Channels of Adjustment in Labor Markets: The 2007-2009 Federal Minimum Wage Increase

In the debate on the economic effects of labor market regulation much work has focused on minimum wages. A legal minimum wage remains one of the most controversial policy issues. The controversy arises for two main reasons: first, there is no consensus over the economic impacts of the minimum wage mandate, especially its effect on employment, and, second, there is a disagreement over the empirical methods used to identify the minimum wage effects. Although the standard competitive model predicts that wage floors should have a negative impact on employment, empirical work shows mixed results. This dissertation explores a number of adjustment channels that can explain the paradox of the small and insignificant employment effects uncovered in the MW literature. Specifically, the economic impact of the most recent 2007-2009 Federal minimum wage increase (from $5.15 to $7.25 an hour) is analyzed using a sample of quick-service restaurants in Georgia and Alabama. In contrast to prior studies, store-level bi-weekly payroll records for individual employees are used, allowing greater precision in measuring the relative cost-impact of the MW on establishments. Despite significant variation in the cost-impact of the three-stage MW increase across establishments, regression analysis finds lack of a negative effect on employment and hours following each MW increase. Additional channels of adjustment are explored using unique data from manager surveys. Evidence suggests that higher product prices, lower profit margins, wage compression, reduced turnover and higher performance standards largely account for insignificant employment effects. These results are consistent with a number of alternative theoretical models of labor markets. An expanded version of the perfectly competitive model that incorporates additional margins of adjustment is also compatible with the reported findings.