Discontinuous Distributions and Missing Persons: The Minimum Wage and Unemployed Youth

Abstract

The effects of minimum wage legislation on the employment and wage rates of youth are estimated using a new statistical approach. We find that without the minimum, not only would the percent of out-of-school youth who are employed be 4 to 6 percent higher than it is, but also that these youth would earn more. In particular, the expected hourly earnings of youth with market wage rates below the 1978 minimum are 10 percent lower with the minimum than they would be without it. Thus, an effect of the minimum is to increase the concentration of non-employment among low-wage workers and to reduce their earnings relative to higher wage workers as well. The minimum wage accounts for possibly a third of the difference between the employment rates of black and white youth, according to our results. Our methodology is based on parameterization of the effect of the minimum on the distribution of "market" employment outcomes and market wage rates that would exist in the absence of the minimum. A concomitant of the estimation procedure is joint estimation of market wage and employment functions that would pertain if there were no minimum.