Education and the minimum wage in the United States

ABSTRACT

This article shows that, across the US states, the level of education has a causal effect on the minimum wage. More specifically, it argues that a one-percentage point increase in the proportion of college graduates implies a 0.4–0.5% decrease in the real value of the minimum wage. This is the first article that uses System GMM in order to examine the effect of education on the minimum wage. Given the structure of the available data, this is the most appropriate econometric technique. System GMM not only controls for endogeneity and for fixed effects but also maximizes the precision of the estimates by using all the available variation in the data.

KEYWORDS:

• Education
• minimum wage
• System GMM

JEL CLASSIFICATION:

• H00
• H27
• I28

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For the theoretical explanation of the increase in wage inequality, see Acemoglu (1998), Galor and Moav (2000) and Pargianas (2017).

² I consider a 10-year time span between subsequent observations. This means that in the panel I use, a period is defined as 10 years.

³ I use the Gini index to capture economic dissimilarity and the percentage of blacks and Latinos to capture racial dissimilarity.