
or even return home if they lose their jobs when the minimum wage
increases. Indeed, recent work by Bean et al (2007) suggests
that undocumented immigrants—who have virtually no access
to public welfare programs—were more likely than low-education
natives or legal immigrants to move between states during 1995-2000.
Also, newly-arriving low-skilled immigrants may be less likely
to settle in states with higher minimum wages if their employment
prospects are worse in such states. Such endogenous locational
choice would explain our finding of positive wage effects yet
no disemployment impact from higher minimum wages.
The results suggest that minimum wages indeed influence low-skilled
immigrants' location patterns. The fraction of the state population
that is composed of low-skilled adult immigrants is significantly
negatively associated with the real minimum wage. The opposite
result holds among low-skilled adult natives. The former finding
for immigrants is consistent with the theory of endogenous locational
choice explained above. The latter finding for natives is consistent
with low-skilled natives moving away from states with more low-skilled
immigrants (Borjas, 2006) or with state legislatures raising the
minimum wage when the share of native-born voters who have little
education and low wages increases. Another possibility for our
results is that employers who have large numbers of low-skilled
immigrant workers exert political pressure to prevent state minimum
wage increases.
Further, average years of education among adult immigrants
in a state is positively associated with the minimum wage in that
state. This suggests that raising the minimum wage causes less-educated
immigrants to leave (or not move to) a state or attracts relatively
well-educated immigrants. We do not find evidence of a similar
result among adult natives. The distribution of low-skilled immigrants
across states appears to be inversely related to effective minimum
wages while the distribution of low-skilled natives is not related
to the minimum wage. In sum, immigrants appear to settle in areas
with lower minimum wages.
8. LESSONS: IMPLICATIONS
FOR THE
EU COUNTRIES
Our findings suggest that low-skilled immigrants are likely
to choose to live in areas with lower minimum wages. We suspect
that employers' decision to create low-skilled jobs in areas with
lower labor costs underlies this pattern. This suggests that other
labor market regulations that influence labor costs, or the level
of enforcement of labor market regulations, may affect immigrants'
locational decisions. Authorities should be aware that not only
will their own country's policies affect immigration patterns,
but so will the policies of other countries. In addition, immigrants
and firms will respond to economic incentives when deciding where
to locate.
18 September 2007
35
We use the terms "immigrant" and "foreign-born"
interchangeably in this memorandum to refer to persons born outside
the US to parents who are not US citizens. Back
36
We focus on three groups: less-educated adult natives, less-educated
adult immigrants, and all teens (ages 16-19). Less-educated adults
here are individuals aged 20-54 who do not have a high school
diploma or equivalent. We do not stratify the teen data by nativity
because of the small sample sizes for foreign-born teens in many
states (most immigrants arrive in the US when they are adults,
not as children). Back
|
