Minimum Wage Effects on Hours,

Employment, and Number of Firms:

The Iowa Case*
P E T E R E O R A Z E M and J. P E T E R M A T T I L A
Iowa State University, Ames, IA 50011

I. Introduction
Until recently, economists were uniquely united in the opinion that increases in the
minimum wage reduced employment. Frey et al. (1984, p. 991) reported that almost
nine of ten U.S. economists agreed with the statement "A minimum wage increases
unemployment among young and unskilled workers." The consensus empirical result,
as summarized by Brown et al. (1982), was that a 10 percent increase in the minimum
wage reduced teenage employment by 1-3 percent. The least skilled segments of the
population (especially school dropouts) appear to have been most adversely affected.
This consensus was challenged in highly publicized studies by Card and Krueger
(1995) and Katz (1992). Their findings, as summarized in Card and Krueger (1995, p.
1), constitute "a new body of evidence showing that recent minimum-wage increases
have not had the negative employment effects predicted by the textbook model." In
fact, "some of the new evidence points toward a positive effect of the minimum wage
on employment; most shows no effect at all." Their research was used to buttress argu-
ments for increasing the federal minimum wage in 1996.
Although several critiques of Card-Krueger ("Review Symposium," 1995; Bel-
lante and Picone, 1999; Burkhauser et al., forthcoming) and several studies using new
data sets (Partridge and Partridge, 1999; "Symposium," 1999) have subsequently been
published, the minimum wage debate is yet to be resolved. No consensus will likely
prevail until the weight of scientific evidence tends to dominate one side or other of
the debate.
Given this situation, it is important to investigate new data sets and make improve-
ments in methodology if economists and policy makers are ever to reach a consensus.
We contribute to the dialogue using a new data set and making, in our view, innova-
tions and improvements in the methodology of minimum wage analysis.
Our study is in the spirit of the longitudinal methodology used by Card-Krueger
and others but has several important advantages. In order to minimize problems asso-
ciated with aggregation bias, we use both firm-level and county-level data sets within
a state (Iowa) rather than the more aggregate state-level data sets used in some stud-
ies (e.g., Partridge-Partridge). Like Card-Krueger, we collect our own primary data

JOURNAL OF LABOR RESEARCH

Volume x x I n , Number 1 Winter 2002
4 JOURNAL OF LABOR RESEARCH

set (a survey of retail and service firms), but we go beyond this and supplement it with
government data from payroll and tax records. These data provide information on
whether firms are covered by the law as well as demographic characteristics, wages,
and hours of their workers.
One of the major advantages of our data set is that it allows us to disaggregate
workers and impacts. That is, we separate workers paid less than the new minimum
wage, and hence potentially directly impacted by an increase in the minimum, from
workers who already earn more than the new minimum, who are less likely to be
affected. Few other studies have been able to incorporate this dichotomy into their
analysis (Linneman, 1982, is an exception). Such a dichotomy is important if one is
to more precisely measure the magnitude of impact and distributional effects of min-
imum wage increases. These two groups of workers are likely to be substitutes such
that declining employment of low-wage workers may be offset, in part, by rising
employment of high-wage workers. Studies that aggregate these two groups of work-
ers may underestimate minimum wage impacts on low-wage workers.
Our data set also has the advantage of allowing us to estimate the impact on hours
as well as numbers of workers. As we will demonstrate, demand for low-skilled hours
is more elastic to wage increases than is demand for numbers of workers. Previous lit-
erature has been content to focus on the impact of rising minimum wages on employ-
ment. In contrast, we stress that the most meaningful approach is to analyze minimum
wage impacts in terms of more conventional elasticities of demand for labor hours.
We also have information on the number and size of firms which is rarely avail-
able. In recent years, economists have paid more attention to the creation and destruc-
tion of firms as part of labor market dynamics. An additional advantage is that our
data span the years 1989-1992 when the newly legislated Iowa minimum wage
increased rapidly and exceeded most other minimum wage rates. Hence, we observe
a large shock which should help to identify employment effects.
Briefly, Iowa was subject only to the federal $3.35 minimum wage, having no state
minimum wage law prior to 1990. Despite being a relatively low-wage state, Iowa estab-
lished its first state minimum wage on January 1, 1990, which at $3.85, exceeded the
federal rate. I At the same time, Iowa expanded coverage to small retail and service firms
having annual sales as low as 60 percent of the federal threshold. 2 Iowa's minimum rose
to $4.25 on January l, 1991 and to $4.65 on January 1, 1992. Throughout this period,
Iowa's rates exceeded both the federal minimum and the minimum wage rates of sur-
rounding states. One advantage of our data set is that we can study the impact of high-
legislated rates in a relatively low-wage state. Many other minimum wage studies have
focused on high-wage states such as New Jersey, Pennsylvania, and California.
In Section II, we analyze Iowa county-level data for retail and nonprofessional
service industries, based primarily on Unemployment Insurance records and Census
data. This analysis has the advantage of completeness, covering all firms and work-
ers, and provides a benchmark with which to compare the firm-level analysis that fol-
lows. However, the county-level data suffer the limitations inherent in aggregation. In
PETER E ORAZEM and J. PETER MATTILA 5

particular, they don't allow us to separate low-wage workers who may be directly
impacted from higher wage workers who already earn more than the minimum wage.
In Sections III and IV we analyze firm-level data generated from our own sur-
vey. We measure employment and wage rates by worker so that they can be dichot-
omized into groups below and above the new minimum wage. Although small sample
sizes and other data limitations necessitate caution in interpreting some of our results,
our estimates suggest that dichotomizing worker effects is important. That is, mini-
mum wage impacts tend to be larger when workers are dichotomized by level of earn-
ings than when they are not. Equally important, our methodology can fruitfully be
applied as other micro-level data sets become available.

II. County-Level Analysis

One advantage of using county-level aggregate data is that one can study the impact
of minimum wages on the number and size of firms. In other contexts, economists
have studied job creation and destruction associated with the birth and death of firms
(Hamermesh, 1993), but relatively little is known about the impact of minimum wages
on firms and firm size. In addition, county-level data can provide an aggregate bench-
mark of employment and earnings effects against which to compare estimates using
firm-level data.
Our strategy is to analyze changes in county-industry cell employment (or earn-
ings or number of firms) as a function of changes in the minimum wage relative to
county-industry wage levels, while controlling for national changes in industry employ-
ment and wage levels and for county changes in income levels. In addition, we allow
for minimum wage interactions with county-industry measures of coverage under the
law and county measures of the rural composition of the population as shown in equa-
tion 1:
in Yiijt/Yijt_l = 0r 0 + (0~ I + o~2Cij + 0r [MWt/Wiijt_l]
i + (%4Cij * Ri) In (1)
+ c~5 In (E~/E~_I) + cz6 In (W~/WjN_I) + 0~7 In (lJlit-l) + uij,,
where Y is alternatively number of firms, number of employees, or quarterly earnings
in the county/industry cell; C is the proportion of firms covered by the Fair Labor Stan-
dards Act in the county-industry cell; R is a dummy variable if the county is rural;
MWt is the Iowa minimum wage; Wijt-l is the predicted hourly wage rate by industry
and county as described below; ENis national employment in the industry at time t;
WNis the national average hourly wage in the industry at time t; and It is per capita
income in the county in period t. Changes in national industry employment and wages
control for exogenous shifts in industry demand, while changes in county income con-
trol for localized demand shifts. The national data came from Employment and Earn-
ings. By law, Iowa firms must comply with the minimum wage if their sales exceed
$300,000 per year. Data on the proportion of firms by county and industry with sales
above $300,000 were obtained from the Iowa Department of Revenue and Finance)
County per capita income was obtained from tapes provided by the Bureau of Eco-
6 JOURNAL OFLABOR RESEARCH

nomic Analysis. Counties were classified as rural if county population in the 1990 Cen-
sus of Population was greater than 38 percent rural. The specification allows for the
minimum wage effect to differ between rural and urban markets and between covered
and uncovered markets.
The dependent variables are taken from legally mandated quarterly unemploy-
ment insurance (UI) forms collected by the Iowa Department of Workforce Develop-
ment (IDWD) and aggregated to the county and industry level. We focus only on those
low-wage retail and service industries likely to be impacted by minimum wage changes.
These include each two-digit retail trade (SIC 52-57,59) and nonprofessional service
(SIC 70-79) industry but exclude eating and drinking establishments (SIC 58) due to
the complications associated with tips.
Unfortunately, these UI data do not report hours or hourly wage rates, which we
need to estimate equation 1. However, the IDWD, in cooperation with the U.S. Bureau
of Labor Statistics, also collects "establishment" data on hours and wage rates in its
"shuttle survey." We use the latter to estimate hourly wage rates for each of our county-
industry cells. Although more detail can be obtained from the authors, we obtained 15
quarters of this "shuttle survey" data 1989:2 through 1992:4 for a cumulative total of
171,947 workers in Iowa. We regressed log hourly wage rates by worker on individ-
ual attributes (gender, production worker status, proportion of overtime hours), county-
level variables (proportions rural, female, with high school diploma, and with college
degree), national variables (industry employment and wage rates), and the current min-
imum wage rate alone and interacted with county and industry dummy variables. 4
Predicted wage rates by county i, industry j, and quarter t (Wijt) were computed such
that cross-sectional variation is attributable to differences in mean wage rates across
industries and differences in county attributes. Temporal variation occurs because of
changes in the national variables and changes in the minimum wage.
Our estimates of equation 1 are reported in Table 1. One-quarter changes in the
data refer to changes from the quarter before (e.g., 1989:4) to the quarter in which the
minimum increased on January 1 (e.g., 1990:1). Four-quarter changes refer to fourth-
quarter to fourth-quarter changes in the data (e.g., 1989:4 to 1990:4). Elasticities meas-
uring the response of each of the dependent variables to changes in the minimum wage
rate are shown at the bottom of Table 1.
The estimates imply that a ten percent increase in the minimum wage relative to
the previous wage causes a decrease in the number of firms of ! .7 percent in one quar-
ter and 2.5 percent over four quarters. The effect on firm numbers is only marginally
larger in the covered sector and does not differ much between urban and rural coun-
ties. Quarterly employment also falls in response to the minimum wage increase. The
effect is larger in the covered than in the uncovered sector and is larger after four quar-
ters than after one quarter. The employment elasticity of around -. 1 is consistent with
the lower end of the estimates in Brown et al. (1982). Taken together, the more elas-
tic response of firm numbers than of employees to the minimum wage increase implies
that average firm size rises with the minimum wage.
 Table 1
County-Level One- and Four-quarter Changes in Firms, Employment, and Earnings in Response to Changes in the Minimum Wage, 1989-1992
One-Quarter Four-Quarter
0
FIRMS EMPLOYMENT EARNINGS FIRMS EMPLOYMENT EARNINGS >
N
ln(MWJWt_0 -. 167"* -.060 -.081 -,255** -. 105" -. 146**
(5.90) ( 1.41 ) ( 1.41 ) (6.17) ( 1.76) (2.00) N
C 9 ln(MWfl~ 1) -.003 -.027 -.037 .007 -.010 .003 e~
(.21) (1.51) (1.52) (.47) (.43) (. 11)
R 9 ln(MWt/Wt 1) .0004 -.0008 .005 .002 .005 .009*
(.18) (.27) (1.16) (.55) (1.30) (1.91) ..]
m
C 9 R 9 ln(MWt/Wr_l) -.004 .008 -.006 -.009 -.009 -.021
(.58) (.74) (.40) (.92) (.70) (1.27) N
In(EN/ENtl) 1.460"* 1.421"* 2.314"* 1.130"* .739"* 1.038'*
M
(7.28) (4.71 ) (5.71 ) (5.92) (2.67) (3.07)
ln(WU/wtU_j) .502** 1.227"* 1.103"* -.194" .029 .032 >
(3.94) (6.41 ) (3.91 ) (1.90) (.20) (. 18)
In(It/It_a) .088 .281"* .308** .330** .430** .523**
(1.11) (2.36) (1.93) (3.19) (2.87) (2.86)
SIC dummies I," ~ ~ ~ ~ V'
R2 .045 .042 .030 .038 .015 .016
N 3654 3651 3651 3653 3652 3652
Minimum Wage Elasticities Firms Employment Earnings Hours Firms Employment Earnings Hours
Urban
Covered -.170"* -.087** -.108"* -1.11"* -.248** -.11" -.143"* -1.14'
Uncovered -.167'* -.060 -.081 -1.08 -.255** -.105 -.146"* -1.15"*
Rural
Covered -.173"* -.080* -.119"* -1.12'* -.255** -.119"* -.155"* -1.16"*
Uncovered -. 166** -.061 -.076 -1.08 -.253** -. 100" -. 137* -1.14*

Note: t-statistics in parentheses. * (**) indicates significanceat the. t0 (.05) level. The slight variation in sample size is due to nonreported quarterly data for a few county-industrycells. -...I
8 JOURNAL OF LABOR RESEARCH

On the other hand, we have already pointed out that the employment response may
be underestimated. The county-level data combine workers whose wages in t-1 were
below the new minimum wage (hereafter, the subminimum group) and those whose
wages in t-1 exceeded MWt (hereafter, the superminimum group). If these groups are
substitutes in production, aggregate data will capture the net change but not the impact
on the subminimum group. We attempt to address the latter issue in the next section.
Quarterly earnings fall in all sectors in response to the minimum wage increase.
The covered sector earning's elasticity is approximately -. 12 over one quarter and -. 15
over four quarters. The earnings elasticities are greater in magnitude than are the
employment elasticities. In fact, negative earnings elasticities require that the aggre-
gate hours elasticity with respect to the minimum wage must be in the elastic range. 5
The results from Table 1 are similar to the pre-Card/Krueger consensus estimates
for employment responses to the minimum wage. Hours elasticities are infrequently
reported in the literature, although our findings of elastic hours responses are consis-
tent with those reported by Linneman (1982). To our knowledge, there are no recent
studies of the response of firm numbers to the minimum wage increases, but neoclas-
sical theory predicts that an increase in input prices will reduce firm numbers, other
things equal. To the extent that larger firms have higher wages and more capital-inten-
sive production processes, their costs will rise by a smaller proportion than will the
costs of small firms. This accords well with our finding that firm size rises in response
to the minimum wage.

II|. Firm-Level Analysis: Data and Stylized Facts

As diseussed previously, the county-level data have a serious limitation in that they
aggregate sub- and superminimum workers. This should bias toward zero the estimated
employment and earnings responses to the minimum wage increase. To examine this
possibility, we collected data on hourly wage rates (or average work hours) for a sam-
ple of firms in these retail and service industries.
Multi-establishment firms were excluded to avoid confusion of respondent loca-
tion with establishment location. The exclusion of multi-establishment firms effectively
excluded general merchandise firms (SIC 53), although the exclusion was not by design.
In general, we focus on smaller firms than exist in the population. Because the mini-
mum wage was raised in the first quarter of 1990, after remaining constant at $3.35
since 1982, the universe of retail and service sector firms was taken to be those firms
in business in fourth quarter 1989. Sampled firms were followed longitudinally from
1989:4 through 1992:1, a period which contained the successive minimum wage
increases in 1990:1, 1991 : 1, and 1992:1.
Selection of Firms and Collection of Data. IDWD records of firms paying into
Unemployment Insurance contained 17,362 single-establishment retail and nonpro-
fessional service firms in 1989:4. Recall that neither hours nor hourly wages are pro-
vided, necessitating our survey. A random sample of 1,201 firms (roughly 7 percent
PETER E ORAZEM and J. PETER MATTILA 9

of the universe) was selected for inclusion in the study. Of these, 329 had changed own-
ers, merged, eliminated all employees (which halted reporting to IDWD), or closed
by 1992:3. These firms were excluded. Thirty-seven firms did not have telephone num-
bers. This left 835 firms still in existence in 1992 which had the same owner, still had
employees, and were sending quarterly reports to IDWD.
Because of confidentiality rules, firms were first contacted by IDWD for permis-
sion to participate in the survey and for the release of their unemployment insurance
records. These initial phone contacts were made in March 1993. Of the 835 existing
firms with phone numbers, 55 percent agreed to release their records; 25 percent refused
to release their records; and 20 percent could not be contacted for various reasons (dis-
connected phones, unavailable owners, or no answer). The majority of those refusing
said they had no records or records were difficult to locate. Others stated that they did
not have the time to participate or were reluctant to disclose wage rates.
Unemployment insurance records included information on quarterly employment
and earnings for individual employees. Driver's license records were merged by social
security number to get the gender and age of each worker, A survey was sent to the 460
firms which agreed to participate. The 460 cooperating firms were distributed across
industries and urban and rural counties in roughly equal proportions to their distribu-
tion in the universe of firms. In addition to other questions, firms were asked to list
hourly wage rates for each of their workers in 1989:4, 1990:1, 1990:4, 1991 : 1, 1991:4
and 1992:1. Ultimately, 212 firms returned the survey, 139 of which supplied useable
hourly wage data on an average of 772 workers per quarter. All 460 firms are incor-
porated into the analysis below.
One innovation of our study is that we measured the coverage status of each firm.
For the 460 firms that agreed to release their records, the Iowa Department of Rev-
enue and Finance (IDRF) released sales tax records for 1990, 1991, and 1992. Firms
with reported sales of $300,000 or more were considered covered (as stated by Iowa
statute) and those below $300,000 were considered uncovered in the analysis below.
About one-quarter of retail employees and one-third of service sector workers in the
460 firms fell into the uncovered sector. 6 Although pioneering, our minimum wage cov-
erage variable has some inherent ambiguities and must be interpreted with caution.
First, the $300,000 annual minimum sales criterion is a moving test, the results of which
may change each quarter. A firm with $320,000 sales prior to the first quarter would
legally be required to pay minimum wages but would later be exempt if its annual sales
fell to $295,000 prior to the fourth quarter. Since we only have calendar-year sales data,
our coverage variable will not capture switching of this nature. On the other hand, it
is questionable whether such a firm would actually change its pay practices in such cir-
cumstances. More likely, the firm would either continue to pay the minimum wage in
both quarters or to ignore the law in both quarters. Since the law is enforced on a com-
plaint basis, it is plausible that some firms may claim (believe) and inform their employ-
ees that they are exempt even though they are not exempt. Other firms may believe
that they are covered even when they are not.
 10 JOURNAL OF LABOR RESEARCH

Second, the law provides exemptions and special cases which our data aren't suf-
ficiently detailed to handle. For instance, individual workers engaged in interstate trans-
actions such as credit card sales or shipping/receiving are subject (as individuals) to
the federal minimum wage even though their firm is exempt from both the state and
federal minimum wage laws. Seasonal amusement and recreation firms may be exempt
from both the state and federal rates, even though their total revenues exceed $300,000.
Full-time students, learners, teenagers (during their first 90 days of employment), and
the handicapped may also be paid less than the minimum wage under certain condi-
tions. Given these complications, it is appropriate to regard our coverage variable with
some caution. Our coverage variable might alternatively be interpreted as measuring
firm sales rather than legal obligations concerning wage rates.
Wage Estimation. While direct information on hourly wages was available for an
average of 772 individuals each quarter, relying on observed wages could cause sig-
nificant biases in the estimation. Minimum wage changes could alter the skill compo-
sition of the labor force. That is, firms might want to switch to higher skilled workers.
Consequently, changes in average wages would partially reflect changes in average
skills and not the desired change in the wage per unit of skill. Ideally, we would like
to hold skills constant at their prior levels. In order to do this, we estimate an earnings
function of the form

In W/t = 7jFi +'[2Ait +'[3A2t +]t4Ait*Fii + 75A2*Fi + 76Cit +77NEMPit (2)

n m
+j=l
~ ~)j SICijt +j~l'= ~tJMo" + Vit'

where F is a female dummy variable; A is age; C is firm-coverage status; NEMP is

the number of employees in the firm; the M are county labor market variables (includ-
ing per capita income, proportion rural, proportion of women in the labor force, and
the proportion with either high school or college degrees); and the SIC are industry
dummy variables.
Decomposition into Subminimum and Superminimum Groups. Estimates of equa-
tion (2) are reported in Appendix Table A1 for all (six) first and fourth quarters in the
sample period. The model explains 41 percent to 51 percent of the variation in wage
rates, which is quite good for micro wage data. Age, as a proxy for experience, has
the expected quadratic effect. Females earn less than males (evaluated at the mean
age of the interaction effects). Covered firms with higher sales pay higher wages,
although the small negative impact of employment size is a puzzle in the two regres-
sions for which it is statistically significant. Wage rates tend to be lower in rural coun-
ties and higher in counties having a higher percentage of females. We suspect that the
latter reflects the endogenous tendency of high-wage areas (such as Des Moines) to
attract more young females.
By holding fixed the earnings function coefficients in a given quarter (hereinafter,
the quarter's earnings structure), we can predict period t hourly wage rates for work-
PETER E ORAZEM and J. PETER MATTILA 11

ers employed in all other periods. This generates a wage rate distribution for each
period, while holding the time t earnings structure fixed, but allowing the worker attrib-
utes to reflect those of the workers actually employed in each period. This predicted
wage distribution (W[) allows those employed in period t to be decomposed into two
groups. The subminimum group is defined as those for whom ln(MWt+l/l,V~) > 0 and
the superminimum group is those for whom ln(MWt+j/W[) < 0, 7 where MWt+j is the
minimum wage implemented one quarter after period t.
The estimated parameters in (2) also enable us to predict what workers in a dif-
ferent period, t', would have been paid at time t. This procedure has the advantage
that we can include newly hired employees at t', even though they weren't employed
at time t. We derive the subminimum population at time t' as all employees for whom
ln(MWt+l/('l/[') > 0, holding the time t earnings structure constant.
In Table 2, we employed this strategy using three different base earnings struc-
tures. The first two columns present the predicted subminimum group, using the 1989:4
wage structure and the 1990:1 implemented minimum wage of $3.85. The two mid-
dle columns use the 1990:4 earnings structure and the 1991:1 implemented minimum
wage of $4.25. The final two columns use the 1991:4 wage structure and the 1992:1
implemented minimum wage of $4.65. This strategy holds returns to firm and indi-
vidual attributes (the earnings structure) fixed over time, so the simulated changes in
employment shares are due to changes in the distribution of attributes of the 460 firms'
employees. Whatever the possible biases in the assignment into super- and submini-
mum groups, those biases are fixed over time. The simulated subminimum employ-
ment shares were generated for all employees in the 460 firms and aggregated
separately for urban, rural, covered, and noncovered employees.
The major purpose of this exercise is to see if employment patterns differ between
rural and urban areas and between covered and noncovered firms. If all firms were sub-
ject to general economic trends, we might expect to observe similar patterns for all of
these groups. That is, if there were a general increase in the demand for more experi-
enced workers, we should observe increasing superminimum employment shares and
decreasing subminimum shares in Table 2. The interesting result is that we only observe
this pattern for urban areas and covered firms (and all employed). That is, comparing
the earliest and the final corresponding quarters (so as to avoid seasonal variation),
the superminimum shares increased by 0.7 to 3.0 percentage points in urban firms
and by 1.3 to 2.6 percentage points in covered firms. In contrast, the superminimum
employment shares declined in all but one case for noncovered firms (-0.1 to -1.9
declines except for one +0.2 increase) and for three of six cases for rural firms (the
six changes being -1.0, -0.3, -0,2, 0, + 1.2, and +2.4). 8
Further examination of the data indicated that at least part of the differential pat-
terns for noncovered and rural firms can be traced to teenage employment. Whereas
the proportion of teenagers declined in other sectors by 5 percent to 22 percent, the
proportion increased by at least 17 percent in the rural and noncovered sectors. 9 One
interpretation is that less skilled workers (e.g., teenagers) spilled over to the noncov-
 12 JOURNAL OF LABOR RESEARCH

Table 2

Simulated Subminimum Employment Shares, Based on Currently Employed Workers

in 460 Firms, Holding Wage Structures Fixed at the 1989:4, 1990:4, and 1991.'4 Levels
Year and 1989:4 Coefficients 1990:4 Coefficients 1991:4 Coefficients
Quarter Subminimum a Superminimum Subminimum b Superminimum Subminimum c Superminimum

All Employed
89:4 27.4% 72.6% 18.6% 81.4% 29.0% 71.0%
90:1 22.5 77.5 14.2 85.8 26.0 74.0
90:4 27.8 72.2 18.1 81.9 28.9 71.1
91 : 1 22.9 77. I 14.5 85.5 25.5 74.5
91:4 27.0 73.0 17.3 82.7 27.7 72.3
92:1 21.5 78.5 13.4 86.6 23.8 76.2
Rural Counties Only
89:4 29.7% 70.3% 21.5% 78,5% 36. 1% 63.9%
90:1 28.8 71.8 19.7 80,3 35.7 64.3
90:4 31.8 68.2 22.9 77, I 37.1 62.9
91 : 1 30.2 69.8 21.4 78.6 36.3 63.7
91:4 29.9 70. I 22.5 77.5 36.4 63.6
92:1 27.0 73.0 20.0 80.0 33.3 66.7
Urban Counties Only
89:4 26.2% 73.8% 17.1% 82.7% 25.3% 74.7%
90:1 18.8 81.2 I 1.0 89.0 20.4 79.6
90:4 25.5 74.5 15.4 84.6 24.3 75.7
91:1 18.3 81.7 10.2 89.8 18.8 81.3
91:4 25.3 74.7 14.3 85.7 22.7 77.3
92: I 18. I 81.9 9.3 90.7 18.0 82.0
Not Covered Firms Only
89:4 28.1% 71.9% 2 I. 1% 78.9% 36.3% 63.7%
90:1 26.9 73.1 19.7 80.3 35.2 64.8
90:4 28.9 7 I. 1 21.9 78. I 36.3 63.7
91 : 1 28.8 71.2 21.3 78.7 35.3 64.7
91:4 30.0 70.0 21.3 78.7 36.4 63.6
92:1 28.8 71.2 20.8 79.2 35,0 65.0
Covered Firms Only
89:4 27.8% 72.8% 17.7% 82.3% 26,4% 73.6%
90:1 20.8 79.2 12.1 87.9 22.5 77.5
90:4 27.4 72.6 16.7 83.3 26.2 73.8
91:1 20.6 79.4 11.9 88.1 21.8 78.2
91:4 25.9 74.1 15.8 84.2 24.5 75.5
92:1 18.9 81.1 10.8 89.2 19.9 80.1

Notes: aproportion of workers employed in the year and quarter with predicted pay below $3.85 in 1989:4.
bProportion of workers employed in the year and quarter with predicted pay below $4.25 in 1990:4.
CProportion of workers employed in lhe year and quarter with predicted pay below $4.65 in 1991:4.
PETER E ORAZEM and J. PETER MATTILA 13

ered sectors as would be predicted in Mincer's (1976) model. J0 On average, rural areas
have a higher proportion of subminimum workers than urban areas, especially in non-
covered firms (footnote 10). In the next section, we present evidence that subminimum
employment in rural firms is less negatively affected by changes in minimum wages
than in urban firms.

IV. F i r m - L e v e l A n a l y s i s : C o m p a r a t i v e S t a t i c s
In this section, we analyze these firm-level data using an employment shares demand
model, an approach similar in spirit to that used in Section II but with the advantage
of distinguishing between subminimum and superminimum workers. As emphasized
previously, the effect of minimum wages on changes in employment and earnings of
these two groups of workers should differ. We first briefly summarize our model, then
discuss the data before presenting our results. An appendix which presents our model
in more detail is available from the authors on request.
Methodology. Designate total subminimum hours for firm i as H I (for below),
the wage rate paid to this group as W/f, and this group's share of total earnings at time
t as Sff = ( W i B H i B t / c i t ) , where C/t is total cost of subminimum and superminimum work-
ers. Assuming output constant demand for factor inputs at time t, neutral technologi-
cal change, ignoring non-labor inputs, and assuming that the superminimum group's
wage rate can be characterized by a random error term, l I the first difference of the sub-
minimum share equations can be written as:
Sfft+t - S B = ot ln(MWt+l/W/tB) + ei t , (3)
where eit is an expression involving the error terms from each share equation and the
random walk process.
It can be shown that the parameter ct in (3) provides an estimate of the elasticity
of subminimum earnings share with respect to the wage change. Dropping subscripts
for simplicity:
dSB/d ln(WB) = S B + S B riBB - (sB) 2 = o~, (4)
where rlBB is the elasticity of demand for hours of the subminimum group with respect
to the wage rate. Given estimates of tx and S, an estimate of rlBB can easily be derived
from (4).
Alternatively, the subminimum group share can be measured as the employment
share, L~ = E~/ET, where E B is number of subminimum employees and E T is the sum
of subminimum and superminimum employment. Equation (3) could be estimated sub-
stituting the employment share as the dependent variable. This would allow us to esti-
mate a corresponding coefficient (c~L) on the wage ratio term.
The parameter ~L provides an estimate of the elasticity of the subminimum
employment share with respect to the wage change:
dLBld ln(WB) = L B OBB - L B (OAB L a + OBB L B) = otL, (5)
14 JOURNAL OF LABOR RESEARCH

where 0B8 is the elasticity of demand for subminimum employment with respect to
its own wage rate; 0AB is the cross elasticity of demand for superminimum employ-
ment with respect to the wage of subminimum workers; and L A is the employment share
of superminimum workers. It can be shown that the subminimum employment elas-
ticity can be measured as:
0B/~ = ctL/(LBLA(I + sA/sB)). (6)
If hours are less costly to adjust than are numbers of employees, demand for labor hours
should be more elastic than demand for employees, implying that qBB < 0BB. However,
the opposite may be true if hiring and training costs are very low, as may be the case
with unskilled labor.
Constructing the Variables. The firm's earnings and employment shares were esti-
mated using the earnings structures reported in Appendix Table A1. The 1989:4 earn-
ings structure was used to estimate hourly wage rates for all those employed in the
460 firms in 1989:4, 1990:1, and 1990:4. All workers in these periods whose predicted
wage in 1989:4 is less than $3.85, the minimum wage implemented in 1990, are con-
sidered subminimum workers. In quarter t (where t = 89:4, 90:1, or 90:4) the submin-
imum group are those for whom 1n(3.85/I~9) > 0. This methodology allows us to assign
workers to sub- or superminimum groups, even if they were not employed in 1989:4.
The employment share for subminimum workers is the ratio of predicted submini-
mum workers to all workers. The earnings share of subminimum workers is the quar-
terly earnings for those identified as subminimum workers relative to total quarterly
earnings. One-quarter changes (89:4 to 90:1) and four-quarter changes (89:4 to 90:4)
in these shares provide the dependent variables for equation (3). The method is repeated
for the 1991 minimum wage of $4.25, using the 1990:4 earnings structure. In this con-
text, we define the subminimum group as those for whom ln(4.25/W~0 ) > 0 where t =
90:4, 91 : 1, or 91:4. Likewise for the 1992 minimum wage increase to $4.65, the 1991:4
earnings structure identifies subminimum groups using In(4.65/W~l ) for t = 91:4 or
92:1.
It is very important to emphasize that this method does not force the subminimum
employment share to decline as workers' wages are raised to the new higher rate. Actual
wage rates are not used in constructing these data. Rather, the employment shares
change solely due to changes in the demographic mix of employees in each firm. That
is, changes in the proportions of teenagers and women change the subminimum
employment shares. By holding constant the wage structure that existed prior to the
minimum wage increase, we prevent (1) automatic decreases in the subminimum pop-
ulation and (2) bias due to changes in the returns to skill that might occur as a result
of the legislated rate increase.
The key independent variable in (3) is the ratio of the minimum wage relative to
the average predicted wage of the subminimum group in the period before the mini-
mum wage increase) 2 This ratio was set to one if the firm employed no subminimum
workers. In log form, the variable takes a minimum value of zero for firms employing
only superminimum workers in both periods (and hence face zero effective change in
PETER F. ORAZEM and J. PETER MATTILA 15

the subminimum wage) and takes on positive values for employers having submini-
mum workers. The log ratio of minimum wage to average previous subminimum wage
is interacted with a coverage dummy variable (C), a rural dummy variable (R), and
the product (CR) as previously in (1). The specification allows estimation of several
potential differences in responses to the minimum wage: impacts on subminimum
versus superminimum workers, on rural versus urban workers, and on covered versus
noncovered workers,
Results. The regressions of changes in subminimum employment shares and of
changes in subminimum quarterly earnings shares are reported in Table 3. J3 Estimates
for one-quarter (3 changes per firm) and four-quarter (2 per firm) changes are shown
separately to allow for possible lagged a~ustments by firms. Joint F-tests of signifi-
cance of all coefficients involving (MWt/Wt_l) variables were computed to determine
whether minimum wages had neutral effects on superminimum and subminimum
employment. The neutrality hypothesis is rejected in every specification. While the R2s
are small, the coefficients are quite stable across dependent variables, specifications
and time intervals.
We have generated employment and hours elasticities (Table 4) from the regres-
sion estimates (Table 3). Estimates of the share elasticities (cz and ctc) are always neg-
ative and are statistically significant at the 5 percent level in 15 out of 16 of the estimates
in which industry dummy variables were entered. Likewise, estimates of the hours elas-
ticity rib n and the employment elasticity 0Be are always negative.
The employment elasticities are in the range -.22 to -.85, varying with the spec-
ification. The magnitudes are larger than those obtained using the county-level data.
As expected, disaggregation makes a difference. Subminimum employment using firm-
level data is more strongly affected than is total employment at the county level.
Although there is no clear pattern between covered and noncovered firms, the
employment elasticities are uniformly less negative in rural areas than urban areas.
Although there is no evidence of a Mincer-type spillover effect that raises submini-
mum employment, we do find evidence that the reduction is smaller in rural firms. As
discussed in the previous section, rural firms have more subminimum workers and may
be less subject to enforcement.
The hours responses are more elastic, ranging from -1.0 to -1.5 with the specifi-
cation. This is consistent with the hypothesis that hours are easier (lower cost) to adjust
than is employment. When we control for industry, a 10 percent increase in the mini-
mum wage will cause about a 6 percent reduction of subminimum employment in urban
firms one year later, but a 13-15 percent reduction in hours worked. As with employ-
ment, the hours elasticities typically are less negative in rural areas than urban areas.
We note that these estimates are short-run elasticities. Over longer periods of time,
employment may adjust more fully. Implicitly, capital is constant in our analysis. Over
longer periods, capital may be substituted for labor. This possibility is somewhat allayed
by the fact that small retail and service sector firms are not capital intensive and may
have limited capital-labor substitution possibilities. 14
 16 JOURNAL OF LABOR RESEARCH

Table 3

Iowa Firm-Level Estimation o f Changes in Subminimum Shares

As a Function o f the Minimum Wage

Employment Shares Earnings Shares

1 2 3 4

One-Quarter Change
In(MWt/Wt I) -.072** -.088** -.028** -.036**
(6.13) (7.06) (2.49) (3.03)
C * ln(MWt/Wt_0 .004 -.019 -.007 -.021
(.26) (1,07) (.43) (1.25)
R 9 In(MWt/Wt_z) .041"* .041"* .012 .011
(2.99) (3.03) (.91 ) (.86)
C * R * ln(MWt/Wt_l) -.022 .008 -.002 .014
(] .09) (.38) (. 13) (.7 l)
SIC dummies included b I/
R2 .062 a .088 a .016 a .029 a
N 1274 1274 1274 1274
Four-Quarter Change
In(MWflWt_0 -.065** -.079** -.029* -.036"*
(3.63) (4.22) (1.91 ) (2.30)
C * In (MWflWt_i) .029 .010 -.004 -.020
(1.18) (.40) (. 17) (.94)
R 9 In (MWt/Wt_j) .007 .006 -.010 -.015
(.35) (.30) (1.28) (.85)
C * R * In (MWt/Wt_t) .001 .024 .008 .052**
(.02) (.75) (1.78) (1.98)
SIC dummies included b i,I r
R2 .039 a .055 a .022 a .044 a
N 845 845 845 845

Notes: t-statistics in parentheses. * (**) indicates significance at the .10 (.05) level, aF-test of the joint hypothesis that all
coefficients except the constant term are equal to zero is rejected at the .01 level, bA constant term was also included in the
specifications that excluded industry dummy variables.
P E T E R F. O R A Z E M and J. P E T E R M A T T I L A 17

Table 4

Demand Elasticities Implied by the Firm-level Demand Regressions

No Industry Controls Industry Controls

Share Demand Share Demand
Elasticity Elasticity Elasticity Elasticity

Employment
Urban c~_L
_~ Employment otL Employment
(0Be) (0BB)
Covered 1 quarter changes -.068** -.54 -. 106'* -,85
4 quarter changes -.035 -.28 -.069** -,55
Uncovered 1 quarter changes -.072** -.58 -.088"* -.70
4 quarter changes -.065** -.52 -.079** -,63
Rural
Covered 1 quarter changes -.049** -.39 -.057** -,46
4 quarter changes -.028* -.22 -.039** -.3 I
Uncovered 1 quarter changes -.032** -.26 -.046** -,37
4 quarter changes -,058"* -,46 -.073** -,58

Earnings
Urban Hours (T~BB) OL Hours (qBB)
Covered 1 quarter changes -.035** -1.27 -.057** -1.50
4 quarter changes -.032* - I .24 -.056** -1.49
Uncovered 1 quarter changes -.028** - 1.20 -.036** - 1.28
4 quarter changes -.029* - 1.21 -.036** - 1.28
Rural
Covered I quarter changes -.026** -1.17 -.031"* -1.23
4 quarter changes -.010 -1.01 -.019 -I.10
Uncovered 1 quarter changes -.016" -1.07 -.025** -1.16
4 quarter changes -.034** -1.26 .051"* -1.44

Notes: The employmentbased demand elasticities are computed using equation (6), and the earnings based demand elas-
ticities are computed using equation (4). Parameter values are taken from Table 3. The top number is the one-quarter
elasticity. The bottom number is the four-quarterelasticity, * (**) representsa value of c~significantly different from zero
at the .10 (.05) level. Over the period, those predicted to be in the subminimum group have average employment share of
.130 and average earning share of .096.
 18 JOURNAL OF LABOR RESEARCH

V. Conclusions
Our results show that minimum wages reduce employment opportunities for workers.
Like the early studies, our county-level (more aggregate) estimates imply fairly mod-
est impacts with elasticities of approximately -0.1. However, our firm-level estimates
for subminimum workers imply much more elastic responses. In particular, hours elas-
ticities are in the elastic range.
One may question why we find much more elastic demand responses compared
to the earlier studies. The real mystery, however, is why minimum wage studies have
yielded such small elasticities when studies of the demand for teenage and unskilled
labor routinely find more elastic demand. 15 Our interpretation is that the level of dis-
aggregation makes a difference. The more closely a minimum wage study focuses on
young and low-wage (what we call subminimum) workers, the larger the measured
impact is likely to be. The corollary is that youth, women, and minority workers are
most likely to be adversely affected by high minimum wage rate increases. Our results
imply declining aggregate earnings for such workers. 16
If economists and policy makers are to reach consensus on minimum wage effects,
it is important to obtain and study new data sets and to improve the methodology. We
make contributions in both regards. First, we analyze a new firm-level data set, aug-
mented with information on individual workers. Relatively few such data sets with
the necessary variables exist. Second, we have used a methodology which we believe
provides improvements. In particular, our technique for separating subminimum from
superminimum workers and isolating the minimum wage impacts on the former may
be useful to others in this field of research.
Our data set, like most, is not perfect. Admittedly, our firm-level sample is small
and limited to a three-year period in one state. On the other hand, our data have sev-
eral advantages over others, in addition to the level of disaggregation already empha-
sized. For example, Iowa is a relatively low-wage state, so the sizeable minimum wage
increases caused larger shocks than found in many data sets. Our study is one of the
few that can explore the effect on worker hours as well as numbers. We also have one
of the few data sets that allows us to distinguish between rural and urban areas, find-
ing smaller employment impacts in rural areas. And although it did not have much
impact on our results, we were able to distinguish whether individual firms are cov-
ered by the minimum wage laws. Finally, we are among the few to study the impact
of minimum wages on the number and size of firms, finding that minimum wages
reduce the number but increase average firm size.
P E T E R F. O R A Z E M and J. P E T E R M A T T I L A 19

NOTES

*We thank the USDA Cooperative State Research Service Grant #92-37401-8284 for financial support. Steve
Smith and Dick Sampson at the Iowa Department of Employment Service, Rich Jacobs and John Godwin
at the Iowa Department of Revenue and Finance, and Mark lmerman, Iowa Extension Program Specialist,
helped us obtain our data. We appreciate the assistance of Darin Wohlgemuth, Jooseop Kim, and Alex Turk
in coordinating, programming, and analyzing this data set. Kelly Cordaro and Norma Meade did the tele-
phone survey and key entry work. Donna Otto prepared the manuscript.
qn 1993, Iowa ranked 42 out of 50 states in average annual income for unemployment insurance covered
wage and salary workers. In contrast, New Jersey ranked third (Statistical A b s t r a c t o f the United States,
1995).
2Apparently, Iowa legislators thought these would be the mandated minimum wage levels in federal legis-
lation which was under consideration and expected to pass. After the lowa legislation was passed, U.S.
Congress passed an amended bill with a lower level. Therefore, the higher minimum wage in Iowa was prob-
ably an accident, but Iowa legislators are hesitant to admit that on the record.
3To test for sensitivity, coverage was also measured by proportion of total sales in the county-industry cell
made by covered firms. The results were not changed appreciably. A better coverage measure might be the
proportion of workers covered per county/industry cell, but that measure was not available.
4The results of this regression are available on request.
5Let quarterly earnings be W.H. The elasticity of quarterly earnings with respect to wages is rlwt4 =
d ln(W~)/d ln(W) = (W/dW) ( H d W + W d H / W . H ) = 1 + Tin where 'qH is the aggregate hours elasticity of
demand for all workers. Vlwn < 0 implies that rlH < - I . Note that Tlt4 = TIE + rlt4/E, where tie is the elasticity
of employment numbers and rlH/E is the elasticity of hours per worker. The results in Table I suggest "qe =
-. 1 and rl,q = - I . I, so lltt/E is approximately - I .0.
6The 460 cooperating firms were distributed across industries and urban and rural counties in roughly equal
proportions to the distribution in the universe of firms.
7predicted subminimum and superminimum status was compared to the actual hourly wage rate for the sub-
set of workers for whom data was supplied by our surveyed firms. These predictions were correctly classi-
fied 79 percent of the time, aggregating over all 6 quarters. The wage equation generated smaller subminimum
groups (by 11 percent) and larger superminimum groups (by 4 percent) than did the reported wages. Appen-
dix Table A2 summarizes the actual versus predicted sub- and superminimum groups by quarter.
8These results are not due solely to the use of wage structures. As shown in Orazem and Mattila (1995),
covered sector employment shares for teenagers fell sharply in Iowa over the period while increasing for
those aged 20-24.
9 See Orazem and Mattila (1995), Table 1.1 I.
l~ proportions of workers paid below the current minimum based on reported wages (top number) or
predicted wages (bottom number in parentheses) are reported for the first quarters of 1990 and 1992. Gen-
erally, uncovered or rural firms are more likely than covered or urban firms to pay wages below the mini-
mum. However, there are large numbers of employees paid below the minimum wage in all sectors.
Urban Rural
Covered Uncovered Covered Uncovered
1990:1 3.5 5.5 4.9 15.5
(33.1) (24.7) (39.9) (53.5)
1990:2 5.8 6.7 4.6 17.0
(23.1) (48.8) (30.4) (61.6)
11Ashenfelter and Card (1982) found that quarterly wage series were well represented by an AR(1) process
with a coefficient insignificantly different from 1. Analysis which relaxed this restriction by incorporating
20 JOURNAL OF L A B O R R E S E A R C H

predicted changes in superminimum wages in response to the minimum wage yielded results similar to those
reported in this study.
12We considered the possibility that superminimum wages might have ripple effects when the minimum
wage rises. To allow for possible impacts on demand we experimented by including changes in both sub-
minimum and superminimum wages in equation (3). The results yielded nearly identical demand elastici-
ties as those in Table 3 (Orazem and Mattila, 1995).
13 Summary statistics for the pooled one- and four-quarter underlying data are:
Mean St. Dev.
E B = subminimum employed per firm 8.95 15.9
EBWB --- subminimum aggregate earnings per firm $24,567 $50,580
MW = minimum wage $4.03 $.498
~r = predicted hourly wage rate $5.37 $1.34
In(MW/WB) = log of ratio .394 .548
R = rural firm .514 .500
C = covered firm .462 .499
ALB = change in subminimum employment share -.005 . 119
ASB= change in subminimum earnings share -.0004 .108
In addition to these variables, we also entered a sample selection control variable in the regression equa-
tions of Table 3. However, this correction, based on exogenous variables such as flooding that took place at
time of the survey, had no significant effect. Full discussion and results are available in Orazem and Mat-
tila (1995).
14We do not have capital data to control directly for such adjustments. An alternative approach, used by Neu-
mark, Schweitzer, and Wascher (2000), is to attempt to use lagged changes in wage rates to capture any
lagged impact resulting from substitution of labor saving inputs. Although this is a reasonable approach in
principle, we are concerned that the lags will capture a variety of extraneous phenomenon, not just the impact
of minimum wages. Sorting out these effects would require a longer time series than our two-year sample
period.
15See Table 3.9 in Hamermesh (1993) for a summary of results of demand studies disaggregated by age.
Elasticities for teenage workers are generally above .5 in absolute value with some estimates well into the
elastic range.
16Linneman (1982) also found that earnings for subminimum workers fell in response to minimum wage
increases.
PETER E ORAZEM and J. PETER MATTILA 21

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 22 JOURNAL OF LABOR RESEARCH

Appendix Table A 1
Log Hourly Wage Rate Equations

1989:4 1990:1 1990:4 1991:1 1991:4 1992:1

Intercept - 1.71 -.24 -1.43 - I .48 -. 17 -. 10

(1.61) (.23) (1.35) (1.40) (.18) (.11)
F (FEMALE) .51 .27 .38 .24 .23 .17
(3.20)** (1.70) (2.62)** (1.57) (I.70) (1.15)
A (AGE) .07 .05 .06 .06 .05 .05
(I 1.3)** (8.78)** (9.85)** (9.65)** (9,41)** (8.05)**
A2 -.001 -.001 -.001 -.001 -.001 -.0005
(9.75)** (7.38)** (8.61)** (8.54)** (8.24)** (6.91)**
A*F -.037 -.022 -.028 -.022 -.019 -.016
(4.33)** (2.60)** (3.60)** (2.65)** (2.62)** (2.03)**
A2 * F .0004 .0002 .0003 .0002 .0002 .0001
(3.65)** (2.05)* (3.06)** (2.30)* (2.03)* (1.49)
NEMP (SIZE) -.002 -.002 -.001 -.0002 -.0007 -.0002
(2.04)* (2.03)* (I.05) (.30) (1.1 I) (.32)
C (COVERED) .125 .142 .098 . I 19 .107 .161
(3.70)** (4.60)** (3.29)** (4.06)** (3.68)** (5.71 )**
SIC's Included ~ ~ ~ ~ V'

% Rural -.37 -.45 -.28 -.36 -.35 -.35

(3.38)** (4.15)** (2.53)** (3.24)** (3.28)** (3.24)**
Per Capital lncome -.0001 -.0001 -.0001 -.0001 -.0001 -.0001
(3.67)** (4.53)** (1.88) (2.99)** (1.86) (3.84)**
% H.S. Grads" -.008 -.011 .005 .010 -.002 -.004
(.61) (.86) (.40) (.76) (.17) (.29)
% College Grads .004 .009 -.001 -.003 .001 .004
(.50) (1.29) (.21) (.42) (.13) (.66)
% FEM in L.E 8.80 6.57 5.28 5.38 3.87 5.02
(4.63)** (3.6 I)** (2.87)** (2.97)** (2.29)* (3.06)**
7, .05 .13 -.01 -.02 .06 .12
(.46) (1.28) (.08) (.20) (.55) (1.22)
R2 .508 .492 .445 .460 .410 .449

N 733 713 788 776 867 756

Notes: t-ratios in parentheses; * (**) significant at 5% (1%) level.

PETER E ORAZEM and J. PETER MATTILA 23

A p p e n d i x Table A 2

Comparison of Predicted and Actual Hourly Wage Rates

Correctly Incorrectly Predicted Correctly

Predicted to be Predicted
Below MW Below MW Above MW Above MW

1989:4
Number 95 77 62 505
(% correct) (60.5%) (86.8%)

1990:1
Number 29 118 16 476
(% correct) (64.4%) (80.1%)

1990:4
Number 85 54 114 519
(% correct) (42.7%) (90,6%)

1991:1
Number 19 46 42 573
(% correct) (31. 1%) (92,6%)

1991:4
Number I 14 87 106 534
(% correct) (57,6%) (86,0%)

1992:1
Number 45 178 15 438
(% correct) (75.0%) (71.1%)
Total 417 560 355 3,045
(% correct) (54.0%) (84.5%)