Adverse Effect Wage Rates and US Farm Wages

Adverse Effect Wage Rates (AEWRs) are regional minimum wages paid to foreign employees working in the United States under the H-2A visa non-immigrant agricultural guest worker program. AEWRs were established as a mechanism to prevent US farmworkers from adverse effects due to the employment of foreign guest workers. However, AEWRs may have unintended consequences. We develop a simple theoretical framework to gain insights into how the AEWRs may influence the wages of non-H-2A farm employees. Our model predicts that higher AEWRs cause the wages of non-H-2A farm employees to rise through two channels: (i) a substitution effect and (ii) a market signalling effect, or “lighthouse effect,” where non-H-2A employees use the AEWR as a benchmark to demand higher wages from employers. We test these hypotheses using a regression framework with data from the National Agricultural Workers Survey. Our estimates suggest that a 10% increase in the AEWR causes a three percent wage increase of non-H-2A farm employees across the nation and a five percent increase in the top five H-2A employment states where more than half the H-2A jobs are certified. We find that one-year AEWR freeze would reduce the growth of wages paid to US-based farm employees by about $500 million.