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Despite Studies, Minimum Wage Hikes Reduce Employment


Despite Studies, Minimum Wage Hikes Reduce Employment

November 30, 2015

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.

This suggests that in a short-term response to the minimum wage hike, few businesses fired anyone. Instead, they raised their prices—something Card and Krueger found—to cover their extra labor costs, and left employment where it was. It makes sense, as employers might not want to immediately, significantly alter their business plans in response to a small increase in the minimum wage.

In the medium to long term, though, a different picture emerges. Higher minimum wages mean fewer businesses will open, and struggling ones will close more quickly. Instead of affecting the number of jobs in an economy, minimum wage hikes affect the rate of job growth. Therefore, in the months after a minimum wage hike, a state may see a similar level of employment relative to what might have been had the minimum wage remained the same. Several years after the hike, however, there will be significantly fewer jobs available than there otherwise would have been.

A 2013 paper by Jonathan Meer and Jeremy West of Texas A&M University discovered exactly this. Consistent with Card-Krueger, Meer and West found that states which raised their minimum wages did not see any short-term reduction in employment. However, there was a strong negative effect on job growth. According to the authors’ findings, a real minimum wage increase of 10 percent reduces job growth in a state by 0.5 percentage points.

Another study, published in 2014 by Jeffrey Clemens and Michael Wither of the University of California at San Diego, confirmed the longer-term effects of the minimum wage. They found that over the course of the late 2000s, the average minimum wage rose by 30 percent and reduced the national employment-population ratio by 0.7 percentage points. Moreover, wage hikes chip away at the incomes of low-skilled workers over the years, since lower job creation means fewer opportunities to gain experience and move up the income scale.

It is possible that, consistent with Card-Krueger (and Meer-West), the short-term effects of minimum wage increases are not as harmful as originally thought. But, ultimately, the study does not tell the whole story. The negative effects of the minimum wage still exist, but are delayed. Alas, progressives will need to look elsewhere for evidence to that minimum wage increases do not affect employment.


Preston Cooper is a Policy Analyst at Economics21. You can follow him on Twitter here.

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