Research

Rising Above The Minimum Wage

William Even - Miami University of Ohio, David A. Macpherson - Florida State University • Published on

Proponents of a higher minimum wage often imply that entry-level employees go years without a wage increase. Common sense suggests otherwise: the vast majority of those who start at the minimum wage do not remain there for long. In this report, William Even of Miami University, Ohio and David Macpherson of Florida State University provide a valuable in-depth analysis of how quickly most people move up the wage scale, what factors influence their progress, and how minimum wage increases affect wage growth above the minimum.

This study is an important tool for policy makers interested in assisting those who earn low wages. By providing a thorough and accurate profile of minimum wage employees and their wage growth, Drs. Even and Macpherson give policy makers essential information they can use to decide whether proposed wage policies are necessary, effective, or appropriately targeted.

Climbing the Wage Scale
Very few workers remain at the minimum wage over the long run. Of the youngest most inexperienced workers, age 16-18, 11.6% earn the minimum wage. As workers age, however, much lower percentages are found at the minimum — a low of 0.7% earn the minimum at age 46-55. The percentage of those earning the minimum wage also declines as workers achieve higher levels of education. For those who have not finished high school, 6.2% earn the minimum wage. Only 1.5% of those who finish high school have the same level of pay. As expected, age and experience reduce the share of those earning the minimum wage regardless of educational level. Only 0.6% of high school graduates, for instance, earn the minimum wage between the ages of 46 and 55. (The percentages tend to rise as workers enter retirement years, likely reflecting changing work incentives.)

Drawing on extensive data covering two decades of observations, Drs. Even and Macpherson isolate numerous facts that form a compelling overview of what happens when people take minimum wage jobs.

  • Between 1977 and 1997, the average first year “exit rate”* of those who worked at the minimum wage was 65.2% — which means nearly two-thirds of minimum wage workers moved above the minimum wage within one year of working at the minimum wage.
  • The first-year exit rate is significantly higher for full-time workers (67%) than for part-time employees, whose exit rates range from 55% for those with the lightest work schedules to 61% for those working 30-34 hours per week.
  • The median annual wage growth for minimum wage workers was 10.1% between 1977 and 1997. For full-time minimum wage workers, median wage growth in the first year is higher — 13.8%. For all workers in the economy, annual wage growth typically measures 2%-5%, much lower than median wage growth at the entry level.
  • Minimum wage workers with more education are more likely to move up the wage ladder than those who are less educated. Workers with less than a high school education see wage gains of 8.06% in the first year, while high school graduates weigh in at 11.76% and those with some college education see wage gains of 14.47%. College graduates see gains of 20% or more within one year of working at the minimum wage.
  • Younger workers are more likely to exit the minimum wage within a year than are older workers. In all age groups below age 46, exit rates top 60%, which means the vast majority rise above the minimum wage quickly. For the relatively few minimum wage workers who are over age 45, exit rates decline from 59% to a low of 41% in the over-65 demographic.

Drs. Even and Macpherson also provide data on those who do not “exit” the minimum wage in the first year. Compared to those who climb the wage scale, those who get “stuck” in the first year are more likely to be working part-time, to have lower education levels, and to be older. Women and African-American workers are somewhat less likely to rise from the minimum wage in the first year, although their exit rates still measure 59.34% and 57.51%, respectively.

Labor Market Factors Affecting Wage Growth
This paper is unique in that the authors go far beyond a simple profile of one segment of the work force. The authors conduct a comprehensive examination of the factors that affect growth from the minimum wage. Among their findings:

  • Higher unemployment rates are associated with lower wage growth among minimum wage workers. Every one-percentage-point increase in the unemployment rate of “prime-age” workers (age 25-61) reduces wage growth of minimum wage workers by 0.21%. Alternatively, a lower unemployment rate would be associated with higher wage growth. Because the authors’ conclusions are drawn from state-level data, one can assume that wage growth varies by region just as labor market conditions vary.
  • As measures of median wages among high school graduates rise, exit rates and wage growth among minimum wage workers accelerate. A 10% rise in the median wage of high school graduates increases the probability of exiting minimum wage by 2.0%, while wage growth increases more than half-a-percentage point. One could conclude that policies aimed at boosting wages of high school graduates (most of whom make much more than minimum wage) would have a positive effect on wage growth at the entry level.
  • The industry of employment has some effect on exit rates. Compared to food service (a large employer of minimum wage earners), entry-level workers are somewhat less likely to rise above the minimum wage if they work in colleges or universities, but somewhat more likely to move up if they are employed in a department store. Among occupations, cashiers (the most common minimum wage job) appear to be the most likely to move up the wage scale.

    The authors measure the potential effect of access to training, whether inside or outside the firm, on wage growth above the minimum. Not surprisingly, those with access to training (and, therefore, to improved skills) tend to rise above the minimum wage more quickly. But a minimum wage hike undermines this effect. The authors find that a 20% increase in the minimum wage “eliminates any advantage of a minimum wage worker being in a high training occupation.” In short, an artificial hike in the minimum wage reduces the effects of a “natural” upward force on wages at the entry level.

    Effects of Higher Mandated Wages
    Finally, Drs. Even and Macpherson measure the impact of mandated increases in the entry-level wage on exit rates of minimum wage workers. They find sharp reductions in exit rates in the years surrounding a mandated wage increase. More importantly, they measure substantial drops in wage growth in the second year following a mandated wage hike. An increase in the minimum wage causes a compression in wage growth. In the case of a 10% increase in the minimum wage, median wage growth increases 7.9% the first year, while those at the 90th percentile see only a 6.4% increase. The following year, however, wage gains slow by 0.9% at the median for minimum wage workers, with a 5.3% decrease in growth for those at the upper end.

    Conclusion
    The research presented here is the most complete analysis currently available of wage growth among entry-level employees. Clearly, most workers who start at the minimum wage build skills and move up quickly, especially when labor markets are tight. This report quantifies this progress from numerous angles, providing policy makers with a new level of information on wage growth and the factors influencing it.

Topics: Minimum Wage