The Impact of the

Minimum Wage in West Virginia:

A Test of the Low-Wage-Area Theory
M A R V I N E. D O D S O N III*
University of Central Arkansas, Conway, AR 72035

I. Introduction
Hypotheses suggesting that low-wage areas may be more affected by minimum wage
increases than higher wage areas are not new. Like the teenage demographic theory
of minimum wage effects, the proportion of workers who earn a wage equal or close
to the legislated minimum drives the low-wage-area theory. This theory only changes
the focus from the age group of workers to the geographical location of employment.
Accordingly, the theory predicts any negative employment effects due to minimum
wage increases will be more prevalent in a low-wage area.
Figure 1 depicts the argument. Assume that the labor demand curve, L l relates the
short-run profit maximizing quantities of labor demanded for the total U.S. labor mar-
ket. Also assume that the labor supply curve, S, represents the quantities of labor sup-
plied at each wage level for the average worker. Consequently, the market clearing
wage and employment combination is given by w* and E*, respectively. In this case,
a minimum wage, denoted by wM1N, has no impact on the equilibrium. However, if
the analysis focuses on teenagers or workers in a low-wage area rather than the total
U.S. labor market, the result may be different. Like teenagers, workers in a low-wage
area may have a lower marginal product thus resulting in a new demand schedule. In
the case of West Virginia, smaller amounts of human capital or lack of representation
by firms that produce highly valued products may be the culprit in producing this shift.
Regardless, with this new demand for labor, denoted by L 2, the minimum wage
becomes binding. In the absence of the minimum wage, the equilibrium level of
employment would be E I. However, since the firm must pay all workers a wage of WMIN
or greater, employment falls to E 2.
Volumes of economic literature have been written on the subject of minimum wage
effects. The survey by Brown et al. (1982) and the recent work by Card and Krueger
(1995) are probably the most cited. Additionally, the summary evidence provided by
Brown et al. (1982) has become the benchmark against which all subsequent esti-
mates of minimum wage employment effects are measured. According to their sum-
mary, teenage employment is reduced by 1 to 3 percent by a 10 percent increase in

JOURNAL OF LABOR RESEARCH

Volume XXII1, Number 1 Winter 2002
26 JOURNAL OF LABOR RESEARCH

Figure 1

Wage

WMIN

wI

Lj

E2 EI E* Employment

the minimum wage. The same increase is associated with up to a 0.75 percentage point
rise in the unemployment rate for this group. Brown et al. 0982) also conclude that
adult employment responds insignificantly to minimum wage increases.
Other recent work in the area of minimum wage effects includes Schaafsma and
Walsh (1983), Wellington (1991 ), Neumark and Wascher (1992), and Williams (1993).
Each of these studies estimates the employment elasticity of a particular demographic
group with respect to the minimum wage. The majority of these studies use pooled-
data techniques. Schaafsma and Walsh (1983), Neumark and Wascher (1992), Castillo-
Freeman and Freeman (1992), and Williams (1993) all use pooled-data techniques in
their estimations. Since pooled data can capture the cross-sectional variation of obser-
vations and control for any variation through time, this technique should come closer
than time-series or cross-sectional approaches to relating the true relationship between
employment and the minimum wage.
All of these recent studies, except Schaafsma and Walsh (1983), use either the Kaitz
(1970) index or some variant thereof. The Kaitz (1970) minimum wage index is a ratio
of the nominal minimum wage to the average hourly earnings in each industry. In most
cases all the major industrial divisions are included as industries. Each of these ratios
is weighted by the proportion of persons covered in the industry. Finally, the index
MARVIN E. DODSON III 27

weighs each industry ratio according to the employment share of that industry. Clearly,
the Kaitz (1970) index, in this full form, summarizes a good deal of information into
one real variable. Castillo-Freeman and Freeman (1992) suggest that the index works
well because it measures the "bite" of the minimum wage. This abundance of infor-
mation as well as the index's ability to measure the minimum wage relative to the mar-
ket prevailing hourly earnings makes it a superior measure of minimum wage effects.
Unlike the intense investigation of teenage employment effects, there has been
very little recent work relating to low-wage areas. The U.S. Department of Labor pro-
duced two investigations on this topic (DOL, 1959, 1965). General results from these
reports maintain that there are no negative employment effects attributable to the min-
imum wage. According to Brown et al. (1982), however, these studies may have under-
stated the impact of the minimum wage since there are no controls for previous
employment growth.
Colberg (1960) examines county-level manufacturing employment in Florida from
January to April 1956. His results suggest that a 1 percent increase in the associated
average wage translates into a 0.12 percent reduction in county employment. Further-
more, the lower wage counties experienced a far greater reduction (0.92 percent) in
employment. Carter (1978) examines the impact of the minimum wage on the unem-
ployment rate in a time series and finds that the southeastern states display a half a per-
centage point increase in unemployment due to a 10 percent increase in the minimum
wage. Heckman and Sedlacek (1981) also find a strong dis-employ ment effect in South
Carolina manufacturing due to minimum wage increases. Castillo-Freeman and Free-
man (1992) examine the low-wage-area theory of minimum wage effects by concen-
trating on Puerto Rico. Their results stand out from the standard minimum wage
literature in terms of the size of the dis-employment effect associated with the mini-
mum wage. These estimates range from a 1.5 to 5.4 percent reduction in employment
due to a 10 percent increase in the minimum wage.
Recently, a new branch within the minimum wage effects literature has challenged
the traditional estimation formats discussed above. This new branch has several names,
the natural experiment approach, the treatment approach, or the pre/post approach to
estimating minimum wage effects. Card (1992), Card (1992b), Katz and Krueger
(1992), and Card and Krueger (1995) are examples. All of these studies examine
employment and wage changes that straddle an increase in the legislated minimum
wage. For example, Card (1992) examines the employment effects in California due
to the 1988 state minimum wage change. Katz and Krueger (1992) examine employ-
ment effects of the 1990 minimum wage increase in the fast-food industry in Texas.
Card (1992b) pools states for quarters II, III, and IV in 1989 and 1990. He then
regresses the teen employment to population ratio on state factors and the average state
wage or an instrument for the state average wage to obtain an estimate of the employ-
ment elasticity with respect to the average wage. Put another way, Card (1992b) esti-
mates the price elasticity of labor demand across a period when a minimum wage
change has occurred. The results suggest no reduction in teen employment due to the
28 JOURNAL OF LABOR RESEARCH

increase in the minimum wage. In fact, he finds a positive correlation, although insignif-
icant, between teen employment and the average wage.
The natural experiment approach to estimating minimum wage effects has drawn
many skeptics (Hamermesh, 1995; Brown, 1995; Freeman, 1995). Some would reject
the approach based only on the implausibility of a positive correlation between mini-
mum wage changes and employment. These critics also point out two methodological
problems. First, any adjustments on the part of the firm due to the minimum wage may
encompass a longer time period than that found in this literature. Since minimum wage
changes are announced in advance, firms may reduce labor demand even before the
minimum wage change takes effect. On the other hand, Brown (1995) maintains that
the typical sample period in the natural experiment approach is not short enough to iden-
tify the treatment effect these studies are attempting to find. He argues that even in this
short time period, the effect attributed to the minimum wage change may include var-
ious other factors. Traditional estimation procedures with the Kaitz (1970) index do
not rely on a treatment or pre/post effect due to the minimum wage and usually encom-
pass a larger data set. For these reasons, these authors advocate the traditional approach
to estimating minimum wage effects over the natural experiment approach.
While standard microeconomics principles, like that in Figure 1, seem clear on
the employment impacts of wage floors, there appears to be no other subject that elic-
its more empirical controversy. Not only do the aforementioned approaches contra-
dict each other, but even further debate has also ensued. For example, Krueger (1995)
reexamines the work of Castillo-Freeman and Freeman (1992) and finds far different
results. In addition Neumark and Wascher (1995) contradict the findings of Katz and
Krueger (1992). In both cases the use of different data sources and methodology may
explain the varying conclusions. Investigations of various sub-populations have also
come to the front in this debate. Williams and Mills (1998) investigate the difference
in dis-employment effects for males and females in a time-series framework. Partridge
and Partridge (1999) investigate employment in the retail sector. Like these studies, I
concentrate on a portion of the population that presumably faces a higher risk of dis-
employment due to the minimum wage: West Virginia workers.

II. West Virginia Wages

West Virginia is a low-wage state (Table 1). In 1995, West Virginia employees earned
$104.62 less than the national average weekly wage. Only in the mining industry do
West Virginia workers earn more than their cohorts elsewhere in the U.S. At the other
extreme, the total trade sector is the most under paid industry in West Virginia relative
to the U.S.
While a gap in the average wage between West Virginia and the U.S. suggests that
West Virginia workers are susceptible to job losses due to minimum wage increases,
evidence concerning the size of the affected group is also needed. Like the proportion
of teenagers at the national level who receive wages at or near the minimum, there is
a larger proportion of all workers in West Virginia, relative to the national proportion,
MARVIN E. DODSON III 29

Table 1
Wage Gap: Average Weekly Wagesfor West Virginia and the U.S.

1990 1990 1995 1995 Average

WV US WV US WV as % of US

Total Private Industry $463.25 $543.31 $546.42 $651.04 84.60%

Goods Producing 580.44 591.00 655.50 700.33 95.91

Mining 759,10 714.00 862.69 871.00 102,68
Construction 444.75 503.00 476.56 562.00 86.61
Manufacturing 537.46 556.00 627.26 668.00 95.28

Service Producing 375.35 495.63 437.34 601.75 74.21

Transportation, Communication
& Public Utilities 532.79 577.00 618.09 674.00 92.02
Trade 254.03 41 1.50 290.09 488.00 60.59
Fire 380.29 571.00 449.28 742.00 63.58
Services 334.30 426.00 391.88 503.00 78.47

Notes: Goods and Service producing are the average of the respective major industries. Total Private is an average of
all major industries included, agriculture and government are excluded. Last column is the average of the percentages for
both years.
Sources: Employment and Wages, Annual Averages+ 1990 and 1995. Bureau of Labor Statistics.

who are affected by minimum wage changes. The statistics below make this point and
suggest that significant negative employment effects will occur at the total employment
level in West Virginia.
In 1996, 26.7 percent of employed teenagers (ages 16 to 19) were paid at or below
the minimum wage. Among persons aged 25 years and older, 4.4 percent nationwide
were in this wage category. For all persons employed aged 16 years and older, 7.1
percent were paid an hourly rate equal to or less than the federal minimum wage. The
proportion of teenagers receiving the minimum wage is the driving motivation in the
minimum wage investigations that study teenage employment. Card (1992b) estimates
that 25.7 percent of all teenagers receive the minimum. Wellington (1991) maintains
that the percentage of teenagers in this group ranged from 28.7 to 45.3 percent between
1981 and 1987.
Like teenagers at the national level, there is a large percentage of workers, regard-
less of age, receiving wages at or below the minimum wage in West Virginia. Although
data comparable to the U.S. minimum wage data above are not available, several meas-
ures can provide close estimates. According to a recent Department of Labor study, the
mean hourly earnings in West Virginia for all industries was $12.58 in May of 1997
(DOL, 1998). Within this group 10 percent received an hourly wage of $5.68 or less.
30 JOURNAL OF LABOR RESEARCH

The lowest paid occupations were in the service sector. The mean in these occupa-
tions was $7.93. The wage at the 10th percentile in the service sector was $5.00, and
at the 25th it was $5.50.
The West Virginia Bureau of Employment Programs (WVBEP) also provides
some wage data. According to their estimates 16.7 percent of all occupations in West
Virginia were paid an hourly wage less than $5.00 in 1995. This same percentage then
would have been directly affected by the 1996 minimum wage increase. Therefore, a
substantial portion of the West Virginia work force is affected by the minimum wage.
Because West Virginia is both a low-wage state and a large proportion of the work force
receives wages near the federal minimum, it is a good test case for minimum wage
effects at the total employment level.

III. Modeling West Virginia Employment

In order to test the low-wage-area theory with West Virginia data, the following model
will estimate the elasticity of employment with respect to the minimum wage in a man-
ner similar to recent pooled studies. Like Williams (1993), the basic estimation is sim-
ply a derived, conditional-factor demand equation, which arises from the firm's cost
minimization problem. In this case the firm minimizes the total cost of its inputs, which
is the sum of the inputs (L) multiplied by their per unit prices (w). This minimization
is conditional on the firm producing some specified level of output (y). The resulting
function maintains that the optimal choice of labor, in this case, is a function of the
wage and the output level.

c(w, y) = min w IL l + w2L2,

Lt, L 2
subject to f(L 1, L2) = y;
L I = L l ( w l , w 2,y).
Equation (1) is the conditional-factor demand equation in estimation form.

LNEMPit = ~o + LNMWit~I + tNYit~2 + Xit~3 + YDt~4 + CDi~5 + Eit" (1)

The observational units are West Virginia's fifty-five counties, pooled across eight
years (1988-1995). The dependent variable is the ratio of total employment to the pop-
ulation aged 15 to 64 in each county (EMP). A county product measure (Y) proxies
for output. Two fixed effects are included by adding year and county dummies, YD and
CD, respectively. All estimates are carried out in natural log form, where LN desig-
nates natural logs.
The matrix X includes county characteristics that may influence the dependent
variable, including population controls and transfer payments. My empirical specifi-
cation differs slightly from minimum wage literature that focuses on teenage employ-
ment effects. In the case of teenagers most studies concentrating on employment use
the teenage employment to population ratio as the dependent variable and include the
MARVIN E. DODSON III 31

teenage population share as an exogenous factor (Neumark and Wascher, 1992;

Williams, 1993; Wellington, 1991). Although, there has been debate concerning this
formulation, it appears to be dominant in the literature.1 In this study, where the depend-
ent variable is the employment to population ratio for those between the ages of 15 and
64, including the comparable population share as an exogenous variable produces some
endogeniety concerns. Therefore, population controls for all age groups outside of the
working-age range are included as explanatory supply-side variables. 2
The minimum wage variable (MW) is a Kaitz (1970) index. The full Kaitz (1970)
index includes measurements of coverage and the mandated wage for newly covered
workers. Both of these factors are ignored in this specification. Coverage of the min-
imum wage has been estimated to be at least 89-90 percent of the work force. Welling-
ton (1991) and Brown et al. (1983) find that including coverage makes no statistical
difference in elasticity estimates. Newly covered workers are ignored because during
the sample period no extension of coverage occurred. Equation (2) defines the mini-
mum wage variable, where F M N W is the federal minimum wage; AHEj is the average
hourly earnings in each major industry j; Ej is employment in each major industry j;
and E T is total county employment.

Mw i = ~,, (Ej / ET)[FMNW / AHEj]. (2)

The index maintains that the minimum wage variable for each county is the ratio
of the federal minimum wage to average hourly earnings in each major industry
weighted by the individual major industry share of total employment. This specifica-
tion will account for industry variation for each county and capture the "bite" of the
minimum wage in each county.
In addition to the basic model just discussed, I examine the effect of the minimum
wage across counties. Specifically, the elasticity estimates are allowed to vary accord-
ing to the rural or urban nature of the counties. Dummy variables indicating metro,
urban, suburban, and rural counties are interacted with the minimum wage variable to
see if these groups react differently to the minimum wage.

IV. Data
Table 2 provides a brief description and the source for each variable. The dependent
variable in the model is a ratio of total employment in each county to the prime work-
ing age population (ages 15 to 64) in the county. These values are employment by place
of work, not residence, making it a better estimate of the total employment opportu-
nities or labor demand within a county. This measure differs slightly from that used in
previous work. Wellington (1991), Neumark and Wascher (1992), and Williams (1993)
all use labor force statistics derived from the Current Population Survey (CPS). With
the CPS data, the respondent may be reporting employment status and location dif-
ferently. My formulation reports the employment based on the county where the job
is located. Therefore, this employment-to-population ratio is a measure of jobs per per-
son in each county.
32 JOURNAL OF L A B O R RESEARCH

Table 2
Minimum Wage Model Variables

Description Source

Dependent Variable
Ratio of total county employment to the county REIS and Bureau of the Census
population aged 15 to 64

Independent Variables
Per capita county level earnings by place of work, REIS
lagged one year (thousands of 1990 dollars)
Kaitz minimum wage index Department of Labor (DOL) and West Virginia
Bureau of Employment Programs (WVBEP)
Mining's share of total county employment, REIS
lagged one year
Per capita disbursements of Old Age, Survivors, REIS
and Disability Insurance (OASDI) at the county
level (thousands of 1990 dollars)
Per capita disbursements of Supplemental REIS
Security Income (SSI) at the county level
(thousands of 1990 dollars)
Per capita disbursements of Aid to Families with REIS
Dependent Children (AFDC) at the county level
(thousands of 1990 dollars)
Number of persons within the county between Bureau of the Census
the ages of 0 and 14 (thousands)
Number of persons within the county aged 65 Bureau of the Census
years and older (thousands)
Percent of county population aged 15 to 64 that Bureau of the Census
is female

Note." Sample period is 1988-1995.

The data for the minimum wage variable discussed above are drawn from sev-
eral sources. The federal minimum wage that applies to all the counties is available
from the U.S. Department of Labor. 3 Average hourly earnings in each industry for all
counties must be constructed. The WVBEP provides average weekly earnings for each
industry at the county level on an annual basis as well as average weekly hours for each
industry at the state level on an annual basis. Therefore, these series can together pro-
vide average hourly earnings for each industry at the county level. Mixing these aver-
age hours at the state level and average earnings at the county level introduces a
necessary, but reasonable, assumption. Employees in any given industry are assumed
to work the same amount of hours per week on average in every county, which some-
MARVIN E. DODSON IlI 33

what reduces variation at the county level. However, since the minimum wage vari-
able varies across counties due to the industry mix, that loss may not be very large.
This county-level industrial mix enters through the industrial shares of total employ-
ment. Employment shares are simply the number of employees working in each major
industry divided by the total employment within the county. The federal minimum wage
takes on three values during the sample, $3.35 in 1988 and 1989, $3.80 in 1990, and
$4.25 for the remainder of the sample.
Total earnings by place of work proxies for county output. Theory demands some
variable that represents the output level in this specification. Unfortunately, this pres-
ents an empirical problem. First, there is no direct measure of county output. Second,
any reasonable proxy may be correlated with several of the other right-hand-side vari-
ables. For instance, county shares of gross state product and county total personal
income produced highly suspect results. Although total earnings introduces similar
empirical concerns, the results are less suspect. In addition, the output measure is lagged
by one year to further reduce any endogeniety and multicollinearity concerns.
The matrix (X) includes transfer payments, population controls by age and sex,
and lagged county mining employment. Three measures of transfer payments are
included in the model, because they may represent the next best alternative to work-
ing, and they may capture some business cycle and demographic group variations.
The expected sign of all three is negative, since these factors are viewed as the alter-
native to work and since subsidies typically increase when employment decreases. The
measurements of output and transfers are per capita in the model.
The transfer income measures used are Old-Age, Survivors, and Disability Insur-
ance (OASDI), Supplemental Security Insurance (SSI), and Aid to Families with Depen-
dant Children (AFDC). OASDI should pick up employment changes due to involuntary
dropouts (disability) in employment. Both AFDC and SSI are designed to provide for
those with low incomes and therefore can control for any influence from the income
distribution. These factors are also a consideration in the decision to work, since they
represent a possible alternative. Of course, there is feedback in this relationship. As
workers are displaced by the minimum wage, transfer payments are likely to rise. There-
fore, in this specification the minimum wage effect may be biased downwards due to
the effect of transfer payments, 4
The number of people in the county between the ages of zero and 14 should be a
negative influence on labor force participation, if child rearing is a significant factor in
the labor/leisure decision. The number of people in the county over the age of 65 could
correlate positively or negatively with employment. If those at retirement age re-enter
the work force, the correlation will be positive. If they truly retire, the impact will most
likely be negative. Elasticities for these two variables must be interpreted as relative to
the prime working age group, because it is the only one left out. The percent of the prime-
age working population that is female is also included as a demographic control.
West Virginia has historically overwhelmingly depended on the mining industry.
The importance of mining in West Virginia necessitates an employment control vari-
34 JOURNAL OF LABOR RESEARCH

able for this factor. Employment shares of the mining industry in each county serve as
this control. Additionally, this employment variable will pick up a good deal of wage
variation due to unionization, since the majority of unions are in mining. As Table 1
indicates, the mining industry in West Virginia maintains relatively higher wages. There-
fore, this variable should control for those workers who are relatively less susceptible
to minimum wage dis-employment. The variable is also lagged by one year to reduce
endogeniety concerns.
While my sample period is not completely appealing due to the recession in 1990-
1991 and minimum wage changes after 1995, county-level disclosure problems make
it the most useful. In addition, there is significant variation in the minimum wage vari-
able at the county level for this sample period. Table 3 provides descriptive evidence
about the wage measurements and the remaining variables for the first and last year
of the sample. The data indicate that the federal minimum wage increased at a faster
rate than county-level average hourly earnings, so the group of workers affected by
the minimum wage clearly must have grown during this period. In 1988, the average
worker across these counties earned $7.40. According to the Kaitz measurement, the
federal minimum wage represented 29 percent of the average hourly earnings among
these counties. By 1995, average hourly earnings rose to $8.75, a 15.9 percent increase
in nominal terms. The federal minimum wage between these years rose from $3.35 to
$4.25, a 26 percent increase. Consequently, the "bite" of the minimum wage increased
among these counties (Table 3). In fact, in 1995 the minimum wage accounted for 33
percent of average hourly earnings in the counties of West Virginia.

V. Estimation Results
The reported coefficients in Table 4 are elasticities. Column 1 displays the results for
the conditional labor demand equation with no further controls. Output is positively
correlated with the demand for labor, but insignificantly so. The minimum wage vari-
able in this specification is negatively correlated with employment and its coefficient
estimate is significantly different from zero at 10 percent. Column 2 adds the demo-
graphic and transfer-payment controls. With these controls, output remains insignifi-
cant while the minimum wage variable and employment are correlated at the 5 percent
level. In this case a 10 percent increase in the minimum wage is associated with a 1.1
percent decrease in employment in the average county.
Neither of the coefficients for population groups outside of the prime working age
is significantly correlated with the dependent variable. Per capita SSI and AFDC pay-
ments produce negative coefficients but only the AFDC coefficient is statistically sig-
nificant. The results also suggest that the female percentage of the prime age working
group is negatively correlated and significant with respect to county-level employment.
There is no significant correlation between the dependent variable and the remaining
population controls or the mining variable.
The addition of county and year dummies improved the estimation considerably.
A joint significance test for both fixed effects rejected the null hypothesis. Further-
MARVIN E. DODSON III 35

more, the Hausman test rejected the use of the random effects model at the 1 percent
level of significance in each specification. Heteroskedasticity is absent in each speci-
fication as well. The Bruesch-Pagan test statistic rejected the null of homoskedastic-
ity in all specifications. The corrected standard errors, according to White's (1980)

Table 3
Descriptive Statistics for 1988 and 1995

Standard
Mean Median Deviation Range
Variable 1988 1995 1988 1995 1988 1995 1988 1995

Ratio of total county employment to 0.587 0.628 0.562 0.596 0.147 0.167 0.644 0.768
the county population aged 15 to 64

Per capita county-level earnings 4,638 5.608 4.08 5.078 2.832 3.646 12.898 13.29
by place of work, lagged one year
(thousands of 1990 dollars)

Kaitz minimum wage index 0.292 0.329 0.287 0.321 0.05 0.049 0.269 0.199

Mining's share of total county 0. I 12 0.085 0.068 0.053 0.117 0.098 0.513 0.429
employment, lagged one year

Per capita disbursements of Old Age, 1.054 1.535 1.(145 1.531 0.176 0.257 0.742 1.054
Survivors, and Disability Insurance
(OASDI) at the county level
(thousands of 1990 dollars)

Per capita disbursements of 0.075 0.159 0.069 0.147 0.031 0.07 0.134 0.281
supplemental Security Income (SSI)
at the county level
(thousands of 1990 dollars)

Per capita disbursements of Aid to 0.062 0.065 0.058 0.063 0.029 0.026 0.131 0.108
Families with Dependant Children
(AFDC) at the county level
(thousands of 1990 dollars)

Number of persons within the county 7.632 6.902 5.71 5.244 6.946 6.229 40.414 35.757
between the ages of 0 and 14 (thousands)

Number of persons within the county 5.307 5.613 3.479 3.705 5.371 5.582 30.835 31.953
aged 65 years and older (thousands)

Percent of county population aged 0.507 0.504 0.507 0.506 0.008 0.009 0.035 0.038
15 to 64 that is female

Notes: County-leveldata on 45 West Virginia counties. Due to disclosure problems 10 of West Virginia's 55 counties were
excluded from the sample.
Sources: See Table 2.
36 JOURNAL OF LABOR RESEARCH

Table 4

E m p l o y m e n t Elasticity E s t i m a t e s

I 2 3

Intercept -1.143"* -2.701"* -2.147"*

(0.069) (0.621) (0.485)

Minimum Wage ~).100 ^ ~0.105"

(0.054) (0.054)

Minimum Wage ~0.086

(Metro) (0.148)

Minimum Wage -0.333

(Urban) (0.258)

Minimum Wage ~). 112

(Suburban) (0.094)

Minimum Wage 4). 143"

(Rural) (0.067)

Output 0.012 0.128 0.127**

(0.01 I ) (0.012) (0.009)

OASDI 0.095 0.247**

(0.067) (0.064)

AFDC -0.097** ~0.262"*

(0.031 ) (0.031 )

SSI -0.002 0.096**

(0.034) (0.028)

Population under 15 -0.003 -0.297**

years old (0.269) (0.047)

Population 65 and older 0.022 0.399**

(0.306) (0.049)

Female Share of Population -1.909* -0.758

aged 15 to 64 (0.889) (0.674)

Mining Share of 0.012 -0.011 ^

Total Employment (0.008) (0.007)

Dummies Counties, Counties, Urban, Suburban,

Year Year Rural, Year

Adj. R2 0,981 0.981 0.78

Notes: Parentheses are White's (1980) corrected standard errors. Coefficients are elasticities (estimated in natural logs).
A ** (*,^) indicates significance at 1% (5%, 10%), two-tailed test.
MARVIN E. DODSON III 37

procedure, are reported in parentheses. Additionally, a LM-test indicated that auto-cor-

relation does not bias the results.
Column 3 introduces the possibility of varying slope coefficients for the minimum
wage variable for different groups of counties. Four new variables replace the Kaitz
(1970) minimum wage variable. These new variables interact the minimum wage vari-
able with a set of four county-descriptive dummies. The county dummies, formed by
the "Beale Codes" produced by the Department of Agriculture, describe the counties
according to their urban or rural nature (Butler and Beale, 1994).
For this study, several of the county codes have been grouped together. All coun-
ties with a designation of 0, 1, 2, or 3 are "metro" counties, which includes central
and fringe counties of metropolitan areas. West Virginia has twelve counties in this
group [Berkeley, Brooke, Cabell, Hancock, Jefferson, Kanawha, Marshall, Mineral,
Ohio, Putnam, Wayne, and Wood]. Those counties with a designation of 4 or 5 on the
continuum are "urban" and have an urban population of 20,000 or more [Harrison,
Marion, Monongalia, and Raleigh]. Counties with an urban population between 2,500
and 19,999 or a designation of 6 or 7 on the continuum are "suburban" [Barbour, Boone,
Fayette, Greenbrier, Jackson, Lewis, Logan, McDowell, Mason, Mercer, Mingo,
Nicholas, Preston, Randolph, Summers, Taylor, Upshur, and Wetzel counties]. The
remaining 21 counties have a continuum designation of 8 or 9 and are "rural" with
urban populations below 2,500 persons.
The specification in column 3 includes the four interacted minimum wage vari-
ables, the control variables used in the previous estimation, and the year dummies.
Three of the four county-descriptive dummies replace the county-specific dummy vari-
ables. Therefore, each group of counties has a slope coefficient with respect to the min-
imum wage and an intercept term.
The null hypothesis of no differences between these slopes can be rejected at the
5 percent level (F3,337 3.278). However, the only coefficient that is statistically sig-
=

nificant is the slope on the rural counties. Employment in rural counties is more severely
affected by minimum wage increases, and its estimated elasticity is more statistically
significant. According to the estimates, rural counties will experience an added 0.4 per-
cent in employment reductions compared with the average of all counties due to the
same 10 percent increase in the minimum wage. The minimum wage elasticity esti-
mates for the metro, urban, and suburban counties are negative but not significantly
different from zero. The results for the control variables are not substantially altered
by this complication.
In each specification the sum of square errors and the adjusted R-square measure
indicate that fixed effects for counties and years produce the best model. In fact, the
adjusted R-square appears to indicate an extraordinarily good model. While this may
be the first sign of multicollinearity due to the output variable, the county dummy
variables suggest otherwise. These fixed effects explain the majority of the variation
in the dependent variable. For example, if all the independent variables were dropped
except the county dummies, the adjusted R-square is still 0.9. In other words, given
38 JOURNAL OF LABOR RESEARCH

that county-specific variation alone explains 90 percent of the variation in the e m p l o y -

ment to population ratio, there remains a negative and significant relationship between
the dependent variable and the minimum wage.

VI. Conclusions
West Virginia counties do provide evidence o f significant d i s - e m p l o y m e n t due to the
minimum wage, a finding that supports the theory that low-wage areas are more sus-
ceptible to e m p l o y m e n t losses when the legislated m i n i m u m wage is increased. M y
results show that a 10 percent increase in the m i n i m u m wage will reduce total employ-
ment in the average West Virginia county by 1,1 percent. The most rural counties may
also respond more severely, up to 1.4 percent for the same m i n i m u m wage change.
These estimates indicate that m i n i m u m wage increases intensify competition in
the work force while the quantity of labor demanded decreases. More important, these
total e m p l o y m e n t estimates are within the range o f previous estimates for teenage
employment. Wellington ( 1991 ), Neumark and Wascher (1992), Williams (1993), and
Brown et al. (1982) all estimate that the teen e m p l o y m e n t elasticity with respect to
the minimum wage ranges between 0.6 and 2.0 percent for the same 10 percent increase
in the minimum wage. These studies also maintain that adult e m p l o y m e n t will be less
responsive than teen employment. Since my results show elasticities for total employ-
ment within the range for teen employment, there is support for the position that the
minimum wage produces negative effects on a larger scale in low-wage areas.
The differences between national measurements of m i n i m u m wage effects and
these local-area estimates highlight an important point. A n y aggregate measure of dis-
employment due to the minimum wage will incorporate geographic areas having vary-
ing degrees o f susceptibility to m i n i m u m wage effects. Surely, any level o f the
minimum wage will not affect some areas because the prevailing market wage is on
average much higher than the minimum. Unfortunately, l o w - w a g e and l o w - i n c o m e
states are intended to be the beneficiaries o f m i n i m u m wage legislation. The negative
impacts I find for West Virginia indicate how federal labor market regulation can indeed
produce counterproductive consequences.

NOTES

*I thank Clifford Hawley, Sudeshna Bandypadhyay,George Hammond, Stratford Douglass, Brian Cushing,
Tom Garrett, Victor Claar, Gary Wagner, and an anonymous referee for helpful comments.
1Supply variables in this single equation model are necessary for two reasons. First, supply variables should
fully identify the demand curve. Second, these variables can account for the employment of those who earn
above the minimum wage. Much discussion on these points can be found in the literature (Brown et al.,
1982; Neumark and Wascher, 1992; Williams, 1993; Wellington, 1991). Although the debate continues there
appears to be a consensus that even in a demand constrained labor market - - binding minimum wage - -
supply variables are important for the reasons above. Identification of the demand curve is, of course, an
important econometric issue. Controlling for the presence of those workers who are paid above the mini-
M A R V I N E. D O D S O N III 39

mum wage is also important in that doing so should produce a minimum wage coefficient that is not biased
by this sector of the labor market.
2In addition to the explanatory controls, the dependent variable also captures supply side variation. As Brown
et al. ( 1982, p. 501, footnote 18) point out, the employment-to-population ratio implicitly controls for labor
supply variation9
3West Virginia does not have a state minimum wage that exceeds the federal minimum wage.
4Other measures of transfer payments may mitigate this bias. Eligibility requirements or marginal tax rates
are possibilities. However, as the observation level is counties within West Virginia, I am aware of no data
that provide variation9

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