Do you want a higher minimum wage with that?

For years, economic orthodoxy held that instituting a minimum wage above the lowest current wages would cause unemployment by interfering with the law of supply and demand and increasing a worker’s price above the benefit of their labor. This landmark paper, “Minimum Wages and Unemployment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania” by David Card and Alan B. Krueger, now approaching its 20^th birthday, was one of the first to challenge the conventional wisdom empirically. It uses a simple and intuitive research design to demonstrate that it is possible to increase the minimum wage without throwing many workers out of work.

Many large-scale studies of the minimum wage have had trouble isolating the effects of the increased wage, since the decision to increase the minimum wage could be plausibly associated with other factors like worker education, economic conditions, or types of firms that might also affect employment outcomes. Card and Krueger cleverly account for omitted variable bias through their research design, taking advantage of variation in state minimum wages to study its effect on the fast food industry.

New Jersey raised its minimum wage from $4.25 to $5.05 on April 1, 1992, while its neighbor Pennsylvania left its minimum wage at $4.25. Card and Krueger interviewed the managers of a sample of 399 fast food establishments from New Jersey and eastern Pennsylvania before and after the April 1^st wage hike. They asked the managers about payroll, full- and part-time workers, and hours of operation, and compared the change in employment before and after the minimum wage hike. Concentrating on fast food chains across a state border allowed them to compare identical operations with similar workers experiencing the same macroeconomic conditions, presumably only differing systemically in the minimum wage.

Surprisingly, Card and Krueger’s difference in difference estimates comparing the change in employment in New Jersey and Pennsylvania restaurants found that, not only did the minimum wage not appear to cause employment loss, but New Jersey fast food restaurants actually gained employment relative to eastern Pennsylvania. New Jersey restaurants gained 2.76 more full-time-equivalent positions than Pennsylvania chains. This result was robust to all specifications and held when comparing New Jersey stores with pre-law-change wages above the new minimum wage to stores forced to increase wages.

New Jersey fast food restaurants tended to shift towards full-time workers, but the research found few significant effects on hours of operation or free meals given to employees. Minimum-wage affected stores did raise prices by 3.7 percent relative to Pennsylvania, but the researchers found no evidence of the dis-employment and store closings predicted by classical theory.

Card and Krueger’s results, based on a simple research design but painstakingly careful empirical work (at one point, graduate students visited dozens of KFCs and McDonalds to find the price of a value meal), put a crack in economic convention and supported policymakers who wanted to raise the wages of vulnerable workers without lowering employment. While this paper, cited over 1400 times, faces many questions over its application to other industries, geographies, and time periods, by offering clear evidence of an instance in which minimum wage increase was associated with more employment, Card and Krueger permanently shifted the debate.

Article Source: David Card and Alan B. Krueger, “Minimum Wages and Unemployment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania,” American Economic Review, V84 N4, September 1994.

Feature Photo: cc/(Annette Bernhardt)