The Effect of Minimum Wages on Immigrants' Employment and Earnings

IZA DP No. 3499
The Effect of Minimum Wages on Immigrants’
APER SERIES
Employment and Earnings
Pia M. Orrenius
Madeline Zavodny
DISCUSSION P
May 2008
Forschungsinstitut
zur Zukunft der Arbeit
Institute for the Study
of Labor

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The Effect of Minimum Wages on
Immigrants’ Employment and Earnings


Pia M. Orrenius
Federal Reserve Bank of Dallas
and IZA

Madeline Zavodny
Agnes Scott College
and IZA



Discussion Paper No. 3499
May 2008



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IZA Discussion Paper No. 3499
May 2008








ABSTRACT

The Effect of Minimum Wages on
Immigrants’ Employment and Earnings*

This study examines how minimum wage laws affect the employment and earnings of low-
skilled immigrants and natives in the U.S. Minimum wage increases might have larger effects
among low-skilled immigrants than among natives because, on average, immigrants earn
less than natives due to lower levels of education, limited English skills, and less social
capital. Results based on data from the Current Population Survey for the years 1994-2005
do not indicate that minimum wages have adverse employment effects among adult
immigrants or natives who did not complete high school. However, low-skilled immigrants
may have been discouraged from settling in states that set wage floors substantially above
the federal minimum.


JEL Classification:
J23, J38, J15

Keywords:
immigrants, minimum wage, low-skilled


Corresponding author:

Pia M. Orrenius
Research Department
Federal Reserve Bank of Dallas
2200 N. Pearl Street
Dallas TX 75201
USA
E-mail: pia.orrenius@dal.frb.org




* The views expressed here do not necessarily reflect those of the Federal Reserve Bank of Dallas or
Federal Reserve System. The authors thank Rachel Friedberg for helpful comments on an earlier
version. We also thank session participants at the 2007 Society of Labor Economists Meetings in
Chicago, 2006 Association for Public Policy Analysis and Management Meetings in Madison, and
seminar participants at Baylor and Tulane Universities.

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The Effect of Minimum Wages on Immigrants’ Employment and Earnings

The federal minimum wage increased to $5.85 from $5.15 in July 2007—the first
increase in the federal wage floor in a decade—and will rise in two additional 70-cent increments
over the next two years, reaching $7.25 an hour in July 2009. These increases bring new
urgency to the debate over how minimum wages affect the labor market outcomes of low-skilled,
low-wage workers. Heightening the urgency is the fact that an increasing number of states took
matters into their own hands and imposed or raised state-level wage floors in recent years.
Before the federal minimum wage rose in July 2007, 31 states and the District of Columbia had
minimum wages that exceeded the federal rate of $5.15, which had been in effect since 1997.
Standard competitive economic models predict that higher minimum wages result in less
employment. Despite this prediction, recent research has reached disparate conclusions about
the impact of minimum wage increases on employment.
Most studies of minimum wages in the U.S. examine the effect of the minimum wage on
employment among groups that earn relatively low wages, such as teenagers and fast food
workers. Neumark and Wascher (2006) provide a survey of this literature. The fastest-growing
low-wage, low-skilled group, however, is made up of immigrants (Sum et al., 2002). As of
2005, about 32% of foreign-born adults (aged 25 and older) in the U.S. do not have a high school
diploma or equivalent. These immigrants account for about one-third of the total adult
population without a high school diploma. The foreign-born comprise almost two-thirds of
adults with less than a fifth-grade education and half of adults with at most an eighth-grade
education (Census Bureau, 2006). Because of differences in age and labor force participation

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rates, immigrants compose an even more disproportionate share of the low-skilled labor force:
almost 44% of adults in the labor force who lack a high school diploma are foreign-born.
Despite the increasing share of the low-skilled labor force represented by foreign-born
workers, virtually no research has investigated how minimum wages affect this group. The
present study is our attempt to fill this gap. Using data from the period 1994-2005, we compare
the effect of minimum wages on employment, hours worked, and earnings among adult
immigrants and natives in the U.S. who did not have a high school diploma. For purposes of
comparison with previous research, we also present results for teenagers.
The impact of minimum wages on immigrants is important not only because of the size
and rapid growth of the low-skilled foreign-born workforce but also because the impact on the
foreign-born might be greater and longer-lasting than the effect on U.S.-born workers. Many of
the native-born workers who earn near the minimum wage are teens or young adults, most of
whom will experience substantial earnings growth as they age (Even and Macpherson, 2000,
2004). A large number of adult immigrants who have little education may, in contrast, be mired
in low-wage jobs for their entire working lives. The level of the minimum wage and its effect on
earnings and employment therefore may play a large role in the standard of living, rate of
assimilation, and settlement patterns of many low-skilled immigrants.

Theoretical Overview
Conventional economic theory predicts that higher minimum wages lead to higher
average earnings and lower employment-to-population rates. The effects should be largest
among groups that earn near the minimum wage, groups that are likely to include youths and
low-skilled adults. However, some research suggests that higher minimum wages are not

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necessarily associated with lower employment rates even though they boost average hourly
earnings among workers (e.g., Card 1992a, 1992b; Card, Katz, and Krueger, 1994; Card and
Krueger, 1994; Katz and Krueger, 1992). Potential explanations for these results include
imperfectly competitive labor markets, decreases in hours worked per worker instead of in the
number of workers, and improvements in the quality and productivity of workers that offset the
effects of higher wage mandates. For example, employers might substitute more-skilled workers
for less-skilled workers as the wage floor increases, resulting in no net change in aggregate
employment but changes across subgroups. Another possibility is that employment rates based
on surveys of individuals remain unchanged despite minimum wage increases because some
individuals work “under the table” for wages below the legal wage floor. Individuals could be
pushed into subminimum wage jobs when the wage floor rises, or they could already be working
for less than the legal minimum and not be affected by increases in the minimum wage.
From a theoretical standpoint, the impact of minimum wages is likely to be larger among
the foreign-born than among natives.1 Immigrants on the low end of the skill distribution tend to
have fewer years of education, less institutional knowledge, and worse English language skills
than low-skilled natives. Commensurate with these differences, foreign-born workers who do
not have a high school diploma earn 14% less than natives with similarly low educational
attainment, and immigrants with a high school diploma earn 18% less than high-school-graduate
natives (Economic Report of the President, 2005). Low-wage immigrants, particularly those
from non-English speaking countries, have considerably lower returns to education and less U.S.
labor market experience than low-wage natives (Chiswick et al., 2006). If immigrants are less
productive than natives within the low-skilled group, then standard economic theories predict

1 We use the terms ‘immigrant’ and ‘foreign-born’ interchangeably in this article to refer to persons born outside the
U.S. to parents who are not U.S. citizens. The data that we use do not allow us to distinguish between illegal
immigrants, legal permanent residents, and temporary migrants.

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that immigrants should experience more adverse employment effects than natives when
minimum wages increase.2
However, there are also reasons why employment effects could be smaller for immigrants
than for natives. If immigrants are more likely to work in industries with less elastic labor
demand or to work off-the-books, then minimum wage increases might have less of an effect on
employment among immigrants than among natives. In particular, the presence of a substantial
number of undocumented workers among the foreign-born labor force may boost the incidence
of subminimum wages in the immigrant population.3 Employers who are already breaking the
law when (knowingly) hiring undocumented workers may also be more willing to flout other
labor regulations, such as minimum wage laws. Although covered by minimum wage laws,
undocumented workers paid less than the minimum wage are probably unlikely to seek legal
redress for fear of revealing their undocumented status.

We are not aware of any previous research examining whether there are differences
between immigrants and natives in the U.S. in the effects of minimum wages on employment
and hours worked. Stylized facts suggest that immigrants are more likely to be affected by
minimum wages than are natives. Results in Butcher and DiNardo (2002) and Chiswick, Le, and
Miller (2006) suggest that the minimum wage compresses the bottom of the wage distribution
more among immigrants than among natives. A recent Organization for Economic Cooperation
and Development (OECD) study finds significantly more adverse effects of minimum wages and
other labor market regulations on immigrants than on natives in a cross-section of OECD nations
(Jean, 2006). In particular, higher minimum wages reduce female economic activity and male

2 For formal models of the varying effects of minimum wage increases across skill levels, see, for example,
Connolly (2003) and Lang and Kahn (1998).
3 Mehta et al. (2002) indicate that about 10% of undocumented immigrants (and 3% of documented immigrants)
interviewed in the Chicago area in 2001 reported being paid less than the minimum wage.

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employment rates more among the foreign-born than natives. Orrenius and Solomon (2006)
found that the unemployment rates of immigrants—particularly young immigrants—relative to
natives are higher in OECD countries with more labor market restrictions than in those with
fewer such regulations. They also concluded that immigrants have relatively low employment
rates compared with natives in countries with more labor market regulations.

Data
We use annual state-level data to examine how minimum wages are related to
employment-to-population rates, average weekly hours worked, and average hourly earnings
among the employed during the period 1994 to 2005. Our measure of the minimum wage is the
annual average of the higher of federal and state minimum wages (the “effective minimum
wage”) in each state. For simplicity and comparability to most previous studies, the analysis
does not incorporate legal subminimum wages (which apply to young or recently-hired workers
under the current federal law and some state laws); industry- or occupation-specific minimum
wages (such as the tip credit minimum wage for some restaurant workers); city-level wage floors
(which occurred in a few areas toward the end of our sample period); or “living wage”
requirements.4 The federal minimum wage increased twice early in our sample period, from
$4.25 to $4.75 in October 1996 and to $5.15 in September 1997. The number of states with a
minimum wage above the federal level at some point during the year ranges from a low of 8 in
1998 to a high of 17 in 2005. Appendix Table 1 lists which states exceeded the federal minimum
wage each year during our sample period.

4 We also do not control for changes in the Earned Income Tax Credit (EITC) or for welfare reform, which might
affect low-skilled workers’ incentive to work. The year fixed effects capture any national-level effects of changes in
such factors. See Neumark and Wascher (2007) for a study that combines the effects of minimum wages and the
EITC among teens and young adults.

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Our employment, hours, and earnings measures are based on data from the Current
Population Survey outgoing rotation groups (CPS ORG) during 1994-2005.5 The CPS is a
monthly survey of about 55,000 nationally-representative households that focuses on labor
market activity. Housing units are in the sample for four months, out for eight months, and then
back in the sample for four months. When a housing unit is in the fourth and eighth survey
waves (the outgoing rotation), the survey asks about individuals’ earnings as well as about their
employment status and hours worked.
We focus on three groups: less-educated adult natives, less-educated adult immigrants,
and all teens (ages 16-19). Less-educated adults here are individuals aged 20-54 who do not
have a high school diploma or its equivalent. Immigrants are individuals who report being born
outside the U.S. and not being a U.S. citizen at birth.6 We report results for teens to provide a
benchmark for comparison with much of the minimum wage literature. Because of the small
sample sizes for foreign-born teens in many states (most immigrants arrive in the U.S. when they
are adults, not as children), we do not stratify the teen data by nativity.
We present results for data stratified by sex as well as for the combined sexes because of
concerns that immigrant women’s labor force participation may differ from immigrant men’s
(e.g., Schoeni, 1998). As discussed below, examining the sexes separately yields some
interesting results for teens as well as for less-educated adults. Previous research that examines
changes in the federal minimum wage finds evidence of adverse employment effects only among
male teens (Bernstein and Schmitt, 1998; Neumark and Wascher, 2007), a result we corroborate.

5 Our approach implicitly assumes that representation of low-skilled immigrants (and natives) in the CPS does not
change in response to changes in the minimum wage. If increases in the minimum wage drive the least-skilled
workers into subminimum wage jobs and “into the shadows (and out of the CPS),” as hypothesized by Cortes (2004:
10), then our results probably would be biased toward not finding effects of the minimum wage. However, Cortes
finds no evidence in support of that hypothesis.
6 This approach does not count individuals born in Puerto Rico or other outlying areas of the U.S. (who are U.S.
citizens at birth) as immigrants. Because such individuals are likely to differ substantially from individuals born in
the U.S., we exclude them from the data entirely.

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We constructed annual state-level employment-to-population rates for these populations
and state-level average hourly earnings among workers in these groups.7 We also constructed
average usual hours worked per week among all individuals and among only workers. The
questions in the CPS ORG from which we constructed our measures concern employment,
hours, and earnings during the survey week, not during the previous year. We deflated earnings
and the minimum wage using the annual average of the consumer price index for urban wage
earners (CPI-W).

As Table 1 shows, 1.4% of workers earn exactly the effective minimum wage, 3.3% earn
less than the minimum wage, and 8.5% earn above the wage floor but within 125% of the
minimum wage. The fractions of workers earning exactly, less than, and slightly above the
minimum wage are all higher among immigrants than among natives, higher among teens than
among low-skilled adults, and higher among women than among men within age/education and
nativity groups. For example, the shares of low-skilled adult immigrants who earn exactly, less
than, and slightly more than the minimum wage are 5%, 7.6%, and 20.6%, respectively, versus
2.4%, 5.2% and 15.6% for natives. Increases in the minimum wage therefore should have a
larger impact among low-skilled immigrants than among low-skilled natives, assuming
compliance with the law. The wage distributions in Table 1 also suggest that minimum wage
effects should be larger among teens than among low-skilled adults and larger among women
than among men.

The finding that immigrants are more likely than natives to earn less than the minimum
wage accords with some previous research. Using 1994 CPS ORG data, Trejo (1998) notes that

7 We used the survey population weights to construct the employment rates and average hours and the outgoing
rotation group weights to construct average earnings. The earnings sample includes both workers paid hourly and
workers paid at other frequencies; we calculated average hourly earnings for the latter as usual weekly earnings
divided by usual weekly hours. We used the labor force status recode to determine employment status.

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