Yes, readers, I have gone back to school and am studying economics. And I’m killing two birds with one stone by writing my commentary on a class-assigned paper in blog format.
The paper in question is, in fact, the 1994 paper which shifted economists’ thinking on the minimum wage, because of its claim that minimum wage boosts had no ill effects on employment and were, basically, “free money.”
Here’s how Vox characterized it:
[F]or years many economists assumed, almost without questioning, that minimum wages destroyed jobs. They might be worthwhile, sure, but you have to weigh the harm they do to the demand for labor against their benefits for workers who remain employed.
In a paper first published by the National Bureau of Economic Research in 1993, Krueger and his co-author Card exploded that conventional wisdom. They sought to evaluate the effects of an increase in New Jersey’s minimum wage, from $4.25 to $5.05 an hour, that took effect on April 1, 1992. (At 2019 prices, that’s equivalent to a hike from $7.70 to $9.15.)
Card and Krueger surveyed more than 400 fast-food restaurants in New Jersey and eastern Pennsylvania to see if employment growth was slower in New Jersey following the minimum wage increase. They found no evidence that it was. “Despite the increase in wages, full-time-equivalent employment increased in New Jersey relative to Pennsylvania,” they concluded. That increase wasn’t statistically significant, but they certainly found no reason to think that the minimum wage was hurting job growth in New Jersey relative to Pennsylvania.
Card and Krueger’s was not the first paper to estimate the empirical effects of the minimum wage. But its compelling methodology, and the fact that it came from two highly respected professors at Princeton, forced orthodox economists to take the conclusion seriously.
And with that in mind, join me as I dig through the meat of the study: “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” (This is not actually the “class assignment”; I will need to distill my thoughts even further into 250 – 300 words, which will be harder!)
The core concept of the study was this: generally speaking, it’s hard to measure the effects of a change in the minimum wage, because there’s so much much else happening at the same time. For example, the latest change in the US federal minimum wage occurred at the same time as the “Great Recession.” But in 1992, New Jersey increased its minimum wage to a level above the federal minimum, $5.05 rather than $4.25, and next-door Pennsylvania did not. The authors believe that looking at changes in employment patterns, wages, costs, etc., at fast-food chains in those two states provide a means of analyzing the impact of the minimum wage hike.
In order to do so, they (or rather their employees) conducted phone surveys of fast-food restaurants in those two states in late February/early March of 1992, just before the minimum wage hike was implemented, and in November-December 1992, after the April 1992 change had had some time for effects to be seen. They had, all things considered, reasonable response rates to their surveys (72.5% in PA and 91% in NJ, with different numbers of attempts made in the two states) for the first wave, and bolstered their response rate for the second wave with in-person visits as needed.
Their core findings:
In the New Jersey restaurants, the number of employees per store actually increased during this time frame, even as they decreased in Pennsylvania due to the recession at the time. At the same time, within New Jersey, among stores which had previously had a starting wage equal to the minimum wage, as well as those stores with a starting wage above the minimum but below the new minimum, the number of employees increased; but in those stores where wages were already above the minimum, employment decreased.
The authors then get mathier. They perform two regressions, one to estimate the effect on employment of a store being in New Jersey, and another to estimate the effect of a store having previously paid less than the new minimum wage. This is where my interpretation is a bit marginal, but here goes:
The change in the number of FTE employees per fast-food restaurant in NJ compared to the change in PA, was 2.51. The regression model calculates, stripping out other impacts, that New Jersey-ness accounted for 2.3 new employees per store. Having to raise wages (compared to NJ restaurants already paying the new minimum) produced a regression factor of 11.91 times the “wage gap” when controlled for differences in different regions within NJ as well as for differences among the different large chains surveyed; this is a high factor because it gets reduced by this gap-factor, which is .11.
They also perform additional statistical tests by fine-tuning their calculations, for example, excluding New Jersey shore area stores because of their tourist economy, adjusting the weightings of part-time employees in calculating full-time equivalents, etc. These produce different employment impacts but still the same conclusion, that the minimum wage increase actually increased employment.
The authors also assess whether the minimum wage hike affected other aspects of the restaurants’ operations. There was an increase in full-time workers in New Jersey, but no significant effect with respect to restaurants who had paid less vs. more in NJ. There was no statistically-significant change in the restaurants’ opening hours, the free/reduced-price meal benefit, the amount of the first raise or the time until that first raise is given.
They did find that prices in New Jersey increased by 4%, a slightly greater increase than would be needed to make up for the higher wages (taking into account the wage increase and the proportion of the restaurant’s costs due to labor), but they discard this as a relevant consideration because prices increased at the same level regardless of whether an individual restaurant was impacted by the wage hike or not (based on whether their starting wage had been below the new minimum or not).
Finally, they assessed whether the wage increase prevented new stores from opening, looking at broader data, and found no statistically-significant evidence.
After presenting their statistical tests, they propose various explanations. They consider alternate labor-market theories “monopsonistic and job-search models”), but discard them. They theorize that employers obliged to pay higher wages may decrease their quality (longer lines, reduced cleanliness) or may shift pricing of some products relative to others, but ultimately conclude with the simple statement that “these findings are difficult to explain.”
So what’s to be made of this?
Their analysis is certainly more useful than one without any “control group” and it’s the new “one weird trick” of economists to find and exploit what they consider to be “natural experiments” (though I suppose “new” is all relative). It also has, I think, particular merit in looking at employment at specific businesses, rather than at unemployment rates across a region, so as to drill down to the question of “how do employer manage an increased labor cost?”
But there are plenty of deficiencies:
One common gripe of Krueger’s critics (e.g., at the Foundation for Economic Education) is that the time frame of Krueger’s analysis is simply too narrow. By late February, employers already knew they would need to offer a much higher minimum wage, and would likely have been taking that into account by avoiding hiring and reducing staff with attrition. It could even be that the increase in employees was an indicator that they found, on average, that they had been too cautious in the period leading up to the hike. It also seems likely that employers wouldn’t have been sitting on some innovation that would allow them to reduce staff which they would suddenly implement immediately upon increasing wages, but that labor-reduction initiatives would take time, so that the long-term effect of the wage hike would take some time to materialize. (For example, the free refill was introduced by Taco Bell in 1988, but became commonplace in the 90s. Was this merely a coincidence that this marketing tactic occurred roughly at the same time as a significant nationwide minimum wage increase, with a phase-in that was driven by the time and effort to remodel locations, or did stores find it more advantageous to reduce worker time in this fashion, when labor increased in cost? Other changes, such as the self-service ordering kiosk, required advances in technology that will presumably be motivated by higher labor cost but not simply “waiting in the wings.”)
It also seems too simplistic to simply discard the increase in prices just because those prices increased at all New Jersey restaurants, including those which had already been paying higher wages. It would seem fairly reasonable that once the previously-lower-paying restaurants had increased their prices, the rest would follow, or that, if certain franchise owners had a mix of higher- and lower-wage restaurants, they might have raised prices in parallel. Consequently, this consistent price-hike across stores is not the counter-evidence Krueger claims.
In fact, it would seem to merit a closer review, to identify the characteristics of those restaurants previously paying higher wages, especially because they did not boost their wages to remain a “higher wage employer.” Were these particularly-profitable restaurants? Restaurants which had difficulty recruiting employees due to locally-tight labor markets? For instance, restaurants in wealthier suburbs tend to recruit workers from further away and offer higher wages to make the additional travel time worthwhile. Would they, in the longer term, have difficulty finding workers without boosting that wage differential?
Lastly, they measure the impact of the wage increase on overall work hours by asking whether the opening hours have changed, whether the number of cash registers have changed, and whether the there is a change in the number of cash registers typically open at 11:00 AM. But it seems likely that a key way that employers will seek to mitigate the effect of a wage hike is by lower staffing at slower times in the day, either by scheduling employers for fewer hours, or by being readier to send employees home. And they ask whether employees work on a full- or part-time basis but do not actually ask in their survey what the total or average work hours is at each surveyed store. Perhaps this is a piece of information that they considered too difficult for store managers to provide, so did not ask it so as to ensure they would receive a response to their request, but without knowing this, we simply cannot know whether the study’s data is what it claims to be.
Now, I’ve said that this is considered to be a key study that shifted the debate about the minimum wage, and, it turns out, it wasn’t without pushback. Richard Berman of the Employment Policies Institute criticized the study in a 1996 report, “The Crippling Flaws in the New Jersey Fast Food Study,” and Krueger and Card responded with their own criticism of Berman’s criticism, as well as a further study by economists William Wascher & David Neumark (not available without paywall), in 2000. Krueger finds fault with the attempts by Berman and by Wascher and Neumark to re-do the analysis using better or alternate data sources, but does not directly address Berman’s “crippling flaws” (or if they do so, it is so briefly addressed that I missed it). What were these flaws? First, that there were significant numbers of stores with clear data errors, such as shifts in the number of part-time and full-time employees as well as a failure to specify, in the price-increase portion, what defines a “regular hamburger” (is it a Big Mac? A Quarter Pounder? A dollar-menu basic hamburger?). EPI researchers went back to many of the surveyed restaurants and could not match the employment numbers, and Berman believes this is simply because of inconsistencies in definition of part vs. full-time and the basic fact that the manager or assistant manager answering the survey would have been juggling multiple duties and relying on memory for these numbers. In any event, Krueger and Card dial back their claims, from 1994’s statement that “we find that the increase in the minimum wage increased employment” to a more cautious, “the increase in New Jersey’s minimum wage probably had no effect on total employment in New Jersey’s fast-food industry, and possibly had a small positive effect.”