Redistribution through Minimum Wage Regulation:An Analysis of Program Linkages and Budgetary Spillovers

Jeffrey ClemensUCSD (visiting SIEPR) and NBER

September 2015

Motivation

The minimum wage is a hotly debated policy topic

It is also a very difficult policy to evaluate

I Empirics of employment effects

I Nuanced range of potential effects

This paper highlights program and budgetary spillover effects

I Program spillovers and the well being of job losers

I Effects of earnings and employment changes on tax revenue

I Both effects likely depend significantly on macroeconomic context

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1. Motivation

2. Data and Estimation Framework

3. Effects on the Wage Distributions of Low-Skilled Workers

4. Effects on the Employment of Low-Skilled Workers

5. Effects on the Earnings Distribution

6. Effects on Program Participation and Payroll Tax Revenues

7. Conclusion

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1. Motivation

2. Data and Estimation Framework

3. Effects on the Wage Distributions of Low-Skilled Workers

4. Effects on the Employment of Low-Skilled Workers

5. Effects on the Earnings Distribution

6. Effects on Program Participation and Payroll Tax Revenues

7. Conclusion

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Basic Approach: Follows Clemens and Wither (2014)

Analyze recent increases in the federal minimum wage, which weredifferentially binding across states

I “U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, andIraq Accountability Appropriations Act” of 2007.

I Increases went into effect in July 2007, 2008, and 2009

Analysis uses the 2008 panel of the Survey of Income and ProgramParticipation (SIPP)

I SIPP sample begins in August 2008

I 4 years of individual-level panel data

I Samples of low-skilled workers selected on the basis of theiraverage wage between August 2008 and July 2009

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Minimum Wage Trends in Bound and Unbound States

$5

.00

$6

.00

$7

.00

$8

.00

Avg

. E

ffe

ctive

Min

. W

ag

e

Jul,06 Jul,08 Jul,10 Jul,12

States Bound by Federal Minimum Wage Increases

States Not Bound by Federal Minimum Wage Increases

Average Effective Minimum Wages

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Map of Bound and Unbound States

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Research Context

Previous work (Clemens and Wither, 2014) uses this setting toestimate employment effects

Things to note:

I That paper conducts an extensive robustness analysis

I The estimated employment effects are substantial

This paper explores two issues:

I To what extent did safety net programs cushion the incomes ofjob losers?

I What are the implications for the public budgets

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Baseline Difference-in-Differences Framework

Yi ,s,t =∑

p(t)6=0

βp(t)Bounds × Periodp(t)

+ α1s States + α2t Timet + α3i Individuali

+ Xs,tγ + εi ,s,t . (1)

Coefficients of interest: βp(t)

I Differential changes in bound vs. unbound states

I Periods include Transition, Post 1, and Post 2

Elements of the robustness analysis

I State level macro conditions: Xs,t and triple-difference approach

I Trends assoc. w/ many baseline characteristics

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1. Motivation

2. Data and Estimation Framework

3. Effects on the Wage Distributions of Low-Skilled Workers

4. Effects on the Employment of Low-Skilled Workers

5. Effects on the Earnings Distribution

6. Effects on Program Participation and Payroll Tax Revenues

7. Conclusion

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Prob. of Wage between Old and New Fed. Min.

0.1

5.3

.45

Wa

ge

$5

.15

−$

7.2

5

Jul,08 Jul,09 Jul,10 Jul,11 Jul,12

States Bound by Federal Minimum Wage Increases

States Not Bound by Federal Minimum Wage Increases

Wage Between $5.15−$7.25

Ave. Baseline Wages: < $7.50

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Estimating “First Stage” Impacts on the Wage Distribution

Yi ,s,t =∑

p(t)6=0

βp(t)Bounds × Periodp(t)

+ α1s States + α2t Timet + α3i Individuali

+ Xs,tγ + εi ,s,t .

Dependent variables for tracking effects on the wage distribution

Y ji ,s,t = 1{W j−1 < Hourly Wagei ,s,t <W j}.

Dependent variables:

I Indicator equal to 1 if wage is between Wj−1 and Wj

I Trace out changes in the wage PMF in 50 cent bins

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Shift in the Wage Distribution of Low-Skilled Workers

-.2

-.1

0.1

.2D

-in-D

Coe

ffici

ents

02.

55

7.5

10N

umbe

r of

Obs

. (1,

000'

s)

$6.55$7.25$0.00 $5.00 $10.00 $15.00 $20.00

Hourly Wage Cutoffs

D-in-D Coefficient 95% CI Num. of Obs.

Changes in the Wage Distribution

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1. Motivation

2. Data and Estimation Framework

3. Effects on the Wage Distributions of Low-Skilled Workers

4. Effects on the Employment of Low-Skilled Workers

5. Effects on the Earnings Distribution

6. Effects on Program Participation and Payroll Tax Revenues

7. Conclusion

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Significant Declines in Paid Employment

Employed Unpaid Work No Earnings(1) (2) (3)

Bound x Post 1 -0.043* 0.015 0.057**(0.018) (0.010) (0.019)

Bound x Post 2 -0.063** 0.019* 0.081***(0.018) (0.009) (0.022)

N 146,933 146,933 146,933Mean of Dep. Var. 0.766 0.187 0.421

Significant decline in paid employmentI Potential contributing forces:

I Binding in low cost of living states ($7.25 was 40-50% of median)I Enacted during a very weak labor marketI Became quite difficult to maintain both employment and Medicaid

eligibility (Clemens and Wither, 2015)

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1. Motivation

2. Data and Estimation Framework

3. Effects on the Wage Distributions of Low-Skilled Workers

4. Effects on the Employment of Low-Skilled Workers

5. Effects on the Earnings Distribution

6. Effects on Program Participation and Payroll Tax Revenues

7. Conclusion

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Short-Run Change in the Earnings Distribution

-.1

-.05

0.0

5.1

D-in

-D C

oeffi

cien

ts

$0 $1000 $2,000 $3,000 $4,000 $5,000Monthly Income

D-in-D Coefficient95% CI

Short-Run Changes in the Earnings Distribution

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Medium-Run Change in the Earnings Distribution

-.1

-.05

0.0

5.1

D-in

-D C

oeffi

cien

ts

$0 $1000 $2,000 $3,000 $4,000 $5,000Monthly Earnings

D-in-D Coefficient95% CI

Medium-Run Changes in the Earnings Distribution

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Earnings and Income

Total Income Earnings Property All Other(1) (2) (3) (4)

Bound x Post 1 -92.087* -87.026* -12.112 7.051(36.474) (38.035) (7.446) (13.330)

Bound x Post 2 -144.042** -165.342** -9.916 31.215+(44.748) (49.490) (8.174) (16.302)

N 147,459 147,459 147,459 147,459Mean of Dep. Var. 748.459 567.782 28.034 152.643

Takeaways:I Earnings declines reflect...

I Significant employment declinesI Lost experience accumulation

I Modest replacement of lost earnings through other sources

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Medium-Run Change in the Income Distribution

-.1

-.05

0.0

5.1

D-in

-D C

oeffi

cien

ts

$0 $1000 $2,000 $3,000 $4,000 $5,000Monthly Income

D-in-D Coefficient95% CI

Changes in the Income Distribution

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1. Motivation

2. Data and Estimation Framework

3. Effects on the Wage Distributions of Low-Skilled Workers

4. Effects on the Employment of Low-Skilled Workers

5. Effects on the Earnings Distribution

6. Effects on Program Participation and Payroll Tax Revenues

7. Conclusion

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Program Participation

Means Cash Food Aid UI Soc. Sec. Any Benefit(1) (2) (3) (4) (5)

Bound x Post 1 0.004 0.000 -0.004 -0.004 0.003(0.005) (0.010) (0.007) (0.006) (0.012)

Bound x Post 2 0.011+ 0.002 -0.002 -0.002 0.012(0.006) (0.013) (0.007) (0.008) (0.016)

N 147,459 147,459 147,459 147,459 147,459Mean of Dep. Var. 0.039 0.139 0.021 0.043 0.205

Takeaways:

I Weak evidence of an increase in means tested cash welfare receipt

I No evidence of changes in other program participation

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Benefit Receipt

Means Cash Food Aid UI Soc. Sec. Total Benefits(1) (2) (3) (4) (5)

Bound x Post 1 5.256 2.880 -4.623 -4.623 -1.110(3.700) (3.432) (5.164) (4.291) (7.236)

Bound x Post 2 7.915+ 1.906 5.940 -3.919 11.842(4.288) (5.129) (5.968) (6.807) (11.256)

N 147,459 147,459 147,459 147,459 147,459Mean of Dep. Var. 20.020 37.399 17.927 34.446 109.792

Takeaways:

I Dollar value of benefits also moves marginally

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Implications for Payroll Tax Revenues

Soc. Sec. Tax Medicare Tax UI Tax Total Payroll Tax(1) (2) (3) (4)

Bound x Post 1 -10.791* -2.524* -2.176* -15.491*(4.716) (1.103) (0.951) (6.770)

Bound x Post 2 -20.502** -4.795** -4.134** -29.431**(6.137) (1.435) (1.237) (8.809)

N 147,459 147,459 147,459 147,459Mean of Dep. Var. 70.405 16.466 14.195 101.065

Takeaways:

I Reduced payroll tax revenues reflect net earnings declines

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Aggregate Payroll Tax Implications

Inputs to back-of-the-envelope calculation

I “Target” population in affected states: ≈ 7 million

I Estimated decline in monthly payroll tax: $29.4

Implied annual in-sample reduction in payroll tax revenues

I 7 million× $29.4× 12 ≈ $2.5 billion

I Standard error: ≈ $1 billion

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Other Potential Tax Impacts

Other potential effects on revenueI Personal income tax of targeted workers

I Earned Income Tax Credit

I Personal income tax of higher skilled workers

I Corporate income

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Aggregate Benefit Expenditure Implications

Inputs to back-of-the-envelope calculation

I “Target” population in affected states: ≈ 7 million

I Estimated change in monthly benefits: $11.8

Implied annual in-sample reduction in payroll tax revenues

I 7 million× $11.8× 12 ≈ $1 billion

I Standard error: ≈ $1 billion

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1. Motivation

2. Data and Estimation Framework

3. Effects on the Wage Distributions of Low-Skilled Workers

4. Effects on the Employment of Low-Skilled Workers

5. Effects on the Earnings Distribution

6. Effects on Program Participation and Payroll Tax Revenues

7. Conclusion

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Conclusion

Program and budgetary spillovers are important policy-making inputs

Program linkages:

I Potential to cushion incomes of job losers

I Few data sources contain the relevant information

Budgetary spillovers:

I Can occur through a large number of channels

I Likely depend on macroeconomic conditions

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