Minimum Wages Discourage Training

Summary of working paper 6651
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...minimum wages reduce training aimed at improving skills on the current job, especially formal training.

The minimum wage is always politically controversial. Little wonder a cottage industry has sprung up in recent years examining the economic consequences of the minimum wage. Does a minimum wage harm the low-skill workers it's supposed to benefit? Or, is the minimum wage a savvy policy for raising the rewards to work?

While the economic research has focused largely on documenting the employment effects of higher minimum wages, that is too limited a perspective, according to NBER Research Associate David Neumark and co-author William Wascher. In Minimum Wages and Training Revisited (NBER Working Paper No. 6651) , they broaden the investigation into a detailed look at the impact of minimum wage laws on job training. Theory suggests that minimum wages will reduce employer-offered on-the-job training because the tutoring is financed out of worker wages. Neumark and Wascher's analysis relies on variations in minimum wage laws from 1981 to 1991. They find that "...minimum wages reduce training aimed at improving skills on the current job, especially formal training." The cuts in training associated with a higher minimum wage are most apparent among 20- to 24-year olds.

Still, the lure of a higher minimum wage might encourage low-skill or less-educated workers to get more schooling in order to qualify for a job. Indeed, the authors note that some advocates believe a higher minimum wage is a route toward a high-wage economy. Yet "there is no evidence that minimum wages raise the amount of training obtained by workers to qualify for their current job, and, indeed, there is some evidence that minimum wages reduce this kind of training as well." Among the many implications of their research, the authors argue, is that the data undermine the case for using minimum wages to encourage a "high-wage" path for the economy.

-- Chris Farrell