While the possible disemployment effect of the minimum wage on teenagers has been the subject of contentious debate, little attention has been paid to the impact of the minimum wage on teen educational outcomes.  This is surprising given that educational attainment is more closely linked to the later-life well-being of teenagers than their employment status as teenagers.  The effect of the minimum wage on educational outcomes is indirect, but it is an intuitive byproduct of human capital theory.  Teenagers face a tradeoff between investing in human capital (i.e. time spent on school) and immediate consumption from time spent in the labor market (or from family transfers).  To the extent that changes in the minimum wage alter the labor market (or the family transfers) faced by teenagers, they will also alter this investment-consumption tradeoff.  The few studies on this topic in the U.S. have found null or negative effects of minimum wage increases on educational attainment, but these studies have suffered from data limitations (i.e. sample selection problems, noisy measures, and short time windows) and have not focused on the teenagers most likely to be affected.

In this paper, I investigate the educational effects of changes in the minimum wage, looking specifically at the effect on the high school dropout decisions of students with low socio-economic (SES) status, who are at highest risk of dropping out.  To strengthen the reliability of my empirical results, I use three different individual-level datasets: the March Current Population Survey (1992-2012), the American Community Survey (2000-2011), and four 4-year panels of the Survey of Income and Program Participation (1996, 2001, 2004, and 2008).  To identify the minimum wage effect, I leverage both variation in minimum wage rates within states over time and variation in minimum wage rates between neighboring localities on either side of a state border at a given point in time.  Consistently across datasets and sources of variation, I find that a 10% increase in the minimum wage lowers the likelihood of dropping out for low SES teenagers by 0.5-0.9 percentage points, roughly 4-10% of the group’s dropout rate, but has no effect on higher SES teenagers.  I find evidence that minimum wage increases reduce the likelihood that low SES teenagers will work substantial hours while still in school (without decreasing the likelihood of employment while in school), and this will reduce their chances of dropping out. This suggests an income effect from raising the minimum wage that leads to reduced hours and increased school attendance, but does not rule out a reduction in labor demand for low SES teenagers. In either case, the narrow focus of the minimum wage literature on teen employment effects may be missing the bigger picture of the minimum wage’s impact on the later-life well-being of teenagers.