The effect of education on the minimum wage

ABSTRACT

This research shows for the first time that the level of education has a causal, negative effect on the minimum wage. I use 2SLS, with historical educational data as an instrument for the level of education in 2010, and I find that across the US states a one percentage point greater proportion of college graduates is associated with a real minimum wage that is lower by 1.5%–1.6%. Also, in order to control for state-level omitted variables, I regress the change in the minimum wage on the change in education and I find again a negative, and significantly at the 1% level, effect. Minimum wage is a policy that is chosen by governments according to voters’ preferences. The results of this research imply that when the level of education increases voters prefer a lower minimum wage.

KEYWORDS:

• Education
• minimum wage
• 2SLS regressions
• voter preferences

JEL CLASSIFICATION:

• H00
• I28
• H27

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Earlier research has argued that education affects the economy, first, because human capital is a factor in the production of final output, and, second, because it increases innovation and imitation rates. See, for example, Mankiw, Romer, and Weil (1992). In addition, Galor (2005) argues that education affects people’s ability to adapt and remain productive in an economy that changes rapidly because of technological progress.

² I use year 2000 independent variables because according to the theory (see the Introduction section to this paper), education affects the minimum wage through the political process which is slow. Thus, it takes time to see the political effect of a change in the level of education. The results do not change if I use year 2010 independent variables.

³ I use education data of year 1960 because is the earliest year with available data for all the states. The earliest data are from year 1940 but in 1940’s data two values are missing (Alaska and Hawaii). The results do not change if I use year 1940 education as an instrument but in this case the instrument turns out to be weak in some specifications.