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 Kruegers 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 Kruegers 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 Kruegers 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 Kruegers findings
• But CKs 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 Kruegers 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 Jerseys 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 844 (Sept. 1994)

11
90s Minimum Wage Research

• Response to Card and Krueger
• CKs 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.
  484 (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 Kruegers strongest evidence is fatally
  flawed.
• D. Hamermesh, ILRR 484 (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 theorythis book
  raises some very sharp questions about the
  practice of labor economics.
• P. Osterman, ILRR 484 (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 CKs data
• there are some extremely large employment
  changes in Card and Kruegers data. The
  largest employment decline is 41.5 FTEs, the
  largest increase is 34 FTEs, 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 Kruegers data is surprising

15
90s Minimum Wage Research

• Neumark and Wascher
• NW suspected that the problem was with CKs
  survey techniques
• Card and Kruegers interviewer first verified
  that they were speaking with a managerThey 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 periodon 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 Kruegers data, versus 3.2 in
  the payroll data.
• D. Neumark and W. Wascher, The Effect of New
  Jerseys Minimum Wage Increase on Fast-Food
  Employment A Re-Evaluation Using Payroll
  Records, NBER WP5224, Aug. 1995

17
90s Minimum Wage Research

• Neumark and Waschers findings
• NWs 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 Waschers findings
• Neumark and Wascher concluded
• In contrast to Card and Kruegers 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
  Jerseys 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 Waschers 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
  NWs results?

20
90s Minimum Wage Research

• Neumark and Waschers 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 CKs results.
• Even in the data we collected, however, the
  standard deviation is well below that in CKs
  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
  franchiseesonly the full sample is
  representative of the universe of fast-food
  restaurantsThus, the proper responseis to
  base the analysis on the full payroll
  sampleincluding those observations collected by
  the EPI.

21
90s Minimum Wage Research

• Neumark and Waschers findings
• And stick by their results
• Card and Krueger stated that they found no
  evidence that the rise in New Jerseys 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 905 (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 905 (December
  2000)

23
90s Minimum Wage Research

• Card and Krueger strike back
• Card and Kruegers 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 Kruegers payroll data
  is less than in their survey data, and actually
  slightly closer to Newmark and Waschers 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 905 (December
  2000)