The Minimum Wage

1. The Minimum Wage • Historical change in the minimum wage • Nominal federal minimum wage changes only by act of Congress, remains the same the rest of the time

2. The Minimum Wage • Historical change in the minimum wage • Nominal minimum wage not changed to account for inflation • Real federal minimum wage decreases as price increases when nominal minimum wage remains the same

3. The Minimum Wage • Time series of nominal & real federal min. wages different • Nominal min. wage highest at present • Real minimum wage highest in 1968 (almost $8 in hour in 2000 dollars!)

4. The Minimum Wage • State minimum wages • States can have minimum wages higher than the federal minimum wage if they wish; 11 states currently have minimum wages above federal minimum • All but Delaware in New England or on Pacific coast

5. ’90s Minimum Wage Research • New Jersey Minimum Wage Increase • April 1, 1992: New Jersey raises its minimum wage from the federal minimum of $4.25/hr. to $5.05/hr. • David Card and Alan Krueger (both Princeton) surveyed 321 fast-food restaurants in New Jersey and 78 in eastern Pennsylvania, once in Feb.-March 1992 and again in Nov.-Dec. 1992 • New Jersey-only minimum wage increase is “natural experiment”: New Jersey, in which the minimum wage increased, is the “experimental” group; eastern Pennsylvania, in which the minimum wage remains the same, is the “control” group

6. ’90s Minimum Wage Research • Card and Krueger’s findings • Starting fast-food wages in New Jersey and Pennsylvania suggest that the minimum wage increase was binding in New Jersey and would have been binding in Pennsylvania:

7. ’90s Minimum Wage Research • Card and Krueger’s findings • CK, using data from their surveys, found that, despite the minimum wage increase, average fast-food employment increased in New Jersey relative to fast-food employment in Pennsylvania:

8. ’90s Minimum Wage Research • Card and Krueger’s findings • Card and Krueger found another “natural experiment” out of the New Jersey minimum wage increase • Some 73 New Jersey fast-food restaurants in the CK survey paid its starting workers an hourly wage greater than $5 • The new $5.05 minimum wage would not bind for most of these 73 restaurants, making them another “control” group of restaurants unaffected by the minimum wage increase • The other 241 restaurants paid its starting workers less than $5 an hour and would be affected by the new minimum wage, making them the “experimental” group affected by the minimum wage increase

9. ’90s Minimum Wage Research • Card and Krueger’s findings • But CK’s survey data showed that average employment increased in the restaurants affected by the minimum wage hike relative to employment in restaurants unaffected by the minimum wage hike:

10. ’90s Minimum Wage Research • Card and Krueger’s findings • Card and Krueger summarized: “…our empirical findings on the effects of the New Jersey minimum wage are inconsistent with the predictions of a conventional competitive model…” “Contrary to the central prediction of the textbook model of the minimum wage..we find no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.” - D. Card and A. Krueger, “Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania, American Economic Review 84:4 (Sept. 1994)

11. ’90s Minimum Wage Research • Response to Card and Krueger • CK’s work, which contradicted 100+ years of economic theory, was controversial, exciting and elicited much response • Ronald Ehrenberg (Cornell): “If the authors’ analyses are correct, they have, perhaps unintentionally, presented a devastating critique both of economic theory and of empirical research methods in economics. Taken at face value, their findings suggest that simple competitive demand and supply models do not provide an adequate description of low-wage labor markets…” - R. Ehrenberg, Ind. and Labor Relations Rev. 48:4 (July 1995)

12. ’90s Minimum Wage Research • Response to Card and Krueger • Other authors were more skeptical. • Daniel Hamermesh (U. of Texas): “The authors challenge economic notions that make logical sense with new evidence; but they never offer a convincing theoretical explanation for why the old logic fails. Lacking that, readers should examine their evidence very carefully. That examination yields the inescapable conclusion that, even on its own grounds, [Card and Krueger’s] strongest evidence is fatally flawed.” • D. Hamermesh, ILRR 48:4 (July 1995)

13. ’90s Minimum Wage Research • Response to Card and Krueger • Why the ruckus? Econ papers are like lab reports. When you get a result that contradicts a basic theory, you figure your method of testing the theory is wrong, not that the theory itself is wrong. But CK argued that the theory, not their methods, were wrong. • Paul Osterman (MIT): “Although they are too polite to say so, in effect they charge that some investigators have pushed the limits of acceptable practice to produce results consistent with theory…this book raises some very sharp questions about the practice of labor economics.” • P. Osterman, ILRR 48:4 (July 1995)

14. ’90s Minimum Wage Research • Neumark and Wascher • David Neumark (Michigan State) and William Wascher (Fed Reserve Board) noted some unusual observations in CK’s data: “…there are some extremely large employment changes in [Card and Krueger’s] data. The largest employment decline is 41.5 FTE’s, the largest increase is 34 FTE’s, and the standard deviation of employment change is 8.4 in New Jersey and 10.8 in Pennsylvania. Given that the mean level of employment was 21.1 in the first survey and 21.3 in the second, the variability in [Card and Krueger’s] data is surprising…”

15. ’90s Minimum Wage Research • Neumark and Wascher • NW suspected that the problem was with CK’s survey techniques: “[Card and Krueger’s] interviewer first verified that they were speaking with a manager…They then asked ‘How many full-time and part-time workers are employed in your restaurant, excluding managers…?’ Survey respondents were not given any time period over which to define employment, and their answers may well have ranged from employment on the shift during which the telephone survey took place to employment over an entire payroll period. Moreover, because different managers may have been interviewed in the first two waves of the survey, there is no reason to believe that the responses in the first and second waves are based on the same ‘definition’ of employment…”

16. ’90s Minimum Wage Research • Neumark and Wascher • NW, with help from the Employment Policies Institute (EPI), acquired payroll data from 230 fast-food restaurants in select zip codes in which Card and Krueger surveyed: “…the payroll data provide total hours worked for a well-defined period…on a consistent basis for the two survey periods, and should therefore be more reliable…” “The standard deviation of employment change is 9.6 in [Card and Krueger’s] data, versus 3.2 in the payroll data.” D. Neumark and W. Wascher, “The Effect of New Jersey’s Minimum Wage Increase on Fast-Food Employment: A Re-Evaluation Using Payroll Records, NBER WP5224, Aug. 1995

17. ’90s Minimum Wage Research • Neumark and Wascher’s findings • NW’s payroll data showed that average employment decreased in New Jersey fast-food restaurants relative to Pennsylvania restaurants after the New Jersey minimum wage increase

18. ’90s Minimum Wage Research • Neumark and Wascher’s findings • Neumark and Wascher concluded: “In contrast to [Card and Krueger’s] claim, the payroll data from the New Jersey-Pennsylvania minimum wage experiment are consistent with the prediction of the standard competitive model that minimum wage increases reduce employment of low-wage workers.” D. Neumark and W. Wascher, “The Effect of New Jersey’s Minimum Wage Increase on Fast-Food Employment: A Re-Evaluation Using Payroll Records, NBER Working Paper #5224, Aug. 1995

19. ’90s Minimum Wage Research • Neumark and Wascher’s findings • Some of the payroll data was collected by NW themselves, while some was collected by the Employment Policies Institute, a conservative thinktank that NW admit “has a stake in the outcome of the debate.” Might this have affected NW’s results?

20. ’90s Minimum Wage Research • Neumark and Wascher’s findings • Neumark and Wascher discuss the EPI problem: “…this comparison..might be read as consistent with the EPI having somehow selected a set of observations in which the results were most discordant with [CK’s] results.” “Even in the data we collected, however, the standard deviation is well below that in [CK’s] data, and the point estimates of the minimum wage effect are negative.” “…because we supplemented the EPI data by attempting to collect data on the remainder of franchisees…only the full sample is representative of the universe of fast-food restaurants…Thus, the proper response…[is] to base the analysis on the full payroll sample—including those observations collected by the EPI.”

21. ’90s Minimum Wage Research • Neumark and Wascher’s findings • And stick by their results: “[Card and Krueger] stated that they found ‘no evidence that the rise in New Jersey’s minimum wage reduced employment at fast food restaurants in the state,’ that ‘the increase in the minimum wage increased employment,’ and that their findings ‘are difficult to explain with the standard competitive model.’ We regard the payroll data as most consistent with the three opposite conclusions.” D. Neumark and W. Wascher, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment,” American Economic Review 90:5 (December 2000)

22. ’90s Minimum Wage Research • Card and Krueger strike back • Card and Krueger acquired payroll data about fast-food restaurants in New Jersey and eastern Pennsylvania from the Bureau of Labor Statistics’ ES-202 database, which consists of employment records reported quarterly by employers to their state employment security agencies for unemployment insurance tax purposes. “…because the ES-202 data include information for every covered employer, there is no reason to doubt the representativeness of the BLS sample D. Card and A. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: A Reply,” American Economic Review 90:5 (December 2000)

23. ’90s Minimum Wage Research • Card and Krueger strike back • Card and Krueger’s “representative” payroll data supports their original conclusion: that the New Jersey minimum wage hike increased employment in New Jersey relative to Pennsylvania.

24. ’90s Minimum Wage Research • Card and Krueger strike back • …but the relative increase in employment in New Jersey shown in Card and Krueger’s payroll data is less than in their survey data, and actually slightly closer to Newmark and Wascher’s results.

25. ’90s Minimum Wage Research • Card and Krueger strike back • Card and Krueger conclude: “Based on all the evidence now available, including the BLS ES-202 sample, we conclude that the increase in the New Jersey minimum wage in April 1992 had little or no systematic effect on total fast-food employment in that state, although there may have been individual restaurants where employment rose or fell in response to the higher minimum wage.” D. Card and A. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: A Reply,” American Economic Review 90:5 (December 2000)