Tuesday, December 01, 2015

Despite Studies, Minimum Wage Hikes Reduce Employment

Manhattan Institute reports:
Progressives who support raising the minimum wage often cite a 1994 study by Princeton economists David Card and Alan Krueger, who found that increases in the minimum wage do not lead to job losses. The study continues to receive attention, even today, and gets credit among liberal economists for challenging the previous consensus that minimum wage hikes lead to reduced employment. New York Times columnist Paul Krugman even claimed that the study set off an “intellectual revolution.”

However, the counterintuitive findings of one study do not mean traditional economic theory should be thrown out of the window. Rather than turning the theory behind the minimum wage a full one hundred eighty degrees, the Card-Krueger study actually helps us better understand how the minimum wage affects employment.

In 1992, New Jersey raised its minimum wage by 80 cents an hour, while neighboring Pennsylvania did not. Card and Krueger seized the opportunity to compare fast-food restaurants in the two states before and after the increase took effect—a framework economists call a “quasi-experiment.” The authors had phone interviews conducted with hundreds of restaurants in the two states, and even had their interviewer drive to nonresponding restaurants in order to conduct in-person interviews. Contrary to conventional wisdom, the authors found that the minimum wage hike in New Jersey did not reduce employment relative to Pennsylvania.

Do these findings mean economists should overturn traditional economic theory? Absolutely not. The study suffers from a number of internal flaws, which Economics21 director Diana Furchtgott-Roth has pointed out here. Even without those, Card and Krueger only looked at an eleven-month period in 1992, from February, before the wage hike took effect, to December, a few months after it was implemented.
An article well worth your time.