The minimum wage and restaurant prices
Using both store-level and aggregated price data from the food away from home component of the Consumer Price Index survey, we show that restaurant prices rise in response to an increase in the minimum wage. These results hold up when using several different sources of variation in the data. We interpret these findings within a model of employment determination. The model implies that minimum wage hikes cause employment to fall and prices to rise if labor markets are competitive but potentially cause employment to rise and prices to fall if labor markets are monopsonistic. Therefore, our empirical results appear to provide evidence against the hypothesis that monopsony power is important for understanding the small observed employment responses to minimum wage changes.
AUTHORS: French, Eric; MacDonald, James M.; Aaronson, Daniel
Product market evidence on the employment effects of the minimum wage
We calibrate a model of labor demand to infer the employment response to a change in the minimum wage in the food away from home industry. Assuming a perfectly competitive labor market, the model predicts a 2.5 to 3.5 percent fall in employment in response to a 10 percent minimum wage change. We then introduce monopsony power in local labor markets. We identify the extent of monopsony power using information on the degree to which minimum wage cost shocks are passed on to consumers in the form of higher prices. Whereas the competitive model implies that employment falls and prices rise in response to an increase in the minimum wage, the monopsony model potentially implies that employment can rise and prices fall in response to an increase in the minimum wage. Previous research shows that prices rise in response to an increase in the minimum wage. We show that this price response is consistent with the prediction of the competitive model. Calibrating the full model, we can place fairly tight bounds on the elasticity of demand for labor with the most plausible parameter values suggesting a 2 to 3 percent loss in employment in reaction to a 10 percent increase in the minimum wage.
AUTHORS: Aaronson, Daniel; French, Eric
The effect of school finance reform on population heterogeneity
This paper tests whether state school finance reform alters neighborhood income homogeneity. One implication of the Tiebout model is that within-community homogeneity declines as a result of an exogenous decrease in the ability of jurisdictions to set local tax and expenditure levels. The property tax revolt and the school finance equalization reform of the 1970s and 1980s offer a test of the role of state fiscal reform on aggregate population sorting behavior. The results show that school finance has a significant effect on school district income sorting, especially among low income communities.
AUTHORS: Aaronson, Daniel
The effect of part-time work on wages: evidence from the Social Security rules
This paper presents estimates of the part-time wage effect. It also shows that failure to account for the part-time wage effect leads to a downward biased estimate of labor supply elasticities of interest. Using three different datasets, we show that both work hours and wages drop sharply at ages 62 and 65. The Social Security rules produce strong incentives to reduce work hours at these ages. We present evidence that these sharp drops in work hours cause a drop in wages for men, although we find little evidence for a similar effect among women. Estimates indicate that, holding all else equal, cutting the workweek from 40 to 20 hours results in roughly a 25 percent wage penalty for male workers at these older ages. Given these estimates, the labor supply response to a tax change, for example, is downward biased by about 26 percent.
AUTHORS: Aaronson, Daniel; French, Eric
Supplier relationships and small business use of trade credit
This paper sheds some light on the empirical importance of supplier relationships, including ethnic ties, for the use of trade credit by minority-owned small businesses. Results based on the 1993 National Survey of Small Business Finance (NSSBF) indicate that ethnic differences in the use of trade credit are present after conditioning on an extensive list of control variables. This holds especially for Black-owned businesses, and we find that they use less trade credit, are less likely to take advantage of discounts for early payment, and are more likely to have payments past due. We use neighborhood survey data to explore the importance of supplier relationships for the use of trade credit by Black- and Hispanic-owned businesses. Although Black and Hispanic owners are equally likely to be offered trade credit, the relationship effects vary by ethnicity. Closer relationships with suppliers as measured by ethnic ties and geographical proximity are associated with more trade credit for Hispanic-owned businesses. In contrast, this result does not hold for Black-owned firms. The neighborhood survey results suggest the idea of looking for ethnic differences in the effects of relationships at the national level as well. Although good supplier-level measures of relationships are not available in the NSSBF, we use census data to construct MSA-level measures of the prevalence of minority-owned businesses. We then explore how location in an MSA with a higher proportion of businesses of the same ethnicity is associated with the use of trade credit by minority owners relative to White-owned firms. We find that a higher MSA share for Hispanic-owned businesses is generally associated with a reduction in differences in the use of trade credit by Hispanic owners relative to White owners. No clear association is apparent between the MSA share for Black-owned businesses and their use of trade credit.Thus, the ethnic differences in the effects of relationships evident in the neighborhood surveys seem to be consistent with the results from the national survey
AUTHORS: Aaronson, Daniel; Bostic, Raphael W.; Huck, Paul; Townsend, Robert M.
Worker insecurity and aggregate wage growth
To adequately evaluate claims that increased worker insecurity had reduced wage growth in the 1990s, research must answer two questions: (1) Has worker insecurity increase?, and (2) Does worker insecurity reduce wage growth? Examining data on displacement rates from the Displaced Workers Surveys and data on workers' perceptions of job security from the General Social Survey, we conclude that worker insecurity has been high in the 1990s relative to what would have been expected on the basis of the falling unemployment rate. Moreover, examining the relationship between measures of displacement and aggregate wage growth using panel data covering the 50 states over the years 1979 to 1997, we conclude that worker insecurity does reduce wage growth for classes of workers. However, we only find evidence of an effect of insecurity on wage workers without college degrees and the increase in insecurity during the 1990s is limited mainly workers with college degrees. Thus we concluded that increased worker insecurity many not have had a large effect on aggregate wage growth.
AUTHORS: Aaronson, Daniel; Sullivan, Daniel G.
The impact of Rosenwald Schools on Black achievement
The Black-White gap in completed schooling among Southern born men narrowed sharply between the World Wars after being stagnant from 1880 to 1910. We examine a large scale school construction project, the Rosenwald Rural Schools Initiative, which was designed to dramatically improve the educational opportunities for Southern rural Blacks. From 1914 to 1931, nearly 5,000 school buildings were constructed, serving approximately 36 percent of the Black rural school-aged Southern population. We use historical Census data and World War II enlistment records to analyze the effects of the program on school attendance, literacy, high school completion, years of schooling, earnings, hourly wages, and migration. We find that the Rosenwald program accounts for at least 30 percent of the sizable educational gains of Blacks during the 1910s and 1920s. We also use data from the Army General Classification Test (AGCT), a precursor to the AFQT, and find that access to Rosenwald schools increased average Black scores by about 0.25 standard deviations adding to the existing literature showing that interventions can reduce the racial gap in cognitive skill. In the longer run, exposure to the schools raised the wages of blacks that remained in the South relative to Southern whites by about 35 percent. For blacks the private rate of return to a year of additional schooling induced by Rosenwald was about 18 percent. Moreover, Rosenwald significantly increased Northern migration of young adult Blacks, with no corresponding impact on schoolage Blacks or young adult Whites, likely fueling further income gains. Across all outcomes, the improvements were highest in counties with the lowest levels of Black school attendance suggesting that schooling treatments can have a very large impact among those at the bottom of the skill distribution.
AUTHORS: Mazumder, Bhashkar; Aaronson, Daniel
The consumption response to minimum wage increases
This paper presents evidence that spending increases more than income, and thus debt rises, in households with minimum wage workers following a minimum wage hike. Furthermore, we show that the size, timing, persistence, and composition of spending is inconsistent with the basic certainty equivalent life cycle model. However, our findings are consistent with a model where households can borrow against part of the value of their durable goods. ; Preliminary and incomplete.
AUTHORS: Agarwal, Sumit; Aaronson, Daniel; French, Eric
Wage Shocks and the Technological Substitution of Low-Wage Job
We extend the task-based empirical framework used in the job polarization literature to analyze the susceptibility of low-wage employment to technological substitution. We find that increases in the cost of low-wage labor, via minimum wage hikes, lead to relative employment declines at cognitively routine occupations but not manually-routine or non-routine low-wage occupations. This suggests that low-wage routine cognitive tasks are susceptible to technological substitution. While the short-run employment consequence of this reshuffling on individual workers is economically small, due to concurrent employment growth in other low-wage jobs, workers previously employed in cognitively routine jobs experience relative wage losses.
AUTHORS: Aaronson, Daniel; Phelan, Brian J.
The Effects of the 1930s HOLC \\"Redlining\\" Maps
In the wake of the Great Depression, the Federal government created new institutions such as the Home Owners' Loan Corporation (HOLC) to stabilize housing markets. As part of that effort, the HOLC created residential security maps for over 200 cities to grade the riskiness of lending to neighborhoods. We trace out the effects of these maps over the course of the 20th and into the early 21st century by linking geocoded HOLC maps to both Census and modern credit bureau data. Our analysis looks at the difference in outcomes between residents living on a lower graded side versus a higher graded side of an HOLC boundary within highly close proximity to one another. We compare these differences to counterfactual boundaries using propensity score and other weighting procedures. In addition, we exploit borders that are least likely to have been endogenously drawn. We find that areas that were the lower graded side of HOLC boundaries in the 1930s experienced a marked increase in racial segregation in subsequent decades that peaked around 1970 before beginning to decline. We also find evidence of a long-run decline in home ownership, house values, and credit scores along the lower graded side of HOLC borders that persists today. We document similar long-run patterns among both redlined and non-redlined neighborhoods and, in some important outcomes, show larger and more lasting effects among the latter. Our results provide strongly suggestive evidence that the HOLC maps had a causal and persistent effect on the development of neighborhoods through credit access.
AUTHORS: Mazumder, Bhashkar; Hartley, Daniel; Aaronson, Daniel