The unexpected long-run impact of the minimum wage: an educational cascade, Working Paper 16355

Neglected, but significant, the long-run consequence of the minimum wage requirement – which was made national policy in the United States in 1938 – is its stimulation of capital deepening. This took two forms. First, the engineered shortage of low-skill, low-paying jobs induced teenagers to invest in additional human capital – primarily by extending their schooling – in an attempt to raise their productivity to the level required to gain employment. Second, employers faced with an inability to legally hire low-wage workers, rearranged their production processes to substitute capital for low-skill labor and to innovate new technologies. This chapter explores the impact of the minimum wage on enrollments between 1950 and 2003. I describe an upward ratcheting mechanism which triggers an “educational cascade. ” My estimate is that the average number of years of high school enrollment would have risen to only 3.5 years, rather than 3.7 years, for men born in 1951 (17 in 1968). Thereafter, enrollment rates would have trended down to about 3.2 years for the cohort born in 1986, rather than slowly rising to around 3.9 years. The cumulative effect of the minimum wage increases beginning in 1950 was to add 0.7 years to the average high school experience of men born in 1986